Early signs of market breakdown are here

Markets last week were under a lot of pressure and this was primarily on account of the Dow sending negative signals. Wednesday saw a sharp fall in markets from which there was no recovery.

At the end of the week with losses on all five days and a poor February futures expiry, markets will be under pressure from the start of the new week as Dow had yet another poor session on Friday.

BSESENSEX lost 1,538.64 points or 2.52 per cent to close at 59,463.93 points while NIFTY lost 478.40 points or 2.67 per cent to close at 17,465.80 points. The broader markets saw BSE100, BSE200 and BSE500 lose 2.59 per cent, 2.60 per cent per cent and 2.49 per cent respectively. BSEMIDCAP was down 2.05 per cent while BSESMALLCAP was down 1.65 per cent. All the sectoral indices closed with losses for the week and BANKNIFTY is now at dangerous levels. The weight of the same in NIFTY is over 40 per cent which adds to the pressure in the coming week.

The Indian Rupee gained 8 paisa or 0.10 per cent to close at Rs 82.75 to the US Dollar. Dow Jones gained on two of the five sessions and lost on the remaining three. It had a bad Tuesday and was sharply down on Friday as well. The dichotomy in the US is that jobs are being generated and unemployment is down sharply, yet this is bad news for the market.

This means that rising interest rates are not going to stop early. The street was expecting 2 rate hikes of 25 basis points before they went on a pause. Now, they expect one rate hike of 50 basis points followed by 2 or three of 25 basis points before the current calendar year ends. It is this street expectation that has made markets nervous and seen a sell-off of some sorts.

The Ukraine-Russia war has completed one year, something which was beyond imagination when it began. Now, global markets are in fine shape with European markets doing the best. This is in sharp contrast to their economies being worst hit by rising fuel and gas prices and issues of fresh fruit and vegetables hitting them even harder. Strange are the ways that markets behave.

Looking at results which have been declared for the quarter October-December 22, one sees definite signs of a slowdown or degrowth in demand in products as diverse as inner wear and paints.

Strange as it may seem but this makes one to believe that India and its economy is seeing a slowing down in demand. Rural demand has been experiencing a slow down in demand for a few quarters already and now a similar scenario is being seen as early signs from semi-urban and urban areas as well. How things will pan out, is yet to be ascertained.

After a hiatus of just about a month, we have an IPO in the week ahead. Divgi Torqtransfer Systems Limited is tapping the capital markets with its primary issue for Rs 180 crs and an offer for sale of 39,34,243 equity shares.

The company as the name suggests is into the business of supplying transfer case systems, torque coupler and DCT solutions for passenger vehicle manufacturers in India. The company is also in the process of designing and developing prototypes of transmission systems for EVs. The company has received an order for supply of the same from a leading provider of EVs in India.

The top five customers account for between 88 per cent to 92 per cent of the companies’ revenues. The revenues for the year ended March 2022 were Rs 241.87 crore while its net profit was Rs 46.26 crore. It reported an EPS of Rs 16.76. For the six month period ended September 22, the company reported revenues of Rs 137.54 crore and a net profit of Rs 25.41 crore. The EPS for the six months was Rs 9.32. For comparison sake if one were to annualise the same, the EPS has increased from Rs 16.76 to Rs 18.64, a growth of 11.12 per cent. Net margins were at an impressive 19.12 per cent.

The price band of the issue is yet to be announced and would happen on Monday, February 27. The issue opens on Wednesday, March 1, and closes on Friday, March 3. Being a niche company and in a highly skilled manufacturing activity, one can be sure that the issue would be richly valued. The positive is the reasonable size, high margins considering its in the automobile segment and its pricing power with OEMs.

February futures expired on Thursday, February 23, on a weak note. The series lost 380.70 points or 2.13 per cent to close at 17,511.25 points. It’s been a tough series with markets being under pressure almost throughout the month. Markets were higher than the series open for hardly a week before retreating and continuing being under pressure.

FPIs have turned sellers again in India and while domestic funds are trying to match the selling, they have turned cautious. The cash with Mutual funds as a percentage of their AUM has moved up significantly, indicating the continued fund flow into domestic funds and their deployment slowing down. It would be interesting to see how FPIs behave with Dow not giving any signs of comfort whatsoever.

The next round of selling in the markets would be in the Midcap and Smallcap space. This segment is still overheated and has not seen any significant price damage or selling. Small investors are quite complacent about their market exposure in this segment and believe they are insulated from market correction. A shakeout is imminent and may see the beginning this week onwards.

Coming to the week ahead, expect markets to be under pressure from the opening day. They will make an attempt to bounce simply because they have lost on all five days of the previous week. This if it happens would be just a relief rally and an opportunity to sell.

The budget day low made on February 1 of 58,816.64 points on BSESENSEX and 17,353.40 points on NIFTY are under threat. Markets may take support here but may not hold if retested once again. Following this on, the next level of support would be closer to 17,000-17,050 on NIFTY and 57,900-58,050 on BSESENSEX. This should hold good for the week. If however this were to break or give away as well, we could see a sharp sell-off.

The strategy for the week would be to keep one eye on the happenings in the US. If those markets are correcting, there is no way we can go in the opposite direction. The pace of movement could be slower or faster but the direction would be the same. Use rallies or corrections to sell again. If one has to look for any longs in the market, they should be only in the large cap and expect corrections in the mid cap and small cap segment.

Trade cautiously.
IANS