Markets show signs of consolidation after hitting record highs; where to invest now?

The week saw benchmark indices scale to new highs while seeing a dip in the derivative volumes. When compared to June 2020, the open interest (OI) continues to remain within the same range yet the traded volume of derivatives saw a sharp decline by 30-40%. The fall in intraday volumes is primarily attributable to either the new peak margin requirements or the drying up of investor conviction at current levels, which seems to be a reasonable explanation for Nifty50 touching the 15800-mark and not being able to sustain those levels. Overall, the markets remained range-bound with an upward bias.

GST collections

GST collections saw an aberration which came in at Rs 102,709 crore for the month of May. The drop in the collections was mainly on account of a sharp decline in business activities owing to localised lockdowns and mobility limitations. In spite of the shortcomings, GST collections were still up 65% on a YoY basis and continued to maintain above the crucial Rs 1 lakh crore mark for the 8th month in a row. Better-than-projected GDP data, positive IIP performance and GST collections being maintained over a lakh crore-mark, all pointed to the necessary resilience exhibited by the economy despite the second wave, further sustaining the overall market sentiment.

With clear signs of economic recovery coming in sight, equity mutual funds continued to report net inflows for the third consecutive month at about Rs 10,083 crore in May 2021, achieving a 14-month high. This was primarily driven by retail investors who moved from DIY investing and favour professionally managed funds for their long-term investing goals.

The government, in its economic review report, indicated that frontloading of fiscal measures would be critical to reviving consumption and investment over the coming quarters. They also went on to add that economic fallout from the second wave may be restricted to just the first quarter this year. In order to jumpstart the growth engine of India Inc and prioritising sustained recovery in demand-led growth, the government with its full firepower have increased capex by 66.5% YoY in April which protected the manufacturing and construction sectors from witnessing severe dents due to the second wave. With the economic recovery in sight, the markets may sustain current levels with some hiccups along the way.

Event of the week

During the week, the world’s most important commodity market was the centre of interest. Traders have picked up call options tied to Brent and WTI crude oil prices reaching $100 by December 2022 on New York Mercantile Exchange. Surprisingly this is happening at a time when oil prices have already spiked nearly 41% this year and it’s just over a year after the pandemic squashed fuel demand which led to the collapse of WTI below zero. Surely, international traders are betting on higher volatility more than speculation on higher oil prices. With these signs of exuberance in the oil market, it would be wise to book profits in oil stocks. Legendary investor Warren Buffett too has recently trimmed his stake in US oil giant, Chevron Corp.

Technical Outlook

Nifty50 index closed on a positive note touching a new all-time high. The index now seems to be finding the new range on the higher side as the dip up to 15,560 on Wednesday was quickly bought into. The Nifty index rallied more than 10% from the recent correction low and hence a mild pullback cannot be ruled out. Given that the market is rallying on a slowed-down momentum, which can be properly visualized with the help of negative divergence in RSI on daily timeframe. Any sustained close below 15400 should be treated as a red signal for the short term. As long as the benchmark index is trading above 15400, we suggest traders maintain a bullish bias on market.

Expectation for the Week

Next week’s US FOMC meeting would keep the market volatile though they have already hinted at keeping interest rates to near zero levels in order to aid the recovering economy. Any development on the same would be keenly awaited. Nevertheless, at the current juncture, an increase in rates and tapering fears appear kind of muted, with the US 10-year Treasury yield already hovering near the bottom end of its recent range. Concurrently back home, primary markets are gaining traction with two upcoming IPOs while the secondary market is attentively focusing on the conclusion of the privatisation process by the government. It is advised that long term investors should continue with their investments in marquee names in a phased manner. Nifty50 closed the week at 15799.35, up by 0.82%.

(The writer is head of equity research, Samco Securities, views express are personal)