Budget 2020 impact: Bearish trend likely to stay down in stock market

The market response to the Budget was extremely bearish. The sell-off can be partly attributed to the fear of coronavirus impacting world growth since that has induced FPIs (foreign portfolio investors) to sell in most markets. But a large proportion of the sell-off came from disappointed domestic investors. 

The domestic institutions are likely to come in on Monday and they might try to shore up indices, but the trend is likely to stay down. In purely technical terms, the Nifty has slid till around its own 200 Day Moving Average and a further fall would indicate a long-term bear market. A fall below 11,500 would be a trigger for a deeper correction till the 11,000-11,100 level. A bounce from here is likely to hit resistance at 11,800-11,850. The trend is South-oriented because the highest weight component of the Nifty - the Nifty Bank – is already below its own 200 DMA.

The movement has been extremely broad with every segment of the market, except IT, falling in the wake of the Budget. The small-caps and mid-caps have also fallen sharply so it’s not a question of avoiding large-caps. 

With the exception of IT, every sectorial index at the NSE is in a downturn. The IT index is up slightly. IT is seen as a safe haven since it gains from a weaker rupee and its revenues are disconnected from the domestic economy. Pharma is another export-oriented sector and it could gain, if the rupee does fall through next week. 

Take the Nifty’s decline of 2.5 per cent as a benchmark of “average” decline. The IT index is up 0.9 per cent while pharma and FMCG are down by 1.5 per cent and 1.9 per cent, respectively. These are the safe havens. The automobile index is down 2.6 per cent, which is in line with the Nifty. 

On the flip side, the real estate index has taken the biggest hammering, falling nearly 8 per cent. This may be because it also saw the biggest build-up of pre-Budget positions. Media has also taken a big beating, falling over 4 per cent. The Nifty Bank is down 3.3 per cent while PSU banks are down 3.7 per cent and financial services is down 3.9 per cent. These sectors are more likely to be vulnerable in a continuing downturn.

The Vix has climbed indicating higher volatility expectations. Traders should probably go with the trend and be either short in futures or take deep long puts across the Nifty Bank and Nifty. Both indices look set to lose more ground. A fall of another 5 per cent by end-February looks possible. The USD is also likely to gain against the rupee. Apart from long positions in IT and Pharma, directly trading USDINR is a possibility.