Benchmark stock indices went haywire on Friday, bringing scare to stock investors who were rejoicing Nifty's record high earlier today. The correction was broad-based that made investors run for cover. Risk indeed is coming back to the market.
With the earnings season underway, commentary from IT firms, even global peers such as Cognizant, suggests no recovery in client discretionary spends. On the other hand, recent results from banks suggest some pressure on net interest margin (NIM) is likely in the near future. Earnings season has so far failed to offer positive surprises.
On the other hand, while federal futures rates indicated six Fed rate cuts at the beginning of 2024, US inflation data is turning out to be hotter than expected. This means the possibility of rate cuts has diminished, Axis Securities noted.
Many economists now predict that there may be no rate cuts throughout the year. "While this scenario is somewhat pessimistic, it carries a reasonable probability," the brokerage said.
Friday's market fall came ahead of the release of the US non-farm payroll data. Investors booked profit and there was a degree of caution, said Vinod Nair, Head of Re search, Geojit Financial Services.
Valuations turn rich
Data showed a total 75 per cent BSE200 stocks ended April above their 200-day moving averages. FPIs were net sellers of domestic equities to the tune of Rs 8,671 crore in April. In the case of Nifty, two-third of its constituents traded at a premium to their historical averages.
Nifty itself traded at a 12-month forward PE ratio of 19.7 times, near its long-term average of 20.3 times.
"Though Friday's correction was broad-based, the large-cap index was the key underperformer due to moderation of FPI exposure to the domestic market," Nair said. The ongoing general elections are adding to the prevailing volatility.
Rising fear gauge a concern
Meanwhile, India VIX has risen for the seventh straight session now, giving discomfort to the bulls. The fear gauge rose 46 per cent during this period and hit a high of 15.3125 today, before closing at 14.62.
Prashanth Tapse, Senior VP (Research), Mehta Equities said India VIX is indicating that the risk is returning back to market after the 1,000-point Nifty rally.
"I feel geopolitical tension would make headlines again giving traders an option to go short on markets. Overall, Q4 earnings are neutral to positive and not so impressive. There are few reports which suggest that FIIs have reduced holding in large caps stocks like HDFC Bank and ITC. For the short term, the trend remains cautious. We advise traders to remain light on positions,” Tapse said.
F&O outlook
On the F&O side, the Nifty put writers posed a spirited challenge against the call writers at the 22,500 strike and the option activity at this strike will provide cues about Nifty’s Intraday direction on Monday, said Ashwin Ramani, Derivatives & Technical Analyst, SAMCO Securities.
What technical charts say
On the technical chart, Nifty is showing signs of near-term bearishness as it formed a double top pattern on the daily chart, coupled with making a bearish Engulfing candle, said Kunal Shah, Senior Technical & Derivative Analyst at LKP Securities.
"This suggests a sell-on-rise approach in the market. Confirmation of the double top pattern would require follow-up selling in the upcoming week. The immediate Nifty resistance is noted at the 22,600-22,700 zone, where aggressive call writing has been observed in the options market. On the downside, the index has immediate support at 22,300, and a breach below this level could accelerate the downside momentum," Shah said.
Should you panic?
Mayank Mehraa, smallcase Manager & Principal Partner at Craving Alpha stayed unfazed. "These swift corrections prevent complacency, fostering a more sustainable bull run. This adaptability underscores the market's capacity to navigate uncertainty, driven by investor confidence and strategic maneuvers," he said.