stock market correction: Domestic MF outflow & US tech rout sending out...

stock market correction: Domestic MF outflow & US tech rout sending out ominous signals

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The confidence of the bulls got shattered during the week gone by after US tech stocks came crashing down, rattling the entire financial market. Nasdaq’s crash does not look like a normal correction; it looks like a bigger downward spiral is unfolding after valuations skyrocketed. With the US elections just 52 days away, it seems unlikely that the US market will make fresh high again and there is every likelihood that selling pressure may continue even in the broader markets.

Crude oil, too, has given up most of its gains and prices have slipped below $40 per barrel on expectations of lower demand going ahead, which suggests the global recovery might take longer than what was anticipated earlier. In contrast, gold’s surprising move is not hinting at any major crash in financial markets, as the prices of the yellow metal consolidated and remained steady even when Nasdaq plummeted.

One of the important ways to analyse the psyche of an investor is by measuring cash flows into mutual funds. Contrary to previous behaviour, retail investors aggressively pressed the redemption button in July and August, when the outflow hit a 10-year high of Rs 8,000 crore in two months. These maniacal withdrawals by mutual fund investors sent out two signals: Either there is a liquidity crunch in household savings rate or the high valuation of Mr Market is making investors cautious.

Both these do not augur well for Indian capital market. There is a long lineup of IPOs and FPOs and the market has already rallied nearly 50 per cent from their March lows. If mutual fund redemptions are taken as any valid indication, plans to raise money by corporates and governments may hit a hurdle and the bull market rally might get punctured. In summary, they suggest the markets are at elevated levels and the risk-reward ratio is absolutely not in favour of investors any more. There is a lot to lose on the downside, and limited gain on the upside.

Event of the week

The Supreme Court is yet to pass an order on the issue of charging compounding interest and credit rating downgrading for the moratorium period. The apex court has passed an interim direction, holding that no account should be declared as NPA as of August 31, 2020 till further notice. This direction, though, gives only temporary relief to the financial services sector, but the pain in the overall economy surely persists and is only getting delayed. Therefore, bank stocks are bound to remain under pressure until there is further clarity on the issue.

Technical outlook

After forming a Bearish Engulfing Pattern previous week, Nifty50 traded in a narrow range this past week. However, Bank Nifty closed on a negative note after forming a bearish cloud cover last week. The overall sentiment remained muted and a bullish move in selected index movers such as RIL led the Nifty some bit higher. The benchmark index is still trading in the overbought zone on a weekly time frame chart and we maintain a bearish outlook going ahead, as the index is likely to retest the lower end of the channel drawn from March lows on a weekly chart. Immediate support and resistance are now placed at 11,180 and 11,590 levels, respectively.

Expectation for the weekAgencies

Expectation for the week

As we get closer to the US elections, the theatrics are set to grow louder both politically and economically. Markets across the globe would remain watchful and may react and adapt to any important news flow from the presidential campaign. Back home, given the onset of a slack period post quarterly earnings, the market could be driven mainly by the heavyweight constituents. RIL is a top contender to keep Nifty afloat, given its second wave of fund raising spree for the retail arm. And this might probably keep the overall market sentiment positive. Subdued crude prices, economies opening up, consolidation of gold may cumulatively indicate that markets are relatively better placed than it was a few months ago.

Nonetheless, investors should not read much into heavyweights, as global cues are neutral to negative now and must remain cautious. Investors are advised to remain on the sidelines and look to increase liquidity in their portfolios.

Nifty50 closed the week at 11,464, up 1.2 per cent.



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