Correction Bigger in Broader Markets: Be Watchful!
The markets in the past one week have reminded us that stock prices cannot move northwards in a unidirectional manner. A healthy correction is what is indeed required else we are clearly positioned to enter a bubble zone. We are at such astronomical valuation levels in the market where even positive results are leading to profit booking. The IT sector stocks have clearly caught investors’ fancy with better-thanestimated results. The Tata Group stocks have been rerated. Chemical stocks have taken a huge hit. The concern on the chemical sector stocks is regarding the earnings.
Navin Flourine reported de-growth in earnings which led to a steep fall in its stock prices. However, the impact of Navin Flourine’s poor earnings was seen across the listed chemical stocks with most of the trending chemical stocks slipping deep into the red. Clearly, heavy profit booking is seen in those counters which have rallied a lot. The BSE Small-Cap index and BSE Mid-Cap indices are down by more than 4 per cent each in the past one week. The pain in the broader market is visible. Investors ought to be watchful when dealing in small-caps and mid-caps.
Several triggers are at play besides earnings at this point of time. Inflation fears, rate hike fears, supply chain disruptions, excessive valuations, ebbing foreign money flow and the ultimate risk of forecasted growth not being delivered. While we are not close to that point where we can say a trend reversal is confirmed, several stocks in the broader markets however have already entered the bear market territory in the sense that they have corrected by more than 20 per cent from their recent highs. It is important to stick to high-quality stocks at this moment and stay with a high-conviction portfolio.
Leveraged trading should be avoided at any cost and attention should be paid to opportunities where the stocks may have fallen more than is justified. All eyes will be on the earnings this season and on the commentary by the Reserve Bank of India (RBI). The global markets seem to be rallying, taking cues from better-than-expected earnings. The areas to focus on for investors will clearly be the IT stocks where some profit booking is happening and clearly an opportunity for long-term investors will present itself in this space as soon as the stock prices get attractive after the drop in prices.
Tata Group stocks’ comprise another set of stocks where investors need to be watchful for outperformance. However, those stocks where the earnings’ visibility is evident and have been beaten down in the recent market fall can be potential candidates for outperformance. Usually, the defensive stocks tend to do well in volatile times. By defensive we mean IT, FMCG and power stocks. This time around the power stocks are showing relative strength. As the festive season is around the retail sector and hotel stocks may also attract some buyers but be watchful.
Focus should be on those stocks that are showing relative strength. The automotive sector stocks despite the challenges related to availability of chips and semiconductors could show some promise. Keep them on your watch list. Beaten down chemical sector stocks may also attract some buyers at the lower levels. At the index level the key support area for the market i.e. Nifty 50 is in the zone of 17,950-17,880. The key resistance area that one needs to watch out for is the 18,605 level. While the broader market structure is positive, the near-term trend seems to have reversed. It is time to be cautious as the market is slippery. Avoid leveraged bets.
