In my last article on the recent market rally, especially in midcaps, I had warned about the current rally fading faster than the last one. But hand on heart, I wasn’t sure it would end this soon.

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The market had an ugly Monday. And that’s not because the advance/decline was at 1:5. Yes, that’s part of the problem but hardly new. Also not because all but one of the top traded 15 stocks were in the red. We have seen that too earlier.

The most salient aspects of Monday’s trade was to see Bajaj Finance and Bajaj Finserv fall 8-10 percent and HDFC Bank drop 2 percent. It’s almost as unbelievable as Virat Kohli, Rohit Sharma and MS Dhoni all getting out on the first ball for three straight games, or Federer, Nadal and Djokovic losing in straight sets in a grand slam on the same day. Ok, may be I am being a little melodramatic, but you get the gist.

What Happened There?

So then where are we as far as the market is concerned and what led to this brutal selloff? While it would be a simple to infer, “FPI tax worries spook markets”, that’s just one part of the problem. Yes, this was an issue today and perhaps the biggest one, but then would the market have reacted the same way if the Nifty was at 10,000 and not closer to 12,000? Perhaps not, the market was heavy going into the budget and needed only a trigger to correct. The tax issue was good enough.

But that’s not all. Let’s not forget that Indian market this year has performed in line with the MSCI emerging market index. It has had bouts of outperformance and underperformance but has broadly remained in line.

There was a significant fall in Asian markets on Monday after Morgan Stanley cut the outlook on global equities. India is a part of this basket. Additionally, crude prices are back to $65/bbl and that also added as an irritant.

Now as far as the texture of the market is concerned, here are my thoughts. For starters, the market has made a lower top and that too driven by news. The Nifty failed to take out the all-time high and hence the budget-day high marks a lower top.

With Nifty effortlessly breaking 11,650 and closing well below 11,600, it has confirmed a breakdown. But it’s not just the fall of the index. It’s the way the Index fell.

The bluest of blue chips saw aggressive selling on Monday. The H2B2 stocks, HDFC and Bajaj twins both were down sharply, with Bajaj Finserv ending up as the top loser. HDFC Bank saw aggressive delivery selling and stocks such as L&T also saw big drawdowns. But then, most of these stocks were at a life-time high and hence as of now, this remains a profit booking move.

Auto Worries

Then, there is the lingering automobile problem. Every rally in autos is a hope trade and every next rally ends more brutally than the previous one and the reason is simple — stocks are down because there is an inherent demand problem. Until things improve on the ground, no amount of correction is too much. And of course the midcap market is going through a bear phase for some time and that has got more pronounced after Monday’s fall.

However, there are a few silver linings from the steep fall. First, FII data reveals that the big selling in index heavies wasn’t really the foreigners selling with abandon. This is corroborated by the delivery data, which shows that barring HDFC Bank, there wasn’t big selling in most of the big stocks.

Then, look at the Put Call ratio. We are now at sub 1. Most market corrections in India bottom out around a Put Call ratio of 0.75-1. Also, while the Nifty has corrected, it’s still well above the 200 DMA of 11,100 and even if it were to get there, it would still be a correction. From the market’s point of view, it would actualluy be healthy if it gets there and the froth in the haloed stocks is removed.

The other problem for the market would come from the earnings season. We are set for one of the worst quarters in recent memory where most companies will struggle for a decent topline growth. In this environment, it’s tough to see the Nifty taking out the recent high. There is a good chance that we have made the top for the year but is the bottom protected? Well for that, the Nifty better defend 11,000.

First Published:Jul 8, 2019 9:26 PM IST