Focus on individual stocks

Tags: Stock Market

A number of stocks gained from the beaten-down sectors along with those which were already doing well

Focus on individual stocks
Ask any small trader or investor how did the stock market behave last week, the probability is that the answer will be — very good. This is in sharp contrast to the trend witnessed most of the times during the last one year. Despite Nifty inching upward and forming new highs, most of time small investors were left high and dry. In the last one week, Nifty gained only 39 points, which is less than one per cent, and which by no stretch of imagination can be called a significant move capable of changing sentiments. Yet the feel-good factor was created by good market breadth in the last two weeks.

A number of stocks gained from the beaten-down sectors along with the stocks that had already been doing well, bringing festive cheers to the market. The reasons of this sudden love for beaten-down stocks could be many, but the prominent one being the NAV management usually seen around the yearend. It is not the first time this trend has emerged. In the past, we have seen this sudden phase of good performance in midcap stocks around this time on many occasions. A number of institutional investors are not present in the market and that is why selling pressure has been less, which also aided the market makers of these midcap stocks.

The second reason, which also has its roots in the first reason, is short covering in the midcap stocks due to the expiry of the December series F&O contracts.

This is not to suggest that the upward move in any of these midcap stocks was not because of genuine cash-based buying. But that will become clear only in the coming weeks. If there is a sudden decline in market breadth once the holiday season gets over when large institutional traders are back in action, it would indicate that the euphoria in the midcap stocks in the last few weeks was in line with the trend witnessed over the past years. If not, that would mean the beginning of a new phase of upward move in the midcap stocks after years of underperformance.

In news flow, there was no major economic news from the domestic market, but one must not lose sight of the fact that majority of the emerging market currencies have not seen any major readjustment after the announcement of the Fed tapering. The trouble with currency volatility is that it has immediate short-term impact on the macroeconomic numbers, especially for countries like India, which are big importers.

But there was one notable event in the US debt market, which doesn’t bode well for emerging markets. The yield on US treasury bonds moved above the 3 per cent mark last week. Now if the yield keeps rising, then it will lead to some outflows from the emerging markets. At the same time, high yields can hit economic recovery in the US, which surely would make the Fed tense and may lead to a reduction in the pace at which it goes about tapering the stimulus programme. So, the US bond yield is another factor traders will have to look at carefully for hints of possible impact on the Indian equity market.

On the technical charts, the short-term indicators have come into the buy mode once again. The momentum indicators that are the first ones to indicate strength are in the buy mode as most of them continued to move upward in the equilibrium territory, but the move does not appear to be very strong.

The moving average convergence divergence (MACD) on the daily charts has come into the buy mode once again, as it turned upward in the positive territory. The 14-day relative strength index (RSI) is now placed in the buy mode, as it has turned upward in the equilibrium territory. The 12-day rate of change (RoC) is also making an attempt to move into the positive territory, which would be another buy signal. The extreme short-term indicators are now placed in the overbought territory and a number of them are moving in the sideways direction, which indicates a bullish undercurrent.

Coming to support and resistance levels in the extreme short term, in its current upward move Nifty faces the first resistance at 6,355 after which another resistance would come at 6,430. If the second resistance level is broken, then we are likely to see another spike in the index as some of the Quant positions could come in for short covering.

To distinguish whether an upward move is coming because of short covering or due to fresh buying, traders should look at the market breadth. If that is good, than one should consider taking fresh long positions or else it will raise the probability of a sharp spike followed by an equally sharp correction.

As for support levels, the first support for Nifty in its current southward move comes at 6,227 after which the next support will come at 6,150 level. If a correction in Nifty starts from the current level, it will be kicking off a lower top-lower bottom formation. Retail investors will do well to concentrate on individual stocks that have come out of the woods after a long time.

rajivnagpal@mydigitalfc.com

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