Roller-coaster ride in 2015
It has been major two-way swings since mid December 2014 to now! NIFTY moved sharply up from 7961 to 9119 (by 14.5%) before pushed down by 12.3% (to 7997). Bank NIFTY two-way momentum was sharper at 19.5% on its up move from 17502 to 20907 before 17.5% push down to 17246. Post this high speed volatility, market sentiment is weak (and nervous) at 8100-8300 and 17600-18300 in sideways mode. The back-and-forth move within set cheap-to-acquire zone of 7950-8100 (17200-17550) and hot-to-hold zone of 9000-9150 (20650-21000) is good, but the speed either-way was scary for many!
Global cues in favour against weak domestic sentiment
The undertone is nervous, to put it mild, despite mild external tailwinds from bullish undertone in DJIA index at 18000-18500, ease in US 10Y bond yield from 2.35% to 2.10% and steady USD Index at 92.50-94.50. Brent Crude is also seen in comfort zone at $60-70. The absence of economic data support for FED shift into rate hike cycle in June - September 2015 is major relief. Despite all these positive cues in play, worry is from FII sentiment (and appetite) for India equity. Given the short term risk on Rupee (post relief from 64.28 to 63.45), FII flows likely to stay muted shifting focus to developed or other emerging markets.
The domestic cues are not bad to cause discomfort. The positive factors are from absolute comfort on inflation, with CPI at ease below 5% and WPI sharply down below par. Given the CPI ceiling at 6%, RBI has sufficient grounds to push the Repo rate down to 7% with either one-shot 50 bps or in 2 steps on 2nd June and August review. The issue however is from elevated short term money market rates, making the policy transmission ineffective including sovereign yield curve. There is no great comfort on the ability to sustain FY16 GDP growth at target zone of 8.1-8.6%, against RBI target of 7.8%. The capital (debt and equity) expansion is yet to pick up in the absence of adequate demand, keeping capacity expansion subdued. There are signs of consumption - investment disconnect at this stage to exert downside risks on set growth target. There are no major risks in play on twin-deficits despite growth pressure and partial unwind of benefits from Brent Crude and Gold price value. All taken, the trump card is with RBI to ease liquidity pressure (through aggressive CRR cuts) with or without cut in policy rates. Combining all these emerging cues into play, MARKET PULSE strategic view was not to chase NIFTY beyond 7950/8100-9000/9150 (Bank NIFTY 17250/17600-20650/21000) till end of H1/FY16 for review after clarity on timing (and quantum) in FED rate action and trend in macroeconomic fundamentals to get sovereign rating upgrade into focus or otherwise.
Nervous undertone ahead despite favourable global cues and more accommodative monetary policy stance
Despite NIFTY recovery from 7950-8000 (Bank Nifty from 17200-17350), struggle at 8200-8350 (and 18000-18350) is worry. The immediate directional bias on the market is mixed reflected from low liquidity and squeeze in May & June Futures premium. The buy-dips support is not with intent to hold for long but with greed to sell post rate cut on 2nd June or otherwise. The sell-on-recovery appetite is huge at 8300-8350 (and 18350-18500) in anticipation of post policy push-back into 7950-8000 (and 17200-17350). At this stage break-out bias is neutral within near term big picture at 7950-8550 (and 17200-19100). How to trade this market, then? Let us keep focus at 8165/8200-8315/8350 (17900/18000-18400/18500); break-out either-way will be swift into 7950-8000 (17200-17350) or 8500-8550 (18950-19100). The liquidity has to be from DIIs as FIIs will be in search for exit having already switched focus to home market or other emerging markets.
All taken, strategy is to stay end-to-end at 8165/8200-8315/8350 (17900/18000-18450/18550) with tight stop on break for 1:3 risk-reward play.
Good luck!
Moses Harding
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