Time To Stick To Large-Cap Stocks

Markets have been under severe pressure for quite some time now, but it looks as if we are headed for some respite and recovery finally. After losing for eight consecutive days, markets have gained on Monday (February 17), which could be termed as a relief, which broke the momentum ofthe falling market. Incidentally the number eight, is an important part of Fibonacci series which is preceded by 5 and followed by 13. The February 13-19 week under review saw markets lose on four of the five trading sessions and gain on one. The lows made were at 75,294.76 points on BSE Sensex and at 22,725.45 points on Nifty. Both these lows were made on Monday andmarkets rebounded quite sharply thereafter. Tuesday markets oscillated but failed to make a new low or close positive. The reasonable surety that we have bottomed out came on Wednesday whenmarkets moved between positive and negative and finally closed with marginal losses, but much better breadth. This three day testing of bottoms and not breaking after Monday’s low gives comfortthat a short-term bottom is in place. BSE Sensex lost 231.90 points or 0.30 per cent to close at 75,939.78 points, while Nifty lost 112.35 points or 0.49 per cent to close at 22,932.90 points.

Dow Jones gained on two of the four trading sessions and lost on two. It lost 37.31 points or 0.08 per cent to close at 44,556.34. US President is yet to announce his final list of import tariffs and they are being announced in a piece-meal basis, which is keeping global markets on some sort of tenterhooks. In a new announcement last night he had announced tariffs of 25 per cent on the pharmaceutical sector, which would make the import of generic drugs into USA that much more expensive. Generic drugs are the bottom of the pyramid and a duty of 25 per cent is not going to affect the healthcare bill in any big way. While pharma shares were initially down quite sharply, they recovered as the day progressed.

In primary market news there were two listings, which happened along with one IPO which openedand closed during the period under review. What is a clear message to merchant bankers from thesethree issues is that investors are not willing to invest in really expensive issues and one hopesmerchant bankers and promoters look at the message.

Subscription to the issue from HexawareTechnologies was driven by QIBs with HNIs, Retail and employee portion remainingundersubscribed. As a result of this lopsided subscription, the share managed to open positive and did reasonably well. Shares which were issued at Rs708, debuted at Rs745.50 on BSE and Rs731 on NSE. The share closed at Rs763.85 on BSE, a gain of Rs55.85 or 7.88 per cent. On the NSE, the share closed at Rs755.75, a gain of Rs47.75 or 6.74 per cent. Shares had listed on Wednesday (February 19).

The other share to list was Ajax Engineering Limited, which had issued shares at Rs629. Shares listedon Monday (February 17) at Rs593 and closed day one at Rs595.60. By Wednesday, the sharehad gained marginally to close at Rs600.85, a loss of Rs28.15 or 4.47 per cent. The issue from Quality Power Electrical Equipments Ltd was open for subscription during February 14-18. The issue was subscribed an overall 1.29 times with QIB portion subscribed 1.03 times, HNI portion subscribed 1.45 times and Retail portion subscribed 1.83 times. The priceband was Rs401-425. The response could at best be termed as muted for the issue. One wonders how the listing would be when the share lists on Friday (February 21).

Markets seem to be absorbing selling of FPIs and taking the overvaluation of mid-cap and small- cap stocks in its stride. There have been sharp corrections in this segment and there is a very large number of stocks which have lost between 30-60 per cent from their highs. This throws up some trading opportunities in the short term. While building a portfolio may not be the right time some sort of short term trading looks attractive at current levels in select stocks.

Coming to the February 20-26 period, we have a trading holiday on Wednesday (February 26). This means that after the holiday, February futures would expire on Thursday (February 27), making markets more volatile on both days namely Tuesday and Thursday. With stability kicking in, expect markets to consolidate and build on the present base, which seems to be building up. Lows of Monday and the broad band of 22,700-22,800 on Nifty should act as strong support in the near term. On the upside immediate resistances are at levels of23250-23,300 on Nifty and at 77,000-77,150 on BSE Sensex. If these are crossed and sustained wecould see levels of around 23,500 and 77,800 respectively.

The strategy would be to look at large-cap and select mid-cap stocks, which have now started offering some comfort, simply because they have weathered the storm. Trade cautiously.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)