Last Friday was Friday the 13th – normally that’s the one people fear but the market always has a surprise lined up – the freaky Friday got pushed by a week. Yes, after enjoying the midweek break, market participants are bracing for a big gap-down opening as the SGX Nifty shows a decline of nearly 250 points compared to the last close.
Why is that? Well, the taper tantrum is back. Okay, let me make it simple – the US Fed has indicated that it will at some point this year taper its purchases of bonds. In simple terms, the easy liquidity that it has been providing the market is going to get tight. Now, most of this money makes its way to risk on assets like equities and commodities and obviously they don’t like it. They want this to continue for eternity.
The reaction is there for everyone to see. Global equities fell 3-4 percent yesterday. The dollar has strengthened to 93.5 and crude has seen a sharp dip to $66/bbl which of course can be good news for us as we are largely a crude consuming country. However, since the overarching theme is risk-off, we will participate in that.
Now, this is not the first time Fed has hinted at taper and many believe, in a way it’s good that Fed is doing it since this will prepare market for the actual event. The correct way to approach this is to look at the anecdotal evidence on what markets have done when there have been previous instances of taper talks. You would have noticed that the market goes into a bit of a shell for about one to three days, corrects big and then moves on and makes a fresh high. Now, of course, this time can be different but chances are that the same script will play out again.
However, what must be noticed is that the market is nearly at 16,600 and not at 15,600. I mean, it has had a huge rally. The Nifty itself is up 5 percent this month and is way over-extended over all time frames. It's possible that the market uses the taper tantrum as an excuse to correct to the 20-day moving average (DMA) of 16,150 and perhaps even 50-DMA of 15,950. In any case, 15,950-16,150 was the erstwhile resistance and hence it’s importance as support zone would have been tested at some point.
The Bank Nifty which is already at 2-DMA appears more vulnerable simply because it is dominated by high FII holding stocks.
Did the broader market see this coming? Over the last few days, there had been distinct signs of distribution with the midcaps falling quite a bit and advance/decline favouring declines. But if the Nifty falls a lot, then the pain in broader market could extend as well. Finally, if this is still a bull market -- and I firmly believe it is -- then corrections should be used as buying opportunities in good quality stocks. That is one mantra which never fails.
