Massive REIT buys led to the biggest spread widening rally in the past two weeks, which was not visible during the entire lock-in period since April. This shows that optimism has reached its peak, at least from an intermediate point of view. In addition, more than 10 stocks are included in the F&O ban list on a daily basis, suggesting that the market is hovering around its overbought levels. There is too much optimism and it is time for a healthy correction to cool off the bulls in charge.
It’s also worth noting that even the good news hasn’t been able to push stock prices up lately. For example, Hero MotoCorp had Diwali’s best sellers in ten years and ended with a low post-festive inventory of less than four weeks at dealerships. Still, the stock could not maintain itself at higher levels. When positive news cannot drive stock prices higher, it indicates the markets are in overbought territory.
As soon as REITs slow down their buying intensity before Christmas, the market could experience a healthy correction.
Equity funds, a major component of DII, saw an outflow for the fourth consecutive month in October, with investors withdrawing some Rs 2,725 crore against an outflow of Rs 734 crore in September. This seems to indicate that equity fund managers continue to record profits at higher levels even as investors increase their liquidity by selling mutual fund shares.
It is quite astonishing that DII, a major player in the market, has managed to sell stocks with a net worth of Rs 30,000 crore in the market so far this month. This shows that DIIs are already anticipating a correction and are ahead of the curve.
Event of the week
The U.S. Treasury Secretary recently announced that major pandemic lending programs will cease on December 31, 2020, and the move sent shivers down the world. The surprise termination of loan programs would translate into a grim economic outlook and could have a cascading negative effect on the global economy plagued by the deadly virus.
Moreover, the move seems unlikely to please Republicans and Democrats alike as they would work to alleviate the stress caused by the pandemic. With the impact of Biden’s victory and in the midst of the power struggle between the US Treasury Secretary and the US Fed, the market should remain on guard. But one thing is certain: all this indecision could cause nervousness on Dalal Street.
Nifty 50 ended the past week with a slight gain after hitting an all-time high of 12,963. But now the benchmark has formed a bullish reversal pattern, which opened with a spread near the high point of the week and then gave up all gains. The speed of the rally decreased with the volume participation. In fact, Nifty has faced resistance on the ascending channel, which is visible on the weekly chart, and may continue to struggle to move forward as it lacks participation from major index drivers such as than RIL, HDFC and bank stocks, which have gotten a bit tight for the short term. We advise traders to keep an eye on the benchmark and go short unless Nifty breaks the ascending channel to the upside.
Expectations for the week
Mr. Market is likely to see purchases in lower order stocks, implying some sort of catch-up rally there. Industry laggards are now trying to catch up with industry leaders in terms of price action. This process may continue as Nifty has formed an intermediate top and is expected to see a correction in frontline stocks. Additionally, smallcaps and midcaps may see a catch-up rebound. However, they can eventually emulate the frontline players and see a correction. India Inc’s quarterly earnings season is largely over and stock exchanges should keep an eye on global indices and / or seek out any major vaccine related updates for future direction.
Investors may look to record profits at current higher levels and wait for a correction before starting to buy again. In addition to this, investors may seek to accumulate quality computer and pharmaceutical names at current levels.
Nifty50 closed the week up 0.62% at 12,859.