Logic says stay away, but emotions at play as liquidity drives FOMO rally

The domestic equity market surprised everyone by moving higher during the week gone by. An explosive price rise was certainly not expected by most market participants, as there was bad news coming in from all corners. Moody’s downgraded India’s sovereign rating a notch to Baa3 while March quarter GDP growth contracted to a 69-quarter lows. Despite this, stocks rallied.

Time and again, we have experienced a rising market while ground realities remain tough. But Sir John Templeton rightly points out in one of his letters that the trend of businesses is only one influence and there are ample other influencers that drive stock prices.

The only justifiable reason to the current momentum is liquidity. The investable universe is gradually narrowing with shortage of top-graded stocks, whereas abundant monies available for purchasing them are increasing, thus pushing frontline stocks higher, and this is getting reflected in the indices. Demand-supply gap has caused this big upmove! Hence, investors are advised to hunt for companies which are next in line after the frontrunners instead of continuing to invest in the quality players that have already seen a runaway rally.

This strategy should be to reap greater benefits going ahead. There will be times when logic proposes not to invest, but emotions come into play and FOMO forces you to invest. In such times always listen to logic, and this time should be no different.

Event of the Week

Oil-to-telecom giant Reliance Industries successfully concluded the mega rights issue of nearly Rs 53,000 crore. Now, this certainly seems to be a sentiment booster based on plain facts, but there is more to the story. Indian bourses have witnessed close to Rs 27,000-28,000 crore of liquidity being squeezed out of the secondary market in the shortest possible time. Numerous businesses offloaded stakes and sucked away liquidity, which otherwise would have got deployed in the secondary market. Bharti Airtel’s promoters sold a stake for Rs 8,400 crore, UK’s Standard Life along with HDFC offloaded shares of HDFC Life to raise nearly Rs 3,200 crore, Tata Power is mulling to raise Rs 2,000 crore through rights issues whereas Uday Kotak sold nearly Rs 6,940 crore worth of shares along with Rs 7,400 crore fund raising concluded via a QIP by Kotak Mahindra Bank. This does not augur well for the market in the short term.

Technical Outlook

Nifty50 posted good performance for last two weeks outperforming its global peers. The index is now approaching crucial moving averages and resistance clusters, which might pose a resistance going forward. However, there is no immediate sign of weakness to rely on. The trend on higher time frame charts for Nifty remains bearish and the index is trading just above the 20-week EMA, which may turn out to be a pullback rally. Going ahead, Nifty may face strong hurdles in the 10,450-10,550 zone, which coincides with many pivotal levels such as the 61.8 per cent of the Fibonacci retracement of the recent down move. We emphasize on observing how the index responds in this zone but maintaining a ‘mildly bullish’ outlook for the near term.

Expectations for the week

Going ahead, it would be important to see how liquidity percolates down in global financial markets. This dispersal of liquidity may signal possible long-term direction for Indian market as well. This signal will be depicted aptly by FPIs and, hence, their behaviour will have to be observed to understand liquidity flows into Indian markets. Ground-level reality check next week will also throw up important signals for the market. It is expected that the market will witness profit booking at higher levels in the weeks ahead. Investors are advised to stay away from the current volatilities for the time being.

Nifty50 closed the week at 10142.2, up by 5.9 per cent.