Crude oil prices, Q1 earnings to set the tone for markets

After touching lifetime highs, bouts of 'Acrophobia' (fear of heights), lack of follow-up buying, jitters over Q1 earnings and none too enthusiastic response to the latest stimulus package of GoI have pushed markets into red during the week ended July 2, 2021. The BSE Sensex and the NSE Nifty closed 0.8 percent lower each for the week ended, compared to a 0.2 percent fall seen in the Midcap index, and a 2.2 percent gain seen in the Smallcap index.

Remarkable gains in some small-cap stocks triggered fears of 'irrational exuberance' puncturing the rally. The market is showing some signs of fatigue around these levels. Tread with caution say old timers. The trading range remained narrow for the benchmark indices. It is pertinent to observe that the FIIs have been net sellers for the last three months selling equities worth of Rs12,039.43 crore, Rs6,015.34 crore and Rs25.89 crore respectively. Decline in Covid cases and vaccination drive, expectations of increased consumer spending and normal monsoon rainfall have bolstered the sentiment. However, the global situation on oil prices is really worrying say economy observers.

The near-term direction of the markets will be dictated by Q1 earnings, progress of monsoon, international crude oil prices, macroeconomic data and global cues. After decent listing gains in Dodla Dairy and KIMS, the two IPO's open for public subscription-GR Infraprojects and Clean Science Technology are expected to do very well. Grey market premium for these issues suggest there is good demand for the shares among the investors.

Heard on the Street: Indian stock market is as calm as can be on the surface, while churning underneath more than it has in decades. The NSE Nifty and the BSE Sensex are so quiet it is almost disconcerting. The index hasn't had a 5% or 10% meaningful correction based on closing prices since the end of March; no wonder the new day traders who started buying shares in lockdown think the market only goes up.

This time the most obvious threat to stocks is the US Federal Reserve, rather than the market's overvaluation. If the Fed raises rates, cash and bonds suddenly look much more attractive, and the TINA justification for buying extraordinarily expensive stocks is undermined. It isn't something many think is likely soon, but the number one threat that could bring the turmoil from the depths to the surface of this market is the Fed.

Quote of the week: "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets-- Peter Lynch

F&O / sector watch

Mirroring the sluggish trend in the cash market, derivative segment witnessed lack lustre trades. Ahead of Q1 numbers, stock specific action was in forefront. In the options segment, maximum Put OI is at 15500 followed by 15000 strike while maximum Call OI is at 16000 followed by 16500 strike. Call writing is seen at 16100 then 16200 strike while Put writing is seen at 15000 then 15500 strike. Chartists say that the Nifty has to hold above 15700 level to witness an up move towards 15850 and 15900 levels. Expect strong support at 15600 and 15500 levels. The Option data suggests an immediate trading range in between 15600 to 15900 zones. Bank Nifty may take support at its 50 days exponential moving average which is placed around 34500 levels. The Implied Volatility (IV) of calls closed at 11.96 % while that for put options closed at 20.42%.

The Nifty VIX for the week closed at 12.84%. PCR of OI for the week closed at 1.27. Techies warn that the market is not only showing classical distribution at higher levels, but appears to be showing ample signs of a likely corrective move.

Stock futures looking good are Axis Bank, Biocon, Cummins India, GAIL, PI Inds, Sun Pharma and Zee Entertainment. Stock futures looking weak are AU Bank, Kotak Bank, Tata Steel, TVS Motors and UPL.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)

STOCK PICKS

Power Mech Projects Limited is one among the leading infrastructure- construction companies based in Hyderabad, India with global presence and highly credited in providing spectrum of services in power and infrastructure sectors. Established in 1999, the company has emphatically established a niche in power generation.

Why we are recommending

Turnaround performance of Q4 indicates good visibility of earnings in coming quarters.

Prospects for companies have brightened due to recovery in economy.

Buy between Rs835-845 for target price of Rs1250 (in 6 to 9 months) and Rs1450 (in 12 months). Keep a deep stop loss at Rs650. Risk /Reward is 1:5.

Aro Granite Industries Limited is engaged in the business of granite tiles and slabs. The company offers granite slabs in various colours, such as regular, Indian and international colors..

The Company operates an export oriented unit based at Hosur in Tamil Nadu for processing polished/flamed granite tiles and slabs. The Company exports its products to North America, South America, Europe and Far East markets. Its slab plant has an installed capacity of approximately 390,000 square meters per annum.

Chota Pokarna in making. Why we are recommending

Largest processed Granite exporter out of India. Supply of over 100 shades of Granite from India and other countries.

Special Economic Zone Unit Located in Mahindra World City, Jaipur.

EBITDA Margins Increased From 10.20% in Q4 FY2019-20 to 15.16% in Q4 FY2020-21.

Company has set up processing facility for Quartz in its existing plant in Hosur with capacity of 180,000 m2 per Annum in the first phase.

Buy between Rs66-68 for price target of Rs100 (in 6 months) and Rs125 (in 9 to 12 months). Keep stop loss closer to Rs56 as the stock has run up recently. Risk /Reward ratio is 1:5.