2 sectors to lead market once correction over: Gautam Shah

In a chat with ET Now, Gautam Shah, Associate Director & Technical Analyst, JM Financial, says after 4-6 weeks, Indian markets expected to get back on track and make higher highs sometime in the middle of this year and metals and capital goods are likely to be the market leaders.Edited excerpts:The question on everyone’s mind is irrespective of the volatility and the uncertainty, is the February horror behind us or could March as well see some sharp downticks the way February did?It is too early to say that the lows of February would not be taken out. I think you are in a kind of an environment where there is so much news flow locally and globally that you want to believe that you want to take this market a week at a time. I think this correction that we have seen in the last few weeks could have happened in 2017. But in that year, you had great momentum for global markets and the news flow locally and globally were quite supportive and that really did not allow even a 5% correction so in the last 15 months. What we have undergone in the last three weeks is probably the largest correction. As I said, it is very normal. It is good to see a price and time correction taking place. The market is basically digesting the gains of 2017 and the way we look at it, we have some evidence on the charts to believe that the Nifty could remain in this band of 10,350 to 10,600 for some more time and every time, the Nifty is attempting to get past 10,600, there is a lot of supply and on the other hand 10,350 has turned to be a very strong base but if I were to stick my neck out, there are more chances of the Nifty actually seeing a breakdown.If that breakdown happens below 10,350 at any point of time in the next few weeks, it could potentially lead to a lower low and the Nifty moving into that very important support area of 10,000 to 10,100 but this is more of a short-term view. In medium-term, we remain extremely positive on the markets and once we undergo this corrective phase and possibly end it in another 4 to 6 weeks, I think Indian markets will get back on track and make higher highs sometime in the middle of this year. The peculiar thing has been irrespective of our vulnerability to the way global markets pan out, while February, start of February we corrected along with them, but we did not recover as much along with the Dow. While the Dow just last week was about 3% away from its all-time high and again that volatility is kicking by, we are choosing to ignore the days they actually rebound. Do you think there is a break from this vulnerability, the susceptibility that we have in terms of tracking global markets. Are we in that sense a little decoupled of late?You just hit the nail on the head. Typically, in the last 15 months, every time the global markets have recovered, India was always a standout performer. It was the market that first went to make new highs. This time as Asian markets and global markets recovered, India had a very muted recovery which actually surprised me and that gave me a sort of an indication that Indian markets are not in a hurry to make higher highs and it needs more correction, it needs more consolidation and obviously the PNB fiasco has not helped.That has been in the minds of market participants and all of this I think suggest that the market needs a little more of corrective action in the next two to four weeks. I must also highlight the fact that we can never be decoupled with the global markets because 17 was not only a great year for India but it was a great year for global equity markets but the problem is US markets witnessed a parabolic rise and whenever you see a parabolic lies for any stock or for any index, it usually does not sustain and the move in the opposite direction is usually very sharp. Having said that, India has not done so badly because we have handled 2000 point declines on the Dow and still we are managing to trade at 10,500 levels. But my concern is that the US markets will go on to make lower lows and our target for the Dow is about 23,000 to 23,500 and if those targets come by. India will be impacted and you could see a lower low which is currently my view in the market place. You have spoken about how things have shaped up and just yesterday, we were talking about how our markets have got a bit spoilt because in 2017, we have been accustomed to seeing only one direction and that has been northwards. But in light of what you have spoken about, how are you looking at the overall sector picture, where is it that you are seeing pockets of outperformance in our markets?A big shift has happened in the sectoral scene because banks and autos were the two pillars of strength in the 2017 rally and as 2018 has started off, we have seen banks and autos underperforming. In fact, the banking index did not recover at all when the global markets and broadly all equity markets recovered. That was a clear sign of underperformance and even now, if the Bank Nifty goes on to break that level of 24,800, you might actually see another 4% to 5% or a 1000 to 1200 point decline for Bank Nifty. Obviously, the PSU banks are not helping given all the news flow and the private banks have just got too big to see a big move. The moves in the private banks are very small these days and you cannot expect an HDFC or Yes Bank or ICICI to really bail out the Bank Nifty from time to time. Banks and autos have taken a backseat and we continue to recommend our clients to book profits in these two and two other spaces which are showing extreme relative strength and are likely to be the leaders once the market stabilises and starts doing well again and that would be metals and capital goods. The kind of