Equity outlook : Special update

Is NIFTY overvalued & hot-to-hold?

The expectation of MARKET PULSE was formation of long term base at 7700-7750 and short term cap at 8150-8200 for back-and-forth play. The bullish cues are from QE driven external liquidity, positive outlook on US growth momentum extending support to global stocks, positive trending in domestic macroeconomic fundamentals and firm NaMo grip for establishment of India economic & social well-being into long term. The bullish momentum beyond 8180 (post one set of back-and-forth moves at 7750-8150) got the trigger from extended QE from Japan, commitment for enhanced liquidity support from ECB and rate-cut expectation from RBI. All these combined, helped NIFTY post a new high over 8180 at 8365 before sideways mode at 8285-8365. In the meanwhile, DJI posted upside break-out after back-and-forth moves at set NT focus of 15850-17350 and into sideways mode at 17350-17700. What next?

Is NIFTY overcooked? It is possible that upside gains in NIFTY for rest of 2014 is limited. While there are no positive triggers ahead, risks to bullish assumptions (and outlook) have emerged. All positive cues (domestic & external) and optimism on the way forward is more than adequately covered in value re-rating since mid 2014. The risk factors now are from unwinding of excessive value built on rate-cut hope on 2nd December, delay in rate-cut into FY16, earnings risk of corporate India to adjust for excessive market valuation and risk of dilution in foreign investor appetite for India Equity at high valuation against short term downside pressure. All taken, India Equity assets has already shifted from cheap2acquire (NIFTY below 7540-7723) to hot2hold (NIFTY over 8365).

What is the way forward? Two options on the way forward for NIFTY: (a) shift of focus for back-and-forth stability at 7700/7750-8150/8200 or (b) retain short term bullish undertone for consolidation (with elevation) at 8150/8200-8500/8550. In either case, long term base is seen firm at 7750-8150 while need new positive triggers to extend bullish momentum beyond 8350-8550. During this time DJI index is expected to do better for extension beyond 17700 for short term consolidation at 17100/17350-18100/18350 as investors shift money into equity (and commodities) awaiting spike in US bond yields. The near term risk on NIFTY is from loss of FII appetite while domestic investors too in unwind mode to book profit at current high valuation for correction into cheap-to-acquire valuation now seen at 7750-8150. For now, let us set focus at 8265/8315-8365/8415 with bias for correction into 8150-8200 and low probability for extended gains into 8500-8550 (seen as ST reversal point into 7750-8150).

It has been terrific 2014 for equity investors and now as we move into year end thin (and illiquid) market, it is prudent to play safe, stay light and book most profit off the table. The risk-reward is not seen to be in favour for staying long NIFTY at 8365-8415 into 2nd December RBI monetary policy and 8500-8550 into year end & holiday season.

Moses Harding