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1. Leading indices below 200 DMA: After scaling to its all-time intra-day high of 9,119.20 on March 4, 2015, the Nifty has been on a downtrend making lower highs and lower lows, which is a bearish sign. Last Wednesday, the popular index fell below the 200 day simple moving average (DMA), a crucial indicator and stayed below it for two days. Though the Nifty surged 268 points in the next two sessions to cross this crucial indicator reflecting a strong recovery, it failed to maintain the trend and was down 171 points on Tuesday to below the 200 DMA, which is a clear sign of weakness. On Wednesday too, it moved up to 8,250 levels but could not sustain. It was down at 8,129 levels around 12.30 pm.
If the Nifty fails to keep its head above the 200 DMA which is around 8,269 current, it will indicate a strong bearish signal prompting the Bears to tighten their grip on the already weak trend. Inability to cross this level could see the index correct further, and as per the price retracement study, the Nifty could fall to 7,591 levels (rounded-off) at first instance. The Nifty has risen from an intra-day low of 5,118.85 on August 28, 2013 (the start of the Modi rally) to intra-day high of 9,119.20 in March this year. The 7,591 level is arrived at by reducing 38.2 per cent of the gain in Nifty since the Modi rally started, from current value. That is, 9,119.20 – 5,118.85 = 4,000. And, 38.2 per cent of 4,000 is 1,528. So, 9,119.20 – 1,528 = 7,591.
If this level is broken, the next support will be at the 50 per cent retracement mark i.e., 7,119, beyond which Nifty could fall to 6,647 levels. These, however, are purely based on technical trends. There can be various events that could reverse the trend including the likes of major policy announcements by the government that could potential excite the markets, or even global events like a sharp fall in crude oil prices, among others. In fact, if the Nifty itself is able to sustain above the 200 DMA for a few weeks, it would indicate some strength and could help the sentiments. Clearly, we need to watch out for these events. A fall below 7,997.15 (the lowest levels in nearly five months; made on Thursday – May 7) would re-confirm the downtrend.
2. Many stocks below September 2014 levels: The Nifty is currently hovering around 8,130 levels, close to 8,152 levels seen on September 9, last year. Same is the case with the S&P BSE Sensex. However, there are many companies that are currently trading at levels that are lower than September 2014 levels. This is another indicator of the state of broader markets or beyond the top Index stocks, which also shows that bears are gaining ground.
3. No signs of earnings pick up: Forget a pick-up in corporate earnings, there could be more downgrades of earnings estimates. Earnings growth is among the utmost important criteria for markets. A weak earnings trend will give the bears more grip on markets. So far March quarter earnings aren’t exciting. To begin with, the trend in asset quality of banks, especially from public sector is far from comforting. In fact, CRISIL on Tuesday said that there is unlikely to be any respite in bad loans in 2015-16, and gross NPAs and weak assets are likely to remain high. Banks are a key component of leading indices, without whom it will be difficult to see the markets go up in a big way. Topline (in the form of loan) growth has also been muted and the outlook remains benign. Unless there are signs of increased economic activity or easing in asset quality pressures, banking stocks may remain subdued. Information Technology and Pharma, two other crucial sectors that were driving earnings till the December quarter, have seen their earnings growth decelerate. Data emerging from other sectors like cement (where top players have reported a year-on-year fall in volumes recently), steel (many players are reeling under pressure due to weak demand and prices, which is adding pressure on their leveraged balance sheets), power and infrastructure only suggest that the picture remains grim. FMCG and a select few areas are seen putting up a decent show. The roads sector could also see more action as the government gives out more awards to build new roads. But, with lack of clarity on the prospects of monsoon, it has only added to the worries of India Inc. The global economies are also not going great guns. And with the rupee outperforming its peers, it has made India’s exports less attractive. The declining interest rates locally are not enough to prop up earnings or demand in any meaningful manner.
Corporates too have little incentives to invest more in their businesses as demand remains weak, stress on the balance sheets of many companies are already high and more importantly, various sectors are witnessing low capacity utilisation. So, fresh investments by India Inc. are unlikely to happen anytime soon. All these indicate that the wait for an earnings pick-up may only get longer, unless the government comes up with measures that could spur big-bang investments.
4. Rural demand impacted: Though the government has taken various measures in the last one year, the impact of such initiatives may take more time to percolate to the country’s economy. With the government rationalising various social schemes it has further impacted rural demand. The recent news of the Land and GST bills being referred to a joint panel of both houses and a select committee of Rajya Sabha members, respectively, also indicates that it will be some time before these crucial bills get a green signal.
5. FIIs turn cautious: Lastly, global cues are not very favourable for India. For instance, treasury yields of countries like US, Germany, etc have turned attractive after rising in recent weeks. This has led to outflows of foreign funds from some emerging markets into these securities. Even otherwise, some countries like China, Japan, Philippines, Taiwan and South Korea have outperformed India in the year-to-date period, indicating the preference of foreign investors. Given the lack of immediate triggers and the run-up since August 2013 to March this year, FIIs may maintain a cautious view on India.
