Markets entering a listless phase, buy on dips strategy may work

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Markets this week opened carrying momentum from the previous week. It slowed down a tad bit but Nifty still managed to reach its life-time high during the week.

Nifty took 18 long years to reach the 7,000-mark while crossing 15,000 levels just took seven years. This dream run was only possible because of the unwavering progress our economy has made which led to the much-needed faith and confidence for FPIs to continue to invest in India. FPIs, right from May 2020, barring September, remained faithful to India’s unscathed growth story and were net buyers of equities, unlike the DIIs. This disparity between FPIs buying and DIIs selling continued in the first two weeks of February too.

But the open interest data for many large caps show a different picture. Their open interest has dropped to half from their October-November 2020 highs. This suggests that traders are unwilling to keep their positions open and are refraining to commit at such market highs. Therefore, it seems that neither the bulls nor the bears are taking charge of currently making the markets listless.

Moreover, SIPs have also shown a MoM decline and equity MFs are witnessing a seventh consecutive month of outflows as of January 2021. These outflows could be attributed to profit booking by individuals at higher levels. It would be interesting to observe when investors start pouring money again into equities through the mutual fund route.

Event of the Week

Brent crude has risen over 50% in the past 3 months and touched highs of $60/barrel after almost a year. This party in Brent crude was on account of the pledge taken by Saudi Arabia to heighten production cuts and the renewed optimism around fuel consumption, given the slowing virus infections due to efficacy in vaccines. However, India being a major oil importer is witnessing an increasing import bill which is also leading to an increase in petrol and diesel prices. If the rise in crude continues at the same pace, our import bills will jump widening our trade deficit gap and putting pressure on our domestic currency.

Technical Outlook

Nifty50 closed the week on a flat note with the index trading in a narrow range. Markets witnessed a brief tug of war between the bulls and bears, as bears pushed the index lower up to 14,970 but could not hold. The market has become overbought in the short term and is also trading at accelerated channel resistance which is why bulls are getting tired and lacking the demand needed to push prices higher. A similar momentum slowdown is being witnessed in many sectoral indices such as Bank Nifty and Pharma as well as global indices like S&P 500. The market is now constrained within the immediate support and resistance of 14970 and 15250 and a break on either side will dictate the trend for the upcoming week.

Expectations for the week ahead

Markets seem to have factored in all the crucial events and the coming week may witness consolidation or short-term healthy dips in prices. India Inc has reached its fag end of quarterly earnings performance given that major index constituents are done with their results.

This time corporate numbers were mostly upbeat, given the active cost-reduction measures carried out by companies to boost their EPS and demand revival which supported the topline. Going ahead, markets may witness a tug-of-war between bulls and bears in the near-term. We suggest investors maintain a buy on dips strategy.

(The writer is Head- equity research, Samco Securities. Views expressed are personal)