Past market trends suggest Nifty50 is far from bottoming out

Usually, when the market bottom is in sight, the sentiment is extremely pessimistic, with fear at its peak. It is a phase where investors are highly sceptical of pouring fresh funds into the market. Such scenarios are also marked by periods where markets decline on lower volumes and rise on higher volumes.

However, currently, the consensus is still to buy the dip to ride the next rally indicating that greed is still alive. Further, volumes on lows are far from drying up. Also, if we look at the data of the past twenty years, apart from the event-based market crashes of 2008 and 2020, other corrections have had average drawdown levels of close to 25% in Nifty. Basis these historical precedences, there is still room for markets to fall.

Additionally, S&P 500 has fallen more from its all-time high than the Nifty. The fact that Indian markets have fallen higher than S&P 500 in every major market fall further suggests that the bottom is still far.

If markets are to reverse strongly, key triggers will be needed which in the current context could be the quick easing of inflation and a pause on the aggressiveness of interest rate hikes. Currently, there are no visible signs of such turning points. Therefore, it is unlikely that the markets are bottoming out.

However, even if markets do rebound, there are strong resistance levels that will be difficult to breach, thereby, increasing the possibility of another relief rally. Therefore investors should be extremely cautious and should not interpret a relief rally as the end of this correction phase.

Event of the week
During the week, the spotlight was on India’s retail inflation which came in at 7.79% to an 8-year high, substantially jumping from the previous month’s number of 6.95%. The RBI has projected Q1FY23 inflation at 6.3% which is clearly now subject to modification in the upcoming June MPC meet. Given this inflation trajectory, our repo rate has a lot of catching up to do.

RBI has already hiked repo rates by 40 bps in a surprise announcement and also indicated that they intend to get the repo rate back to pre-Covid levels. This signals that another hike of about 75 bps is already on cards. Further, other major central banks, including the US Fed, have signalled cumulative rate hikes of about 2%-2.5%. So for parity, our repo needs to be somewhere between 6%-6.5%, thus requiring additional rate hikes of about 150-200 bps over the next 12 to 18 months.

Therefore, for the June meeting, it is likely that the repo will be hiked by another 25 bps at the minimum.

Technical Outlook

ET CONTRIBUTORS

Nifty50 closed strongly negative for the week and Indian as well as major global indices have become oversold in the short term. Nifty is currently trading around a strong support zone of 15,700, which is the lower end of the downward sloping channel. Bank Nifty index is also trading around the rising trend line support drawn from the March 2020 low. Therefore, an immediate bounce in Nifty and Bank Nifty cannot be ruled out.

Extremely aggressive traders may initiate long positions while maintaining a strict stop loss just below 15,700. The immediate resistance is now placed at 16,600.

Expectations for the week
As the result season nears its last leg, Dalal Street will focus on global cues to determine its direction. In India, WPI figures are expected to be released and the most awaited IPO, LIC will be listed on the bourses.

Given the current market scenario, it is likely that LIC gets listed at a discount or close to its upper band. Further, if there are no positive catalysts next week, indices are projected to stay under pressure as markets have adopted a ‘Sell on Rise’ mentality. Investors are advised to stay on the sidelines, as in such difficult times it is better to wait out the storm rather than go bottom fishing.

Nifty50 closed the week at 15,782.15, down 3.83%.