Bear market confirmed by southern breakout

After several weeks of range-trading, a clear trend was finally established post-Budget. Unfortunately, it was down. The Nifty dropped to 4,771.6 points, a week-on-week loss of 8.65 per cent. The Sensex was down 9.12 per cent at 15,974.52 points. The Defty lost 10.04 per cent as the rupee weakened as a consequence of dollar outflows caused by foreign institutional investor (FII) selling. Domestic funds were also sellers.

Background and breadth indicators were also poor. Volumes remained low, and declines far outnumbered advances. Smaller stocks lost more ground. The Nifty Junior was down 14.45 per cent and the Nifty Midcaps was down 11.31 per cent. The BSE 50 lost 10.59 per cent. The BankNifty lost an extraordinary 16.35 per cent while the CNXIT was down 5.59 per cent – relatively little damage due to the weaker rupee.

Outlook: Several key supports were busted as the market moved decisively outside the trading zone of 5,000-5,600. There is support at current levels and good support at 4,600. While there could be a short-term recovery, the upside will be restricted by resistance between 4,900-5,000. A major bear market is confirmed.

Rationale: The breakout has pulled the indices decisively below respective 200 Day Moving Averages (DMA) and those will be resistances on a pullback. In the short-term, momentum indicators are oversold and this could trigger a short-term recovery. In the long-term, sequential closes below the 200 DMA confirms a major bear market.

Counter-view: Liquidity will be a key factor in any recovery. But volumes are down through the past 6 weeks and that is a bad sign. It would be a positive signal if the market climbed back to 5,000-plus and closed above the 200 DMA. But that looks unlikely since it would require substantial volume increase.

Bulls and Bears: A few sectors have defensive strength. Pharma and auto shares look to have the best insulation along with FMCGs. Ranbaxy is looking like a counter-cyclical, as is Aurobindo. Metals look more risky but Hindalco, Sterlite, Sesa Goa and perhaps, Tata Steel are reasonable bets for aggressive long traders. Dabur India and HUL are defensive counters. In the auto sector, Hero Honda and Bharat Forge seem decent defensive bets.

On the flip side, bank stocks were butchered with panic across the board. There could be a smart pullback here eventually due to short-covering. The stocks to watch are SBI, Bank of Baroda, Kotak and of course, ICICI itself. Reliance Capital could also respond to the buyback offer, and LIC Housing is also likely to do beat other financial stocks.