Despite the recent uptick, analysts don’t expect a significant upside in the markets for 2-3 months.
In the past fortnight, the Nifty has moved from a near-term low of 5,349 to 5,560. However, analysts are not convinced that the recent uptick can continue for long, as the Nifty is heading toward its 200-day moving average (DMA), which will act as a key resistance. All indicators suggest markets will remain subdued in the near term.
The recent example of a similar movement was in March, which inspired retail investors. But the rally soon fizzled out. After touching a low of 5,365 in March, the index trended upwards and crossed the 200-DMA (then around 5,740) and touched a high of 5,912, up 10 per cent in three weeks. But it soon collapsed, trapping investors who thought things were improving.
Investors closely watch the 200-DMA because it is a potential indicator of strength or weakness in the markets or for a sector or a stock. If the market or a stock slips below the average price of 200 trading days, it indicates a bearish signal and vice versa.
While the Nifty is still 200 points away from its current 200-DMA of 5,757.67, technical analysts recommend retail investors to remain cautious whenever the Nifty gets closer to the 200-day (long-term) average.
REASON
Anil Manghnani, chairman of Modern Shares and Stock Brokers Ltd, said such rallies generally happen during the end of an uptrend, as retail investors, tired of waiting on the sidelines, enter while thinking the markets will move up after it has crossed the key moving averages. However, the underlying fundamentals and technical indicators do not support the uptrend, causing the rally to peter out.
Typically called a ‘suckers rally’, it is described as a temporary rise in a specific stock or the market as a whole. Such rallies occur with little fundamental information to back the movement in price. This rally may continue just long enough for the ‘suckers’ to get on board, after which the market or specific stock falls. It is also known as a ‘dead cat bounce’ or a ‘bull trap’.
Manghnani added that as long as the 50-DMA (short-term moving average) is below the 200-DMA (long-term moving average), markets will be susceptible to falls. Also, fundamentally, the markets may continue to remain in a downward trend until there is a reversal in earnings downgrade, inflation and interest rates, according to Anish Damania, head of institutional equity at Emkay Global Financial Services.
In calendar year 2008 as well, the markets slipped below the 200-DMA, but the fall was fast and steep. The average daily market turnover was Rs 20,754 crore. But, things are different this time, with average daily cash market volumes in May near historic lows, of Rs 13,291 crore, and falls are not very sharp. Retail investors have remained on the sidelines so far, as frontline stocks are not available at steep discounts.
Market analysts expect range-bound trading for the next two to three months and a 200-300 points gain on the Nifty index may be followed by profit booking. Maghnani said, “Institutional investors are playing contrarian. Whenever markets surge, they sell, and whenever the markets fall, they buy.”
Given the market conditions and the bearish outlook, retail investors should select stocks for long-term gains of two to three years. Suresh Parmar, associate vice president of institutional equities at KJMC Capital Markets, said, ‘Retail investors should select stocks which have good track record, give dividends and have a reputed management.”
