Q4 results may lead to stock-specific action

Turning a blind eye to fears of renewed outbreak in Covid-19 cases, border tensions with China and economic uncertainty; the domestic stock markets notched impressive gains during the last week.

Benchmark indices the NSE Nifty and the BSE Sensex gained nearly three per cent to close at 10,244 and 34,732 respectively. NSE Midcap and BSE Small cap indices rose closed 1.5 per cent and 3.5 per cent higher for the week. Some analysts cite fear of missing out as another driver behind this week's gains.

FIIs were significant buyers in last two trading sessions to the tune of Rs 1,603 crore. Foreign investors do not expect the geopolitical situation between India and China to worsen significantly.

Fitch Ratings revised its outlook on India's sovereign ratings to 'Negative' from 'Stable', citing a weakened growth outlook and challenges from a high public debt burden due to the Covid-19 pandemic. After the 82-day freeze in prices imposed in the middle of March after the government increased excise duty on petrol and diesel to shore up finances; the prices of petrol and diesel have been increased consecutively for the last 15 days.

With these successive increases, prices have reached a two-year high. Near term direction of markets will be dictated by macro-economic data, developments on the spread of coronavirus virus, geopolitical tensions with China on the border, monsoon spread, movement of currency, FII inflows and crude oil prices.

Watch out for results from a host of large private sector companies (ITC, Asian Paints, Info Edge, Berger Paints, Glenmark Pharma, Future Consumer, India Cements), and public sector giants as well. With more than 600 companies going to announce their Q4 numbers in the coming week, we expect stock-specific action with large swings.

Heard on the street:

Trying to predict the direction of stock prices based on the shape of lines in a chart often seems akin to reading tea leaves. In today's markets, however, so-called technical analysis may not be completely wide of the mark. Last few week's gyrations have opened a window into investor psychology.

All along, there has been a cognitive dissonance in the combination of a surging equity market and what will likely be the sharpest one-off economic contraction on record. Investors have hoped for the best and bought the dip, reassured by the unprecedented deployment of activist fiscal and monetary policy.

It makes sense up to a point. But even for many optimists, the idea that the markets could notch gains this year, i.e. expectations of discounted future corporate profits could now be greater than back on December 31, 2019, just sounds absurd, and for good reason.

Technical analysis can trace its origin back to the writings of Charles H. Dow, founder of The Wall Street Journal. It gained prominence in 1948 with the works of Robert D. Edwards and John Magee, who provided some empirical evidence that looking at shapes in stock charts had predictive power. In the current highly uncertain environment, however, investors shouldn't underestimate the power of market sentiment.

But buying stocks on the back of them remains somewhat irrational. No data contains information about what will happen when business gets back to normal yet. As irrationality goes, perhaps a bit of stock-market astrology will prove a better guide than economic indicators. At least for now.

F&O/SECTOR WATCH

Ahead of the settlement week, on the back of short covering derivatives segment witnessed brisk trading. Track rollovers to spot winners of July series. Options data indicates that the maximum Open Interest (OI) on the Put side is still placed at 9,500 strike.

Fresh Put writing was seen at 10,000 strike, which has the second-highest OI and also likely to act as a major support this week. The maximum OI on the Call side is placed at 10,500 strike followed by 11,000. Short covering pushed Nifty towards 10,200 levels.

The Implied Volatility (IV) of Calls closed at 28.46 per cent, while that for Put options closed at 30.53 per cent. The Nifty VIX for the week closed at 31.46 per cent. PCR OI for the week closed at 1.53 down indicates more Put writing as compared to Calls.

Overall option data indicates that the undercurrent is in favour of bulls and Nifty may trade in a broader range of 10,000-10,500.

In coming sessions, 10000 should act as crucial and major support for the Nifty and on the upside, immediate resistance is placed at 10,350 level. Volume breakout above 10,350 may propel Nifty towards 10,600 level as well. Bank Nifty closed positively by 3.5 per cent and also witnessed OI addition to the tune of six per cent for the week.

Option data shows Call writing at 22,000 strike and Put writing at 20,000 strike implying support 20200-20500 and resistance at 22000-22100. Stocks looking good are Adani Power, BHEL, BEL, HDFC Life, Federal Bank, Havells, Mannapuram Finance, National Aluminium, Zee Entertainment and Ultratech.

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