We have seen a very sharp correction in the Dow as well as Nasdaq with the tech heavy stocks leading the fall in the US. Both these indices are sitting at multi-month lows now. Where do you see that headed? Has the selling pressure abated now or is there more downside?
The weakness is led by what is happening in the US markets and overnight Dow Jones has broken its February lows; 32,284 was the previous low and it managed to close below that. While Nasdaq, which has been leading the overall correction, S&P 500 has gone below February lows. S&P 500 VIX is a clear indicator. It is also headed towards 35 mark, indicating that the high volatility period may be back for the US markets.
We are still trading at 22% VIX in spite of the overall correction that we have seen and the volatility – especially the gap up and gap down – that we have seen in the series in the last few weeks have been very tough for traders. It has not really allowed participation from the market. So -net from a global perspective, it definitely seems to be a grim picture. Time and again, we have seen those bouts of volatility with short covering rallies as well. But as long as the FIIs long-short ratio remains below the 25% range, we believe that upsides for the markets will be capped.
Historically we have seen that long-short ratio on the index futures has bottomed out around 17-18%. Only once did it stay below that which was during the pandemic fall that we had in March 2020. But barring that, most of the times we have seen this ratio bottoming out around the 17-18% range. Currently it is trading at 23% and we believe that there is some more room on the downside as far as this important ratio is concerned.
Overall, this is still a sell-on-rise market, especially given the 200-day exponential moving average that we had which is around the 16,830 mark. As long as we remain below that, this is a classic sell-on-rise market where we are heading further downside in the medium term.
You said we are likely to see some more downside. What sort of target have you set for Nifty and Nifty Bank?
The best way to break up the index at this point in time is based on two timeframes: One, if you are a positional trader, you are not worried about the 200 point plus and minus that we are seeing on the Nifty. So as a positional trader, the view is any time you see a rise around 16,600-16,700, look at shorting opportunities. In case you are stuck in long, look to exit your long positions around that level and in case you are a day trader or a very short-term trader, then given this weekly expiry setup, we believe that there is a bounce back which is playing of as we speak and we could very well be headed for the 16,500 mark.
So positionally, we feel that 16,000 should be tested possibly in the next weekly expiry and below 16,000, we believe that there is a good chance to make a new lower low. The earlier low was around 15,670 mark. So, 15,500 is something that we have on our mind as a positional target for the Nifty . Any rise we see from these levels could be good opportunities to short. At least, one can buy put options and ride this possible down move.
The India VIX trading at 22% is also something not so comforting for the overall scheme of things. At the same time, not being as high as probably what S&P 500 VIX is gives us room on the upside as well. So in case there is a sharp fall from here, India VIX could head towards its previous high of around 28% to 30%.
The Nifty downside you suggested 15500 is open as far as the markets go, but in terms of the specific pockets, whether the metal space which has been beaten down quite a bit already or the IT space which has seen quite a bit of correction, does it warrant a fresh look and a fresh buy at these levels?
Bounce backs in such periods can be tricky because bounce backs can be sharp and quick and we are advising clients not to sell something which is already weak. Generally what happens is we prefer to short weakness and buy strength but typical grinding down market, we are looking at ideas which were relatively strong but now are becoming weaker.
At this point in time, as far as the shorting ideas are concerned, we are sticking to index strategies, index based shorts whereas as far as something like metals is concerned, most of the metal counters have RSIs as low as 20. So any bounce back in base metal stocks could be a smart 5-6% kind of a move. Purely from a bounce back perspective, in case there is some green on the base metals, metals counters could be looked upon for going on the long side.
Given the weakness in the USD to INR which has crossed the 77 mark, we believe it is headed towards a change in trajectory. The earlier range which was in the range of 74 to 76 is now shifting upwards and we believe that it is headed towards 78 and above.
So on the upside, the rupee is becoming weak and that should bode well for the largecap IT. In the largecap IT space, Infosys is something that we like, particularly given the technical setup and the nature of the stock and its correlation historically with weakening rupee has been quite a robust one.
So from a bounce back perspective, IT could very well be a surprise. This sector was the first one to get weak and was under bear control. It broke its 200-day moving average earlier than the broader market and we believe that at least until the 200-day moving average breaches, which is around the 1650-1675 mark, a bounce back can be expected in Infosys. It can be bought with a Rs 1,500 as a stop loss. So we are very specifically long.
As of now, IT can do well and as far as a very short-term view on the market is concerned, I think this bounce back should take us slightly higher both on the Nifty as well as on the Bank Nifty.
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