Volatile trading ahead of Q3 earnings season

Snapping three-week losing streak, the domestic stock market staged a smart recovery in the last week of 2022 and recouped 80 percent of the earlier week's losses. BSE Sensex rallied nearly 1,000 points to 60,841, and NSE Nifty jumped nearly 300 points to 18,105 level. However, after scaling record highs in the beginning of month, the equity benchmark indices lost 3.5 percent each in December. The broader markets were also exuberant last week, with the Nifty Midcap and Smallcap indices adding 4.5 percent and six percent respectively. Among sectoral indices on the NSE, Nifty PSU Bank outperformed headline indices and surged 11 percent in the week, followed by Metal, Oil & Gas, Auto, Bank and Energy. Despite fears of recession and spread of Covid outside China; markets are witnessing strong buying at lower levels, which are supporting the markets on the downside.

The volatility and range-bound trade of past four weeks, is expected to continue in the first week of 2023 as well. FIIs net sold more than Rs14,000 crore worth shares in December. On the contrary, DIIs bought over Rs24,000 crore of shares in last month of 2022. For the full year, DIIs have bought Rs2.75 lakh crore worth shares, against Rs2.78 lakh crore of FIIs selling. The main trigger for FII selling in 2022 is the rising interest rates in the US and INR depreciation. One of the most prominent trends during 2022 was the jump in retail investors. The year saw the cycle of domestic retail investors buying what the foreign investors or foreign institutional investors sold. In the near term, the direction of the markets will be dictated by Q3 results, macroeconomic data, US Fed minutes, international crude oil prices, dollar-rupee equation andreports emanating from China that are of consequence to the markets.

Analysts don't see any runaway rally for stocks as the Covid situation in China poses a threat of spreading to neighbouring countries. Ahead of the start of the Q3 results season, market may continue to remain volatile and highly stock specific. The year 2022 turned out to be a difficult one with unprecedented inflation and economic turbulence. However, Indian markets have shown resilience leaving a lasting impression by outperforming other global indices.

IPO Corner: After a record-breaking performance in 2021, the IPO market delivered mixed returns in 2022, due to heightened volatility caused by geo-political tensions and global economic turmoil. Omni channel payment solution provider AGS Transact Technologies was the worst-performing IPO with a 63 per cent negative return. Delhivery (33%), Inox Green Energy (31%), LIC (28%) and Abans Holdings (25%) stood as the worst performing IPOs in the calendar year 2022. Adani Wilmar remained the top-performing IPO for the year 2022, with a return of more than 128 per cent since the listing. Other than Adani Wilmar, Hariom Pipe Industries (116%), Venus Pipes & Tubes (115%), Veranda Learning Solutions (76%) and Vedant Fashion (51%) were the other top performing IPO of 2022. Last week of the year saw subdued listing of Kfin Technologies and Elin Electronics. IPO of the bulk packaging solutions provider Sah Polymers with a price band of Rs61-65 per share. The IPO will conclude on January 4. After weak response to the IPO, next week will see the listing of Radiant Cash Management Services.

Listening Post: Everybody talks about bull and bear markets, especially the current one, often called one of the longest bull market in history. But nobody seems to agree on an exact definition, or knows where the prevailing ones originated, including many investment professionals. Analysts often say that a bull market is defined by a 20 per cent rise from a market index's most recent lowest point; a bear market, a 20 per cent decline from its latest high. Variations on that are countless and endlessly confusing. Only by looking back at the history of these terms can you can get a better sense of what they mean, why they matter and how you should factor them into your thinking. According to some people, the use of bull and bear to refer to financial optimists and pessimists, respectively, originated in Britain in the early 18th century. 'Bull' evoked the bellowing of an eager buyer. 'Bear' appears to have come from an early proverbial expression, "to sell the bear's skin before one has caught the bear"—an apt metaphor for a short sale, in which a trader sells borrowed shares in hopes of buying them back at a lower price.The terms 'bull market' and 'bear market,' however, didn't arise until the 1850s. For decades, bull and bear markets referred not to long-term moves in the stock market as a whole, but to ephemeral price action in a single asset. It is a bull period as long as the average of one high point exceeds that of previous high points. It is a bear period when the low point becomes lower than the previous low points. The 20 per cent threshold for bull and bear markets began to take hold only "in the latter 1950s and early 1960s. The 20 per cent threshold took a long time to gain traction, however. First, realize how arbitrary the terms 'bull market' and 'bear market' are. No one knows why the definitions don't include a minimum length of time. Or why they're usually based on closing prices instead of intraday highs and lows. Or who came up with the 20 per cent threshold and why it wasn't 25% or 30% or 41.2879%. (Defining a 'correction' as a 10% decline is equally arbitrary). Considering that the terms can create a self-fulfilling prophecy. Investors always want more precision than the collective mood swings of markets tend to offer. In this case, the fact that the recent decline was just shy of 20 per cent appears to have given investors the confidence that the market hadn't entered bear territory—and changed their behaviour. The more you know about financial history, the less surprised you should be by how bull and bear markets unfold.

Quote of the week: "The stock market is filled with individuals who know the price of everything, but the value of nothing."

— Phillip Fisher

That is another testament to the fact that investing without an education and research will ultimately lead to regrettable investment decisions. Research is much more than just listening to popular opinion.

F&O / SECTOR WATCH

Tracking the rebound in cash market, derivatives segment witnessed exuberant volumes during the settlement week. Nifty surged more than 1.50 per cent over the week while Bank Nifty outperformed and closed the week with gains of more than three per cent. Rollovers in Nifty Futures decline at 79 per cent (last month 82%). On other hand, market wide rollovers stood at 92 per cent (last month market wide 92%). Rollovers clearly suggest that stock-specific strategy must be adopted. On the sectoral front, Nifty PSU banks advanced along with Metal, Reality and Auto space while Nifty Pharma & FMCG counter remained under pressure.On the Option front, Maximum Call open interest (OI) was seen at 19,000 strike, followed by 18,500 and 18,000 strikes. Call writing was seen at 18,200 and 18,300 strikes. Maximum Put open interest OI was seen at 18,000 strike, followed by 17,000 and 17,500 strikes. Put writing was seen at 18,000 strike, followed by 17,500 and 18,300 strikes. The Implied Volatility (IV) of Calls closed at 13.49 per cent, while that for Put options closed at 14.25 per cent. The Nifty VIX for the week closed at 14.81 and is expected to remain volatile. PCR of OI for the week closed at 1.16. For Nifty, a broader trading range of 17,800-18,500 is predicted for coming days. 18000-17850 zone would act as a strong support zone while 18250-18300 zone will offer strong resistance.In the coming week, automobile stocks will be in focus as companies will release their monthly sales numbers for December. Industry sources expect the growth in passenger vehicle & commercial vehicle sales segments to continue, but predict a mild slowdown in 2-wheeler sales. Buy M&M, Maruti and Tata Motors.Financials, Capital Goods and Cement sectors look good for 2023. With credit growth at 17.5 per cent, gross NPAs at 7-year low and net NPAs at decade low; financials, particularly banking will continue to do well in the coming few quarters. However, the returns in 2023 will not be as spectacular as in 2022. Capital Goods and Cement have the potential to outperform. Stock futures looking good areCummins India, HDFC, Federal Bank, M&M Finance, Shriram Finance, SBI and Tata Steel. Stock futures looking weak areDr Lal Pathlabs, Havells, and Tata Consumer.