Market Condition and How to Approach the Markets this Week

Current Market Status

While major global markets are down 10-12% YTD, the Nifty 50 has managed to deliver ~4% returns. In December so far, Indian markets have seen net FII selling of Rs. 2,026 crore while DIIs have also sold stocks worth Rs. 43 crore. Over the last few days, the U.S., Japan, the U.K., and key Asian markets have fallen 4-6% in a week. The Nifty 50 has managed to stay positive in December, but the volumes have dried up in recent sessions.

The Nifty started strong and retook its important 10,942 level during the week ending December 21, and the market status was changed to a Confirmed Uptrend. However, the week ended with a huge selloff session amid falling global markets. Both the Nifty and the Sensex fell 0.5% and 0.6%, respectively during the week ended December 21. Meanwhile, the Nifty Midcap and Smallcap gained 0.6% and 1.6%, respectively, materially outperforming the Nifty 50 and the Sensex.

Gains in the market were led by Nifty Metal (+1.6%), PSU Banks (+1.8%), and Financial Services (+1.0%), whereas Nifty IT (-4.33%) was the top loser amid a strengthening rupee. According to MarketSmith India’s methodology, at the end of the week, Nifty Bank, Financial Services, IT, FMCG, Metal and Auto are in a Confirmed Uptrend whereas Nifty Realty, Energy and Pharma are in a Rally Attempt. The YTD returns for the Nifty and the Sensex were 3.1% and 5.7%, respectively.

Looking ahead, what’s in store?

After retaking the important 10,942 level, the Nifty breached it along with its 200-DMA during Friday’s selloff, indicating weakness. The market status, however, remains unchanged at a Confirmed Uptrend with current distribution day count of 5 on the Nifty. The first few sessions of next week will be important to watch as an additional 2-3 distribution days will lead market status to be downgraded to an Uptrend Under Pressure. It’s worth noting that two of the distribution days are going to expire by 27th and 28th December. The 50-DMA line would act as an important support level and the Nifty currently trades 1.8% above it.

What can investors do?

With markets exhibiting volatility, investors are advised to be cautious about their exposure size till the market’s status is corroborated by additional follow-through days and a lower distribution day count. Further, investors should be selective on sectors, and focus on defensive sectors like FMCG and Retail, and steer clear of currency sensitive sectors like IT for some time, until the volatility subsides. Sectors leading in growth, like Financial Services, can be picked up once the market validates its Confirmed Uptrend status. Investors should shortlist stocks based on good fundamentals and growth story, and should limit their investments to technically strong stocks trading above their 50- and 200-DMAs. Some good quality stocks are Nestle, RBL Bank, HDFC Bank, and Asian Paints. On the other hand, technically weak stocks, which are unable to sustain above 200- or 50-DMA, should be avoided.

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