Don’t invest aggressively, preserve cash…

Don’t invest aggressively, preserve cash

Investors should be in wait-and-watch mode and can selectively look at booking profits.

The domestic equity market rallied during the week as hopes built up for a possible fiscal stimulus from the government. Global markets, too, rallied as many countries — including emerging markets like Thailand, Malaysia –announced stimulus packages in the 10-15% range of their GDP. Whereas developed countries like US have provided stimulus to the economy of a similar magnitude; India still awaits a second fiscal package.  The upward move on the Indian bourses was a globally orchestrated rally and if the Indian government does not live up to the expectations of a major stimulus, markets will be disappointed, and bring down the price levels.

The fall in the stocks and the subsequent bounce back was largely due to the market assimilating with the health aspect of corona virus. The financial implication of the same is yet to be assessed and discounted, not only in India but across the globe. A crisis similar to the Global Financial Crisis of 2008-09 catalyzed by the subprime mortgages may unfold post lockdown, but on the positive side, central banks across the world have already reduced interest rates to near zero levels in order to boost liquidity, and are preparing themselves to buy bonds worth trillions of dollars from the market to avoid a 2008-09 type crisis.

This hope is pushing markets higher.  On the domestic front, the domestic market witnessed a bagful of optimism in the pharmaceutical sector, which was one of the most neglected spaces since last half a decade. The BSE Pharma index rose 50% this past month. However, the optimism seems to be cooling off and prices are unwilling to continue their upward journey. In spite of the prices opening with a gap up, the rally is being sold out on the same day or the next day.Stocks like Strides Pharma, Lupin and Glenmark Pharma rallied momentarily on positives of plant/product clearances, but the momentum did not last long. Hence, traders can go short on this sector and investors may avoid and wait for correction.

Event of the Week The central banking system of the US, The Federal Reserve, left its benchmark interest rate unchanged at the 0%-0.25% range and commented that it would use its tools and act as appropriate to support the economy. The remarks of Fed Chair Jerome Powell highlighted that the Fed would be patient and would not be in any hurry to move up the rates, which cheered the US market.  This careful status quo decision of the Fed shows the commitment that they will support financial markets with their unlimited money power, which is boosting global equity sentiments.

Technical Outlook Nifty50 opened with a gap up in the last session with the broader market participation, and ended up forming a big bullish candle for the week. The index has rallied almost 30 percent from the lows. However, the rally has been corrective in nature and not an impulse up-move. Going with the trend, we maintain a cautious outlook going ahead as the index is approaching the cluster of 50% Fibonacci retracement and gap resistance around the 9,900-9,950 range. Longs can be liquidated on weakness and fresh shorts can be initiated below 9,500.

Expectations for the Week In the coming week, markets are expected to take major clues from any updates on gradual lifting of lockdown, which would assist the participants to gauge the ground level reality and set the course of direction.  Markets are also expected to keep an eye on the long-awaited stimulus package as well as mutual fund investors’ behaviour on inflows and outflows from Dalal Street. Volatility will remain high in the coming week and a lot of volatility is expected in smallcap and midcap stocks, although they will face selling pressure at higher levels.  Investors should be in wait-and-watch mode and preserve cash by not aggressively investing at current levels. As it is said: equity is king in bull market and cash is king in uncertain times. Investors can selectively book profits in order to raise liquidity. Nifty50 closed the week at 9,859, up 7.7 percent.