Range-bound trading likely amid ongoing polls

Spooked by the rise of US inflation to 40-year high triggering expectations for faster US Fed tightening in 2022, increasing oil prices amid geo-political tensions between Ukraine and Russia and continued FII selling, the domestic stock markets closed on a bearish note during the week ended February 11, 2022. The BSE Sensex fell 492 points to 58,153 and the NSE Nifty declined 142 points to 17,375 points. The broader markets also witnessed selling pressure and the Nifty Midcap declined 2.3 percent and Smallcap plummeted 4.5 percent. FIIs net sold more than Rs 5,600 crore during the week, taking monthly outflow to over Rs9,700 crore in February. Their total selling was more than Rs1.52 lakh crore since October 2021. One takeaway from the past week in markets is that 2022 is starting to look like what many predicted heading into the year.

In recent weeks, several factors have helped stocks, according to investors and analysts. One has been a solid round of Q3 corporate earnings. With an unexpectedly Dovish stance, the RBI once again avoided joining other Central Banks.

RBI appears to be of the opinion that inflation is transient, as seen by its lower-than-expected inflation forecasts for FY23. This runs counter to the global trend and raises few concerns, given the backdrop of soaring crude oil and commodity prices. RBI's lack of direction on this front leaves Indian market exposed to the Fed's manoeuvre in March. Expected sharp increase in petrol and diesel after the conclusion of State Assembly Elections may fuel inflation feel observers. Some global analysts have noted that this rate-increase cycle could be more dangerous than some others because stocks have entered at elevated valuations in many markets across the globe. Optimists say that markets don't like uncertainty, but think this cycle will play out like the others where the economy and corporate profits are strong enough and that markets will be higher at the end of the year than we are now. Another key event to watch out for would be the developments related to five States elections including Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur. Assembly polls in Uttar Pradesh have already kicked off last week, while Uttarakhand, Goa and Punjab polls will take place next week. Manipur polls will be in the last week of February. The results of all these elections will be announced on March 10, till then experts feel the market will keenly watch the data and remain range bound. The coming week is expected to be volatile as investors will keep a close watch on oil prices and minutes of the recent US Fed meeting (February 17) to get clear idea about further action. Also, there could be a bit of stock-specific action as we are close to the end of December quarter earnings and reaction to January CPI & WPI inflation data. Considering the ongoing global developments like Russia-Ukraine stand-off, US Fed actions and inflationary trends; markets are likely to continue to remain volatile and range-bound in near term. Investors are advised to sit tight on their quality investments and avoid aggressive bets till a clear direction emerges.

Market Musings: Stocks have rarely been this expensive. That doesn't (necessarily) mean they're headed for a crash. Robert Shiller, a finance professor at Yale University, who won a Nobel Prize in economics in 2013, measures how expensive stocks are by taking the price of the leading index of that country like S&P 500 index of US or Nifty50 of India, dividing by the average of its past 10 years of earnings and adjusting both the price and the earnings for inflation. The past isn't a constant; it's in constant flux. Economists and investors often say that stock valuations should regress to the mean, or move away from extreme highs or lows back toward the long-term average. But that historical average is continuously being modified by new results. Many analysts and asset managers are warning that today's market is flashing a red alert. The respected investor Jeremy Grantham recently wrote that U.S. stocks and other assets are so

overpriced that they constitute a superbubble, setting up the largest potential markdown of perceived wealth in US history. Trimming your stocks a bit as they rise always makes sense. But dumping all your shares because they are near record highs makes sense only in a world of perfect certainty—which exists nowhere but in fairy tales.

When hit with recessions or declines, you must stay the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries.

F&O / SECTOR WATCH

Mirroring the heightened volatility in the underlying cash market, the derivatives segment witnessed brisk volumes with large daily swings in select counters. The maximum Call Open Interest was seen at 18000 strike followed by 17600 &17500 strikes, with Call writing at 17400, 18000 & 17500 strikes, while the maximum Put Open Interest was seen at 16500 strike followed by 17000, 17400 & 17100 strikes, with Put writing at 17100 & 17000 strikes, and Put unwinding at 17600 & 17700 strikes. Implied volatility (IV) of Calls closed at 16.35 per cent, while that for Put options closed at 17.59. The Nifty VIX for the week closed at 17.71 per cent. PCR of OI for the week closed at 1.36.

The options data indicates that the Nifty could see a wider trading range of 17,000-17,800 levels in the week ahead. Bank Nifty has major supports at 38100 & 37800 levels. However, for further upside Bank Nifty needs to give move above 39200 level to regain its bullish momentum. Weighed down by FMCG, IT, Infra and select BFSI and Energy stocks, markets were caught in downward spiral. However, metals stocks bucked the trend with the respective index rising more than 3 percent. Select pharma counters are witnessing renewed buying interest.

Stay invested in Aurobindo Pharma, Laurus Labs, Sun Pharma and Biocon. However, industry watchers caution that surprise inspections by US FDA may play spoil sport and dampen sentiment. Resilient performance was seen from PSU Banks. Use declines to buy SBI, Canara

Bank, BOB and PNB. The ongoing crisis between Russia and Ukraine is weighing on the global sentiments and international crude oil prices are at multi year highs. Keep a watch on stocks in Oil & Gas space. Stock futures looking good include Aurobindo Pharma, BPCL, Coal India, Jindal Steel, NTPC, TVS Motors, Tata Steel and Vedanta. Stock futures looking weak ABB, IPCA Labs, Lupin, Manappuram, McDowell and Intellect Design.