Watch Out for Support Level of 200-DMA
July 2020 turned out to be a jubilant month for the stock market with the Nifty ascending for the second month in a row with gains of nearly 7.5 per cent. The advance and decline ratio for the month stood at 0.87 as compared to 1.41 in the month of June. The gains could be attributed to two of the top three weighted stocks of the Nifty 50 index i.e. Reliance Industries and Infosys as both logged a double digit gain of 21 per cent and 31 per cent, respectively. As the market continues to ascend, participants from institutions have definitely been a matter of concern.
FIIs were net buyers to the tune of only Rs 2,490.19 crore in July while on the other hand DIIs were net sellers to the tune of Rs 10,007.88 crore. This showed lack of interest and intent by DIIs during the recent rally arising out of concerns over the liquidity situation in the market. With the corona virus curve starting to flatten in India’s worsthit city Mumbai, the phase of Unlock 3.0 by the Bombay Municipal Corporation has led to the reopening of malls and shopping complexes but with certain restrictions.
And while the fear of the pandemic seems to be receding, worries of stretched valuations of the stock markets are certainly making market participants anxious. The valuations of the NSE Nifty 50 hit an all-time high. The Nifty 50 index price to earnings (PE) multiple reached an all-time high of 30.41 times. Meanwhile, the focus was on the outcome of the Reserve Bank of India’s policy outcome which, quite on expected lines, had the Monetary Policy Committee (MPC) keeping the repo rate unchanged while maintaining an accommodative stance.
In the meantime, some important measures were announced for additional liquidity measures, including support of Rs 10,000 crore to National Bank for Agriculture and Rural Development (NABARD) and National Housing Bank (NHB) to help the housing sector and promote agricultural and rural activities. Also, raising the loan to value (LTV) ratio on gold loans from 75 per cent to 90 per cent of the value of gold till March 31, 2021 may have some impact on gold loan financing companies since they could become wary of lending up to 90 per cent with a sharp runup witnessed over the last few months.
Stressed MSMEs are eligible for restructuring debt provided accounts are classified as ‘standard’ till March 1, 2020. Further, commenting on real GDP growth, the RBI governor said that it may remain in the negative during the first half and the proceeding full fiscal. But his closing comment that ‘we shall do whatever is necessary to revive the economy’ does seem to have provided some solace to market participants.
The stock markets have seen a sharp rise from March 2020 while battling some of the worst economic data and this rise was aided by massive retail participation and promoters buying their stocks. However, with the easing of lockdown restrictions, the retail crowd has shifted its interest from the stock markets to move back into their routine groove. This is evident from the volume of shares traded, turnover value and number of trades. When retail investors are actively trading, the average size of the trade is small but the number of trades is more. In July 2020, the trades numbered 3,950 lakhs as compared to 4,304 lakhs seen in June 2020 while the traded quantity stood at 667,758 lakhs as compared to 845,760 lakhs and the average daily turnover was Rs 58,631 crore as compared to Rs 61,395 crore in June 2020.
These are early signs supporting the outlook that retail investors are gradually reducing their participation. The coming week is going to be an economically heavy weak as a host of data would be released, including that of industrial production, CPI and WPI inflation rate. Hence, volatility could be high on the cards and our advice to traders is to keep an eye on the 200-DMA which is currently placed at 10,853 while also watching out for India VIX. A surge above the 30 levels would be a sign that market participants are sensing some uncertainty.
