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  • Jimeet Modi

    CEO, Samco Securities & StockNote
    The founder & CEO of SAMCO Securities, StockNote and the Indian Trading League Company, Modi believes that price is the most important factor in investing. He is credited with developing the AIRM (TM), an approach to screening stocks and businesses in a scientific manner. His role model is Warren Buffett.

Ready, steady, pause! Clear signs Nifty headed for major correction

This is the time to be cautious and take some profits off the table.

Nov 30, 2019, 10.48 AM IST
Nifty closed the week at 12,056, up 1.2 per cent.
Markets seem to have achieved a sort of mini-euphoric phase given the relentless rally of about three months without any significant correction. Various polls suggest 90 per cent of people are bullish that markets will touch new highs by Christmas. FPIs have increased their bullish bets on Indian equities whereas net purchases till the third week of November totaled to Rs 17,548 crore.

Moreover, IPOs are frantically getting oversubscribed; new ones are also buzzing and are getting ready with the same energy. Ideally, these are euphoric states, which make ‘herding’ more conspicuous: buying when markets are going up. Nifty rollovers, too, were at a high of their three-month average. Needless to say, this is the time to be cautious and take some profits off the table when euphoric factors are visible.

Moving on to a specific sector, a breakthrough was achieved in the pharma space, wherein the domestic drug industry agreed to the government’s proposal to allow a 30% cap on margins of non-price-controlled drugs. This eventually took obnoxious pricing decisions out of the hands of pharma biggies, which is a big negative for a free market economy. Had this event transpired at the sectoral peak, pharma stock prices would have crashed.

But the fact that it occurred when this sector is already down led to a neutral reaction by these stocks. This certainly gives an indication that a major bottom has been formed for the sector and it would be safe to play the cards on stocks that are hitting 52-week highs, because if such restrictions on profitability could not take the prices lower, what else would?

Event of the week

The steel sector was in limelight as some companies indicated that they have already raised prices by Rs 500 per tonne and a price increase of Rs 1,000 per tonne is under way. Steel prices have already increased 20 per cent in international markets and in high beta stocks, prices have already risen 50 per cent.

Hence, when such events become talking points on Dalal Street, it can best be assumed that it’s time to move out of the sector, book profit and re-enter at lower levels.

Technical Outlook

Nifty50 has a made a failed double top, a powerful pattern to signal that correction has set in. Nifty Private Bank index has made a clear double top whereas midcap and smallcap indices are diverging from the current rally in Nifty50, indicating overall weakness in the market.

Momentum indicators had already weakened a few days ago, but now with a strong down-move, the market is expected to head lower. Traders may short Nifty50 with a stop loss above 12,180.

Nifty 50
Technical Outlook for Nifty 50

Expectation for the week

RBI’s Monetary Policy Committee (MPC) would meet next week to review interest rates. Given the inflationary trend, there is a likelihood that a 25 bps rate cut may not follow, but in order to tackle slowdown, a rate cut is the only tool available with RBI. Thus, it will be a tough call for the MPC to make.

The US Fed is not expected to reduce rates this time around given the recent commentaries by the Fed Chairman.

The buoyancy on the bourses will bring in more IPOs, which could benefit retail investors, but will impact the secondary market in terms of liquidity, leading to a correction in overheated stocks. Investors should calm their nerves and wait for a correction before investing.

Nifty closed the week at 12,056, up 1.2 per cent.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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