“When the market is in a correction phase or trying to find a potential bottom before the rally starts, investors should not do bottom fishing because a falling knife is always dangerous,” says Mayuresh Joshi, Head of Research – Equity, William O’Neil India.
In an interview with ETMarkets, Joshi said: “Let the markets attain a clear uptrend direction identified from a Follow-through Day. Till then, it’s better to sit on the sidelines and preserve capital.” Edited excerpts:
Both Sensex and Nifty50 are down in double-digit from their highs. How should investors navigate the current market volatility?
Over decades, the emotions that guide investors haven’t changed. Fear, hope, pride, and greed perhaps rule the market more than investors would admit.
Significantly, the steep fall in the equity market can be unnerving for investors, which often triggers emotions. The best way to navigate the current market is to control your emotions and let a rule-based method show you the path.
When indexes are down in double-digit from their highs, the technical damage is severe. So, do not try to catch the falling knife. Wait for the market to form a bottom.
Let the stock having good earnings show technical strength. There are a lot of uncertainties globally, and predicting is never a prudent thing to do for such events.
« Back to recommendation stories
I don’t want to see these stories because
US markets are on the verge of entering a bear market. What is the kind of impact you see for equity markets across the globe? Do you see further outflows from India as well as risk-off sentiment picks up?
Since 1971, there have been 33 S&P 500 corrections (9% off highs and below 200-DMA), of which seven turned into bear markets. Six sectors, including Technology, Consumer Cyclical, and Retail, are trading 10% or more below both major moving averages in the US. Technology is trading ~30% off highs.
Breadth is decisively negative, with few stocks trading above the 50-DMA. There are global supply-chain woes, and Inflation remains high. It is squeezing consumers and businesses.
This is pushing the US Fed to increase rates rapidly. Higher Inflation and rate hike cycle is a new reality, and right now, the stock market is still adjusting to that new reality. And yes, no one know will be a “hard or soft landing.”
These issues are not limited to the US, but all major developed and developing economies. So, volatility will remain, and the bottom formation process might take some till the new realities get adjusted. India has outperformed, and the investment done in 2020 is still given good returns.
So, there are a lot of outflows, and they may remain for some time.
Modi government will complete 8 years in office on 26 May. Many stocks turned multibaggers in the same period, and benchmark indices doubled in the same period. What are your views, do you think the govt laid down the foundation for robust market conditions?
The government has been very proactive and bold in taking the required measures for the economy. The thumping mandate in 2014 was after decades in India.
This raised hopes of extensive reforms, and the government delivered well. GST implementation, Corporate tax cut, privatizations, Make in India, economical packages during tough covid times, higher spending through infra projects, promotion of exports, new technologies, and many others have set the strong foundation for economic growth.
All these will have a very positive impact on development over the next few years. GDP will expand, and so will the earnings of the companies. The new opportunities in the economy will create new growth stories and some growth names turning multi-baggers.
Also, improving profits will help increase the valuation of companies. The positive growth in the economy will also attract foreign investment. A blend of all these can push the market higher.
After the recent fall, do you think the Indian market has entered the buy zone?
According to William O Neil’s methodology, the market is in Rally Attempt, which means that the market (NIFTY) has created a potential bottom of 15,735. We need a Follow Through Day, i.e., an up move of 1.5% or higher on volumes higher than the previous day to take the markets to a confirmed uptrend.
Till the market enters an uptrend phase, we avoid bottom fishing and remain defensive on the market, not looking to add risk. This also means selling or trimming the positions and preserving capital.
The recent bounces in Nifty have been on low volumes, which can be highly deceiving when markets are trading 5-7% below their 50 and 200-DMA.
Which sectors are looking attractive after the recent fall?
According to our Panaray product, Consumer staples, Basic material, Utility, and Energy are outperforming and improving.
Recently, a global investment bank went underweight on IT. Which sectors are you underweight on amid an uncertain global environment?
The recent fall was a broad-based one. Almost all the sectoral indices came under pressure. Barring Nifty FMCG and Auto, all the sectoral indices are trading below their 50-DMAs. Metal, Auto, and Pharma indices are in a Rally. Apart from these indices, all the other indices are looking weak.
What is your view on currency? How is it impacting FII flows?
The Rupee weakened to an all-time low against the dollar due to
foreign fund outflows and elevated global crude oil prices. The US dollar and the yen are trading stronger as investors move toward the safe-haven assets.
As per RBI’s calculations, almost every 5% depreciation in the Rupee adds about 10-15bps to the Inflation. So given the fact that Inflation is already very high and the RBI has been relatively late to play catch up as far as raising interest rates to tackle Inflation is concerned, from now on, the outlook is not too good for the Indian Rupee.
Higher crude prices and the depreciating Rupee are putting pressure on the current account deficit.
India can defend the depreciating Rupee by using its foreign exchange reserves of nearly $600B. Now there is no need to push the panic button.
FIIs have been on a selling spree in Indian equities, and they were net sellers of Indian equities for eight consecutive months. If the Rupee depreciates further, there can be further selling of FIIs.
The monthly SIP (systematic investment plan) contribution, too, witnessed a decline in April at Rs 11,863.09 crore against Rs 12,327.9 crore in the previous month. Do you think retail investors are getting wary of markets at current levels?
Monthly SIP contributions declined in April to Rs. 11,863.09 Crore against Rs. 12,327.9 Crore in March, but SIP accounts stood at an all-time high in April at 53.9 million against the previous high achieved of 52.7 million in March.
The decline in SIP contributions would have happened because of volatility in markets and fear around macros globally and on domestic levels. Recent NFO allotments may have also diverted old SIP contributions.
What would be your advice to retail investors after a double-digit fall from highs? Things which investors should avoid doing?
Even post the recent pullback Nifty is trading 5-7% below its 50 and 200 DMA, which is not a good sign for the index.
When the market is in a correction phase or trying to find a potential bottom before the rally starts, investors should not do bottom fishing because a falling knife is always dangerous.
Let the markets attain a clear uptrend direction identified from a Follow-through day. Till then, it’s better to sit on the sidelines and preserve capital.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)