Markets at crossroads – Direction uncertain

Markets were on a roll last week and registered sharp gains in tune with the rest of the world. They were virtually flat on Tuesday with Monday being a holiday and rose sharply on the remaining three days including expiry day. BSE SENSEX gained 1,751.51 points or 5.71 per cent to close at 32,424.10 points while NIFTY rose 541.05 points or 5.99 per cent to close at 9,580.30 points. The broader indices saw BSE 100, BSE 200 and BSE 500 rise 5.88 per cent, 5.67 per cent and 5.54 per cent respectively. The BSE MIDCAP rose 5.09 per cent while BSE SMALLCAP rose 3.50 per cent. The top sectoral gainer was BSE BANKEX which was up a massive 11.18 per cent. The banking and financial services sector was beaten down and was under tremendous pressure considering the lockdown and virtual closure of all commercial activity. Further people in the market had shorted these counters and as stock prices rose it led to massive short covering as well.

The Indian Rupee gained 33 paise or 0.43 per cent to close at Rs 75.62 to the US Dollar. Dow Jones had another week of gains and was up 917.95 points or 3.75 per cent to close at 25,383.11 points.

May futures saw the bulls making a strong comeback in the last three days and recovering as much as 450 points. It wasn't enough to pull the series back and May futures expired with losses of 369.80 points or 3.75 per cent down at 9,490.10 points.

Markets are very interestingly poised and we have witnessed a rare chart formation on the monthly indices. There has been an inside month to an inside month. Let me explain. The high and low in March on the BSE SENSEX was 39,083 and 25,638 respectively, and the month closed at 29,468 points. In April, the high was at 33,887 points which was lower than the March high and the low of the month was 27,500 which was higher than the March low. The month closed at 33,717 points. In May the high was at 32,845 which was lower than April high and the low was 29,968 which was higher than April low. The month closed at 32,424 points. What this formation indicates is that if there is a movement which crosses the previous months high or low and sustains, there would be a breakdown or breakout which could be sharp and very volatile. Unfortunately, it does not indicate at this stage in which direction that would happen.

The same has happened in NIFTY as well with the monthly numbers as follows. March the high low was 11,433 and 7,511 with the close at 8,597. In April the high low was 9,889 and 8,055 with the close being 9,859 points. In May the high low was 9,598 and 8,806 with the close being 9,580 points. The crucial levels for us therefore become 32,850 on BSE SENSEX for a breakout and 29,950 for a breakdown. Similarly, on NIFTY, the breakout level comes at 9,600 while the breakdown level is at 8,800 points. As the pattern indicates, the range is becoming narrower but intraday volatility is increasing.

On the COVID-19 front, the number of people affected globally has increased to 61.61 lakh people with 3.71 lakh deaths and 27.38 lakh people having recovered so far. In India, the number of people affected has increased to 1,82,500 with 5,186 deaths and just under 87,000 people having recovered. Compared to the previous week, the world has seen 6.93 lakh new patients, 27,000 deaths and 4.90 lakh patients recovered. In India, the number of new patients has increased by 50,000 while deaths have gone up by 1,300. Patients recovered has moved up by 32,500. Very clearly the recovery rate has registered significant growth globally and more so in India. In India, the worst affected state continues to be Maharashtra with over 65,000 patients, just about 2,200 deaths and 28,000 people having recovered.

The Central government has announced a new set of guidelines for the next stage of lockdown with many relaxations for the country as a whole except containment zones and a few select leading cities where the affected people are very large. States have to take a call on relaxations in their respective areas.

Trading in renunciation of Reliance rights issue ended on Friday on the bourses. The range of the price was from Rs 152 on the opening day to Rs 258.30 during the seven days that the same was permitted. The closing price was Rs 222 for the rights renunciation and Rs 1,465 for the share, implying a difference of Rs 208 between share and rights price. The effective premium on the renunciation has reduced this week to Rs 14 against Rs 50 in the previous week. The rights issue to close on Wednesday, the 3rd of June and it would be interesting to see how many of the small shareholders of Reliance in the 1-500 shares held, actually mange to subscribe to their rights issue.

The week ahead would be crucial and it makes sense to remain on the sidelines until clarity emerges about the breakdown/breakout as mentioned earlier. One needs to be rest assured that once the event occurs there would be substantial movement in the direction in which the event has occurred. Wait for the trigger before taking any meaningful positions in the market.