Stick to quality stocks till calm returns

Even if Nifty declines by 10 per cent, it would still be above the levels it had touched in February this year

Expect the unexpected is a maxim of the equity market. But most players ignore this golden dictum, only to regret later. After the Uri incident, Dalal Street had been speculating on what could be the Indian response. The majority thought this would also pass as another forgotten episode, after a few strong statements, as in the past. But the Indian response of striking at some terror camps jolted the street, which was not prepared for the event. Panic set in as the news of strikes came on Thursday afternoon. Compounding the panic was the expiry of the September series derivative contracts.

Such geopolitical tensions don’t get settled in a day or a week and both news and rumours would be making the rounds in the market, heightening the probability of intraday volatility and on overbought night basis. Any guesswork at this juncture on a flareup in animosity is pointless, as no none knows what is in store. In such uncertain times, investors and traders should go by the golden rule of investing: stay with good quality stocks until the events pass, and have a stop loss on the trading positions.

If one goes by previous data, mainline indices declined between 7.5 per cent and 9 per cent during the periods of such tensions and all those losses were covered in six to eight weeks. Now, even a 10 per cent decline from the current levels means the Nifty would still be above the levels it had touched in February this year. So, why panic and assume that equity as an asset class is going to underperform and resort to selling?

At the same time, some reassessment should be done by investors who have high exposure to mid- and small-cap stocks and there is no dearth of investors who are exposed to these segments alone. In the last six months, mid-caps, some deservingly, witnessed sharp gains. It has been seen in past that when the index corrects 10 per cent, some mid-cap stocks lose anywhere between 30 per cent and 40 per cent in value. If the quality of management is doubtful, then the decline is not only steeper but some never recover from the fall. So, it is important to have a relook at the mid-cap portfolio and book some profit in trading positions. If there is the slightest bit of doubt about the quality of management or the stock has run ahead of its fundamentals, just move out of that stock.

Thursday's movements alone would prove this assumption right. Last Thursday, Nifty lost 2 per cent, whereas the mid-cap index lost almost 4 per cent. More than 330 mid- and small-cap stocks hit the downward circuit filters, which meant they had lost anywhere between 5 per cent and 20 per cent in a single trading session. So, instead of making assumptions based on TV debates, it is better for investors to focus on restructuring their portfolios and stay light on their trading positions.

As for news flows in coming days, regardless of any change or status quo in policy rates, what the governor says after the RBI policy meet on Tuesday will be watched closely for clues to the central bank's thinking and possible line of action for the months ahead.

Coming to oscillator charts, most short-term oscillators, already in the sell mode, have gained further momentum. The average and trigger lines on the daily moving average convergence/divergence charts have further diverged and are now placed on the equilibrium line. Its movement into negative territory, the probability of which is high at this point, would give further confirmation of the trend. The other extreme short-term indicators, which had been in the sell mode, have entered the oversold territory. It is to be watched whether these short-term indicators would move out of this territory in the next couple of trading sessions. If they do, that would be a bullish signal. But if they don’t even attempt to move up and start to move in sideways direction, the correction could become more painful.

Coming to short-term support and resistance levels, 8,690 is the first resistance range for the Nifty; the 50-day moving average (50 DMA) is placed at this range now. After that 8,800, the level from which the Nifty slipped down on Thursday, would be a key resistance range. The index has to cross this range on a closing basis if the bulls were to come back to the street.

The first support for the Nifty comes at 8,480 points, after which a strong short-term support range is 8,350. If this support is lent by banking stocks, the index could move up further. In contrast, if the support is from just a couple of index heavyweights, traders have to be cautious.

rajivnagpal@mydigitalfc.com

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