Stock Market: Beware! Bear market rallies can surprise you anytime, play safe

The domestic equities market opened this past week with the bulls marching with all their might. The equity indices jumped significantly, taking cues from their global peers, mainly from the US bourses. Confidence returned on reduction in the number of daily Covid cases in some countries. Sentiments are changing from ultra-pessimistic to mildly pessimistic, which is what is driving the markets higher.

Trillions of dollars of economic stimulus packages in the US, Japan and other economies that have also helped boost confidence to a large extent. Back home, Indian bourses have defied gravity by merely reacting to the global peers, as the Covid crisis is showing no signs of easing yet and the government is still working on the second tranche of economic package to combat the Covid-19 effects – the first being a $22.50 billion stimulus aimed at the bottom of the pyramid.

It is also pertinent to note that despite a cautionary commentary from the management of one of the fastest-growing NBFCs on various scenarios arising out of the lockdown, markets still went higher implying that the worst has been discounted in current price.

It seems once the lockdown is lifted, markets will start taking note of the ground reality and react accordingly as the aftereffects of the lockdown will start emerging. This may help the bears to take charge once again for the possible second round of fall in the market.

Till then, emulating the global indices would be the general trend for our market.

Event of the Week

The pharma sector was trending this week as the government approved partial export of two key drugs to fight novel Coronavirus. Taking cues, the pharma index rose 35% during the week. As this sector has remained undervalued for the longest period, this week’s rally has brought the index to comparatively fair valuations. However, investors should not jump the gun and stay away from this space for now, as pharma is a crowded trade and the situation can change very quickly depending on USFDA approvals or if a foreign player starts manufacturing the same drug.

Due to the event-driven nature of the sector, investors should wait. However, traders, can place contrarian bets in this counter.

Technical Outlook

Nifty formed bullish candlesticks during the week with broader market participation, positive market breadth and closed almost 20% off recent lows. However, we assume the ongoing surge is a bear market rally and is least likely to sustain. In fact, the market may witness strong resistance at a cluster of Fibonacci retracement of 38% at 9,300-9,400 Nifty levels. Going ahead, we have a mildly positive outlook for the next week with the support and resistance placed at 7,900 and 9,400, respectively.

Expectation for the Week

The Covid-19 situation remains fluid and uncertainty still looms on the possible economic impact of the outbreak. However, it is expected that the market will be guided by global sentiments in the coming week with sudden gap-ups or gap-downs. Any negative surprise with respect to the lockdown will also have an impact on the bourses.