Looking to invest after the correction? Here are few tips for you

Equity markets this week experienced a rollercoaster ride. Looking back, the rally from March 2020 lows was nearly a 100% which is hard to believe, given the circumstances. But after this swift rally, a healthy correction from intermediate tops of 15,431 is only logical.

The current correction can be metaphorically compared to the steady process of releasing steam from a pressure cooker in order to let the food cook. Markets too demand a measured approach for it to cook up for the bull rally ahead. In the absence of this steam outlet, markets can experience a sharp crash which can lead to larger losses.

Therefore, corrections should be embraced as a part of market’s behaviour in the long run. Benchmark indices across the globe are moving in tandem with one another and are witnessing pressure from macros. Various mutants of the virus are also clouding economies with an air of uncertainty of fresh lockdowns. Therefore, bulls have preferred to remain on the sidelines as the global economy attains the much-needed stability around the second wave of coronavirus.

Indian Banks on the contrary experienced a key development with an end to the moratorium period. It is expected that the true picture of their asset quality will now come to the forefront in the coming quarters. However, most banks have already prepared themselves by making sufficient provisions on their books regarding the stressed loans. But it would be clear only when the actual NPAs get reported. This was one of the major reasons BankNifty experienced enhanced volatility during the week. With benchmark indices under pressure, investors are advised to look for stocks that have undergone decent correction for putting in fresh capital for the long term.

Event of the Week

Nifty Auto remained a laggard this week akin to the weakness observed in the Global Automobile Index. Autos are facing a shortage of semiconductor chips which has disrupted and even temporarily halted production in some cases. The supply scarcity and rise in base metal prices forced automakers to make use of price hikes, eroding demand for a cyclical industry such as automobile. Additionally, with rising petrol and diesel prices domestically, demand for autos continues to remain jittery. All of this caused the selloff in autos. Investors are suggested to be mindful of these developments before gaining any exposure in this space.

Technical Outlook

Nifty 50 index closed on a negative note in the weekly candle with the index now trading at its rising channel support drawn from March 2020 lows on a linear scale. The market breadth remained mostly negative for the entire week and almost all sectoral indices closed in red. The Nifty index now seems to have found support and opened with a bullish gap on the last trading session. A similar pattern was observed in BankNifty index as well as other emerging indices which experienced a small bounce. As long as Nifty is trading above 14300 levels, a short-term bounce cannot be ruled out. Traders can maintain a mildly bullish outlook as the immediate resistance for Nifty now lies at 14900.

Expectations for the week ahead

With no major events in the following week, markets may continue to remain volatile especially because of the rising cases and fears of a lockdown. D-Street may continue to witness new IPOs as we close in on the last trading week of the financial year. Given that the coming week would be a three-day week due to festivals, investors can look for knee-jerk reactions in stocks as an interesting opportunity to buy and commit a tiny proportion of fresh capital for the longer term, before the start of Q4 earnings in April. Nifty50 closed the week at 14507.30, down by 1.61%.

(The writer is head-equity research at Samco Securities. Views expressed are personal)