Markets in consolidation mode

Spooked by the rising number of Covid-19 cases, RBI's warning of a potential rise in NPAs in FY21 and weak global cues; after sixth consecutive week of gains, the domestic stock markets corrected during the week ended July 31, 2020.. For the week, benchmark indices the Nifty closed at 11,073, down by 120 points and the Sensex weakened by 421 points to 37,607. The broader market outperformed the benchmarks as the BSE Mid-cap and Small-cap indices gained marginally during the week. Rising Covid-19 cases indicate there is still the risk of a second wave, or an elongated first wave of the virus. In the week ahead, all eyes will be on the three-day Monetary Policy Committee (MPC) meeting, which will conclude on August 6. Given the recent financial stability report wherein RBI warned of a sharp rise in NPAs in FY21 and current inflation scenario, economy observers expect the MPC members may cut repo rate by at least another 25 bps on top of 115 bps cut in previous two meetings. Markets expect decision on extension of moratorium of loans, more liquidity and regulatory measures from RBI to support the financial system and revive the economy. Investors largely expected poor economic figures, and the extent of the first quarter's decline in gross domestic product was slightly smaller than economists' projections.

GST collections suggest mild green shoots in the economy. This whole pandemic has been a quick peer into the future and what the world could look like in two or three years. It's sped up the transition to a new economy and market players are trying to figure out which are the businesses that are going to be really successful in that economy. With major corporate earnings out of the way, markets are moving into a consolidation mode with momentum slowing down in the last couple of sessions. Near term direction of the markets will be dictated by the rise and fall of Covid-19 cases, crude oil prices, rupee movement and FII flows.

Heard on the Street: Don't let the stock market rally 'Mask' reality say experienced market players. Investors are suddenly showing foresight like never before, and are looking past the pandemic to an eventual recovery. After falling nearly 40 per cent from late February to late March, the NSE Nifty and the BSE Sensex have come to within about 10 per cent of their all-time highs. Every recession is different, though, and perhaps this is one where it is easier for investors to envisage the eventual recovery than in past downturns. Still, there is substantial uncertainty about what course the coronavirus might take in the months ahead, the unemployment rate is above its highest levels from the last crisis and gross domestic product just registered its sharpest downturn on record in the first quarter. A newfound belief in profits' ability to recover seems dubious.

F&O / Sector Watch

Settlement week witnessed brisk trading in the derivatives segment. Rollovers were a tad lower than last three month average. Options data indicates Nifty movement in the range of 10,800-11,300 in coming days. Maximum put open interest is at 11,000 and maximum Call open interest is at 11,200. Modest call writing was seen in 11,200 strike and put writing was seen at 11,000. Surprising build-up of positions was seen in put options at 10,600 strike. For Nifty immediate resistance is placed at 11,150 level; above which the rally can get extended towards 11400 level. Technical oscillators are suggesting that volatility will continue to grip the markets in coming week and traders should remain focus on stock specific moves. With most of the major corporates coming out with Q1 earnings, it is time to review different sectors say analysts. Expectedly most companies from Pharma sector, large and small, have reported good numbers. The sector is a winner in COVID-19 times. Use corrections to buy Aurobindo Pharma, Dr Reddy, Divi Labs and Sun Pharma. With work-from- home at more than 95 percent; unhurt from the lockdown IT sector has emerged as the clear winner. Following the Tier-1 companies, second rung IT companies also have shown similar positive trends. The market has been quick to discount the standout performance with the IT index gaining a whopping 22 percent in July. Stay overweight in the sector. Cement industry has surprised with smart improvement in price and volume. Robust rural demand has helped the industry substantially. Buy on declines Ultratech, ACC and Ambuja Cement. Looking good in stock futures are Amara Raja, Ambuja Cement, Godrej Consumer, National Aluminium, Sun Pharma, UPL and Voltas.

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