All eyes on US elections

Spooked by negative global cues as rising number of coronavirus infections across the globe that's shaking investors' confidence in the global economic recovery, and uncertainty is surrounding the outcome of the US elections; the domestic markets ended on an uncertain note during the week ended.

The BSE Sensex closed way below 40,000 mark, down 1,071.43 points or 2.63 percent at 39,614.07, while the NSE Nifty fell 287.95 points or 2.41 percent to 11,642.40. Despite current week's breather, market breadth has improved significantly with 66 per cent stocks of the Nifty trading above 200 days SMA compared to last week's reading of 64 per cent.

Market players believe that rejuvenation of market breadth bodes well for a pullback rally and durability of upward momentum. The Nifty Midcap and Small cap indices have also been forming a higher base above 50 days EMA. Expect broader market to endure its catch up activity as the sectoral rotation within broader market space would lead to rejuvenation of upward momentum.

In an encouraging sign, the eight core industries output contracted at a much lower rate of 0.8 per cent in September 2020, collating well with the higher consumer spending seen in early October. The disaggregated performance of the core industries was highly uneven, with sharp improvements in coal, refinery products and cement, amid a worsening performance of fertilisers and natural gas in September 2020.

Encouragingly, coal, electricity as well as steel were able to post a YoY expansion in September 2020. The 15th Finance Commission will present its report on November 9. The most important aspect looked for from this report is devolution formulae, that is, share of central taxes to 28 States.

Heard on the Street: US markets notched their worst month since March in the final lap of the Presidential race. Volatility reigned in the week before the November 3 contest. Investors have been spooked by a record high in coronavirus infections in the US, fresh lockdowns in Europe that threaten economic growth and a mixed bag of earnings report from big technology companies.

Markets are concerned that a replay of February and March is on cards. After a remarkable run since late March, stocks peaked in early September—only to tumble on worries the market had run too far, too fast.

Although economic data and corporate earnings have improved lately, many investors fear the impact of another round of lockdowns in the event the number of coronavirus cases continues to increase. The prospect of a contested presidential election continues to cast a shadow over the market, adding to the uncertainty over what the rest of the year will bring.

Europe is once again at the epicenter of the coronavirus pandemic, with the continent now recording more and faster-rising deaths than the US in an abrupt reversal of fortunes.

Fresh lockdowns by governments in response to the rising infection levels, led by France and Germany, are weighing on markets. On the eve of the US Presidential election and second wave of coronavirus in some parts of the globe, week ahead will be very critical for global markets.

Quote of the week: The four most dangerous words in investing are: this time it's different; –Sir John Templeton

Follow market trends and history. Don't speculate that this particular time will be any different. For example, a major key to investing in a particular stock is its performance over five years. Nothing shorter.

F&O/sector watch

Derivative segment witnessed highly volatile moves in the week ended and settled in a negative territory with loss of more than two per cent week-on-week. On the rollover front, the Nifty started the new series with higher Open Interest than in the last series.

The November series started off on a negative note and experts expect it to be volatile one. The option data indicates that the Nifty could remain in a wider trading range of 11,200-12,000 levels.

Maximum Put Open Interest (OI) was seen at 11,000 followed by 11,500 strike, while maximum Call OI was at 12,000 followed by 12,500 strike. The Implied Volatility (IV) of Calls closed at 23.39 per cent, while that for Put options closed at 25.12 per cent.

The Nifty VIX for the week closed at 24.02 per cent and is expected to remain volatile. A more than 10 per cent rise showed a strong uptick in the volatility, which resulted in a higher premium for option contracts. PCR of OI for the week closed at 1.67. Call writers were seen adding hefty OI in 11700-11800 & 11900 strike as well.

It indicates that any sharp upside would remain capped in coming week. From technical front, if Bank Nifty holds its 200 days exponential moving average which is placed at 23600 levels on daily charts a strong rally from current levels is not ruled out. In the week ahead banking and NBFCs stocks will be in focus as the next hearing in the Supreme Court on the much-awaited loan moratorium case is scheduled on November 2.

Experts feel the verdict is expected to be in favour of the banking sector. In the passing week, the GOI has already informed the Supreme Court that lenders have been directed to credit the difference between compound interest and simple interest for six months of moratorium period on loans up to Rs 2 crore, to the accounts of eligible borrowers by November 5. Avoid shorting and use sharp dips to buy financials say industry observers.

On the back of monthly automobile sales numbers, heightened action is indicated in auto stocks. Tractor is the only segment of the automotive market that has seen double digit sales growth since July, with September retails up 80 per cent year-on-year.

As a result, tractor companies are ramping up production capacity hoping that this sales spike will continue beyond the festival and harvest season. Stay invested in M&M and Escorts. Reports from Tata Motors, Maruti and other auto majors indicate increasing shifts to meet the soaring demand.

However, the supply chain disruption is still a worry for the industry, which is now racing to hit 100 per cent production. Buy on declines Tata Motors and Maruti. Stock futures looking good are Adani Ports, Cholamandalam Fin, HDFC Life, ICICI Bank, Muthoot Finance, National Aluminium, Pidilite Inds, Ramco Cement and Tata Steel.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)