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Heads up! Nifty portraying bearish outlook, may retest 10,500 in August series

August 01
11:02 2020

The Nifty50 is portraying a bearish outlook and a decisive break below 11,000 can lead to a retest of 10,600 which is a possibility in a couple of weeks, Umesh Mehta, Head of Research, Samco Group, said in an interview with Moneycontrol’s Kshitij Anand.

Q) It was a volatile week for Indian markets. Nifty50 failed to hold on to 11,300 levels. What led to the selloff on D-Street?

A) The Nifty50 index was already at overbought levels in the short-term and witnessed fall in participation from heavyweights such as Reliance Industries and HDFC Bank.

Additionally, the market has also lost its upward momentum and it appears like distribution has been set in motion.

Keeping a tab on rollover data in frontline stocks, it seems like complacency has crept in as the majority of the long positions have been carried forward to the next month and generally such kind of optimism leads to short-term corrections, which was witnessed from the volatility in markets post the expiry day.

All these factors combined led to the selloff on D-Street.

Q) Which are the important levels that one should keep an eye on in the coming week? And, what should be the strategy?

A) The Nifty50 is portraying a bearish outlook and a decisive break below 11,000 can lead to a retest of 10,600 which is a possibility in a couple of weeks.

Since this is the first red weekly candle after six weeks of rallying consecutively, a down move is likely from here onwards.

The index is overbought in the short term and hence, the strategy should be to book profits on any bounce back for investors and go short on weakness for traders

Q) Based on the July expiry where do you see Nifty heading in the August series. Do you think we could make a dash towards 11,500? Or could we correct towards 10,500 levels?

A) The rollover data in frontline stocks from this expiry shows that several long positions have been carried forward to the next and such excessive optimism can lead to short term corrections.

To add to it, Bank Nifty’s trend is already weak and consolidating in a range for the last four weeks. Selling pressure in Nifty50 at higher levels and weakness in Bank Nifty is likely to drag the benchmark indices lower. Hence, we expect correction towards 10,500 in the August series.

Q) More than 100 stocks in BSE 500 index rallied 10-50 percent amid positive close seen in the benchmark indices in July month. In the Small-cap index, the number is close to 160 which rose 10-100 percent in the same period. It looks like select small & midcap stocks are attractive buyers’ attention.

A) Most frontline stocks may have risen excessively portraying high valuations but select mid and small caps are certainly not trading at high multiples,they are decently priced, some even undervalued.

Hence, selective buying in certain pockets of the broader markets can entice investors in their search for value.

A staggered buying strategy through SIPs in fundamentally strong small and mid-cap stocks is the right approach, especially when they are trading at decent valuations but buying lump sum at current is not advisable.

Q) Sectorally, IT, Energy, and Healthcare stocks were the top sectors in July? A lot of stocks in the IT space hit a fresh 52-week high. What is leading the rally in these sectors?

A) Healthcare especially pharma stocks had been witnessing a short two-three months’ consolidation. But, it seems like they are now ready for a rally.

Despite Donald Trump’s orders to restrict the pricing power in generics, pharma stocks did not correct significantly. They bounced back shortly thereafter. This shows the resilience and positive sentiment in the pharma sector. The results portray some sound operating efficiency despite the dip in the top line. All these factors portray the rising sentiment leading the up move.

IT showed operationally strong performance in Q1 results which drove the prices higher. Mid-cap IT names performed better due to several cost-cutting measures and a healthy order pipeline.

With no debt on their books, the cash flows generated can be conserved for growth and this is cushioning IT companies who are living up to their name of being a defensive play.

Q) What are your top three-five trading ideas for the next three-four weeks?

A) Financials are expected to remain weak and hence short on rally while buy on dips in pharma stocks can lead to profitable trades for the next few weeks.

Auto shares may also give the opportunity to sell if numbers are not up to the expectation. In general, one should maintain a cautious stance.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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