Our benchmark indices have lost some blood this week as the bears were establishing their grip. Valuations of many stocks are skyrocketing, although fundamentals seem to be lagging. Interestingly, FIIs and DIIs have reduced their stake in most of the companies which have recovered sharply within the week despite no negative news.
This is in line with the final phase of the Dow Theory, in which institutional investors (considered smart money) book profits slowly during a sharp rally, while retail investors absorb these volumes and continue the rally. The Dow Theory’s findings seem to apply as retail investors have been increasingly stockpiling shares over the past few months.
This bull market started when the market fell to lower levels due to fears of the pandemic. Institutional investors across the world started buying stocks following the announcement of stimulus packages, rising liquidity, progressive opening up of the economy and better business sentiments. With stock prices returning so quickly, excited retail investors entered the market.
FOMO spread like fire and a record number of new investors joined the frenzy. In such situations, retail investors are likely to buy stocks that absorb any potential downside in the market, without examining the fundamentals. As seen in the past, when valuations diverge from the underlying fundamentals, expectations and expectations propel the markets upward into the dangerous zone of greed. The smart money then pulls the plug, usually resulting in a sell-off or correction. Only time will tell whether or not we will see such intense selling in the future, but this week’s events indicate that investors should be extremely cautious.
event of the week
Whipsaw swing appears to be the new normal for markets, after a flurry of businesses announced their quarterly numbers this week. Many companies saw a sudden drop in their stock prices despite posting good numbers. While such conflicting movements may seem puzzling, they are not unfathomable. This can be attributed to the fact that investors are overemphasizing or struggling to better results to meet expectations rather than considering the broader perspective. As a result, even the slightest variation of actual results from their estimates causes panic reactions. Investors are advised to consider the long-term potential value of companies rather than comparing the performance of various projections.
Technical Outlook
After a volatile week, Nifty closed on a negative note and is still trading in overbought areas. Other emerging market indices are also finding resistance at current levels and hence further correction in the index cannot be ruled out. The benchmark index has got strong support at the level of 18050. Any break below this support level could trigger a bearish sentiment across the market. Unless the index takes a decisive directional move, we suggest traders to maintain a cautious approach and not venture into any aggressive trades.
expectations for the week
The market may struggle to regain its footing next week and is likely to remain in a narrow range. After crossing the 40,000 mark for the first time this week, Bank Nifty is likely to make headlines next week as various banks announce their results. Considering the improving economic activity, enhanced collection efficiency and stable asset quality, a favorable earnings outlook can be expected from this industry. Moreover, with the monthly expiry next week, the market may remain volatile. The Nifty closed at 18114.90, down 1.22% at the end of the week.
Yesha Shah is Head of Equity Research at SAMCO Securities
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