Will there be Light at the End of the Dark Tunnel?
The known devil emerged from the woodworks last night when the US Federal Reserve did what was widely expected – the most aggressive rate hike since November 1994. However, what was surprising to see thereafter was the reaction of the market participants. The US’ equity markets rallied, and the dollar and yields fell. So, why did this happen? It was the prepositioning which was so bearish ahead of the event that in the past five trading sessions, Dow Jones has plummeted 6.5 per cent while the technology-heavy Nasdaq and the S and P 500 index nose-dived 7.6 per cent, respectively. And post the event we saw a classical reversal of pre-positioning.
Furthermore, market participants clearly took notice of the commentary by US Federal Reserve Chair Jerome Powell, wherein he mentioned that the Federal Reserve is committed to fighting inflation and returning it to 2 per cent. Also, such a large hike should be considered ‘abnormal’. This proved to be heartening for market participants and so it was the combination of bearish prepositioning and commentary which proved to be the silver lining for the US’ equity markets. Thus, the stage was perfectly set up for the Indian bulls to carry on the positive baton from the overnight cues given by the US market and take charge.
Initially, the bulls did take charge. However, the market failed to extend the morning gains and it did not move above Monday session’s high. What followed was mayhem as Nifty breached its crucial support level of 15,650 and also, hit a fresh 52-week low. In the same vein, Nifty Smallcap index breached its important support level and marked a fresh 52-week low. An important point to note here is the cash volume in the Indian equity market just before the US Federal Reserve event. NSE cash volumes were lower for many months and on June 15, it reported its lowest total volume, which stood at Rs 36,571.02 crore.
This was 15 per cent lower than the June average volume of Rs 44,903 crore and far lower than the average volumes of May at Rs 57,677 and April at Rs 68,013 crore. So, now the million dollar question is how one should approach the market from a short to medium-term view? Inflation and rising interest rate are a reality which we have to live with for the next few months, may be right on to 2023. Considering we pretty much know for certain that inflation is here to stay, maybe that means the market too should discount this and give in to the fact that the central banks have acknowledged that they will remain committed to combat high inflation.
This should provide enough solace. That said, the global banks are synchronised to a tightening regime and further tightening of financial conditions ahead would leave investors with a sense of uncertainty in the air. Furthermore, the real focus is on the regime change and surprisingly it’s not about the US Federal Reserve dot plot but it’s about quantitative easing (QE) going into quantitative tightening (QT). In a QE world, the more risk you take, the more reward you get, while in a QT environment, the more risk you take the more you get penalised. That is the real thing to focus on in the equity market.
Importantly, the idea is not on to give up investing but about picking up your spots. That is because while no one knows where the bottom is, this is the chance to identify quality stocks at every dip and buy and hold. When bears stalk the street, go and buy quietly, trusting the fundamentals and then wait for the bulls to come rampaging. This could mean a wait of some months but the gains will be worth the patience. However, before making entry into any stocks watch out for these four Ls: Don’t invest in loss-making companies. Don’t own companies with ludicrous expectation. Avoid companies with lofty valuation. And do not own high leverage companies.