relative strength that metals have shown in the last three weeks is phenomenal. Not only technically but even fundamentally, a lot of triggers are in place for many of these stocks to generate supernormal returns in 2018. You could see the metals index go up 20-25% so stocks could do really well and capital goods are closely tracking the 18,500 level on the BSE Capital Goods Index. If that level holds, then capital goods and some of these popular stocks in the F&O space will be the ones that can drive the markets higher. That is probably the reason the entire shift has happened in the last few months. What is the sense that you are getting when it comes to the overall liquidity situation for our markets? Given the fact that when it comes to concerns, it could perhaps emanate from overseas with the way the yield is moving the US 10-year bonds, what is your expectation in light of the overall liquidity situation shaping up? Liquidity is a double-edged sword. You can read it the way you want. The whole of 2017 we spoke about domestic liquidity and how SIP money was helping the markets scale greater highs. That argument is still valid and still you are not seeing the Nifty do so well. So, I say you can read it the way you want. But clearly this domestic liquidity factor will not allow the Indian markets to get into a full blown downtrend and that is the silver lining, the big positive that we can talk of when it comes to liquidity. But from US 10-year perspective, we are of the view that the US 10-year is headed towards a level of 3.2%. I There was this major breakout that we saw on the US 10-year charts a couple of months back and that breakout is not going to reverse in a hurry. The jury is out whether this is going to really impact global equities or not, but theoretically a move beyond 3% is going to concern global investors and that could possibly be the reason for equities to take a backseat for some time. The sheer outperformance in this bout of volatility in February or for that matter from the start of the year to now has been IT and metals. These have been the strong conviction sectors and in bits and starts, there have been some FMCG names as well. Is leadership going to remain with these sectors or could we see some moves come in outside them as well?No, I do not think so. The relative strength that we have seen in the last couple of months is here to stay and that is the reason that the trend texture and the sectoral texture have changed for the markets. So, do not look at banks, autos anymore. I do not think they are going to outperform at least for many months to come, but metals will continue to do extremely well. I am very confident that once the Nifty stabilises and breaks out above 10,600, you will see many of these metal stocks run away. IT on the other hand, has already done very well. The breakout happened in the middle of last year when the CNX IT index broke out above that level of 11,000 and from there, it has almost seen a 2000 point rally but in the IT space right now, if you have to look at stocks it has to be in the midcap IT because there, you have some lovely setups emerging. Unfortunately, I cannot give you names but across the board, midcap IT is a space that could give you supernormal returns. Even if you look at frontline IT, a stock like TCS was in a range for almost five years and that range breakout took place in three months and such breakouts do not reverse very easily. I think IT will do well. The frontliners will do well at their own pace but the midcap IT could easily give you 20-25%.You have spoken about how things have shaped up over the globe and just yesterday, we were talking about how we have gotten a bit spoilt because in 2017, we have been so accustomed to only seeing one sort of direction and that has been northwards. but in light of what you have spoken about, how are you looking at the overall sector picture? What are the pockets of outperformance in our markets?There is a big shift in the sectoral scene because banks and autos were the two pillars of strength of the 2017 rally. As 2018 has started off, we have seen banks and autos underperform. In fact, the banking index did not recovery at all when the global markets and broadly all equity markets recovered. That was a clear sign of underperformance and even now if the Bank Nifty goes on to break that level of 24,800, you might actually see another 4% to 5% or a 1000 to 1200 point decline for the Bank Nifty. Obviously, the PSU banks are not helping given all the news flow and the private banks have just got too big to see a big move. The moves in the private banks are very small these days and you cannot expect an HDFC or Yes or ICICI to really bail out the Bank Nifty from time to time. Banks and autos have taken the backseat and therefore we continue to recommend our clients to book profits in these two spaces and the two other spaces which are showing extreme relative strength and are likely to be the leaders once the market stabilises and starts doing well again -- are metals and capital goods. The kind of relative strength that metals have shown in the last three weeks is phenomenal. So, not only technically but even fundamentally, a lot of triggers are in place for many of these of stocks to generate supernormal returns in 2018. You could see the metals index go up 20-25% so that stocks could do really well. In capital goods, we are closely tracking the 18,500 level on the BSE capital goods index. If that level holds, then capital goods and some of these popular stocks in the F&O space I think they are the ones that can drive the markets higher so that is probably the reason the entire shift has happened in the last few months.

from The Economic Times http://ift.tt/2F76Dd2