market outlook: Volatility loop: Has global uncertainty pushed market into a bear trap?

Markets swayed in a range this week, remaining largely indecisive. Prior to this week, domestic benchmark indices managed to quickly recover from the losses witnessed recently. While currently there seems to be a positive bias, the larger question is whether this rally is sustainable?

Usually, when a bull rally ends, the first leg of correction is succeeded by sharp recovery, popularly known as a “relief rally”. The relief rally causes market participants to believe that the correction phase is over, but eventually leads to an even steeper correction.

Historically, following the bull run of 1999-2000 peaked, domestic markets rebounded over 30% post the first leg of correction. However, investors who mistook this as a continuation of the bull cycle were trapped as the indices plunged by 45% thereafter. Even amid this 45% dip, 3 significant relief rallies occurred. Similarly, the 2008 bear market saw two while that of 2011 saw four such relief rallies.

Coming back to the present, the worst does seem to be over. Markets have ruled out the possibility of a global war, have adjusted to rate hikes projected by the US Fed and have discounted, to some extent, the impact of the Covid outbreak in China. Further, RBI governor has eased some woes by reassuring that Indian inflation is still transitory.

Hence, while the chances of this rally being a bear trap are minimal, markets are expected to be volatile and to consolidate within a range in the short term at least as few dark clouds still hover over us. The ultimate economic impact of the Russia-Ukraine war will only be known with time and will continue to be analyzed. Further, the possibility of the US going through a recessionary phase as well as the potential disruption of economic activities should the new variant spread to other countries including India will continue to keep Mr. Market on edge. Therefore, investors should tread with bail and invest for the long term in a staggered manner.


Event of the week


As the war between Russia-Ukraine has resulted in another battle between inflation and the end consumer, price hikes across the board products were the talk of the town. India Inc has sought to pass on the rising raw material prices to consumers to address margin concerns.

Petrol, diesel and LPG prices were hiked this week. Further, auto OEMs, FMCG players, steel majors, airlines, paper companies have also already hiked their prices and even indicated further increases. These hikes will be fully reflected in the inflation print for the month of April.

While the RBI anticipates inflation to moderate in the coming months and ultimately remain within its tolerance band, the inflation numbers for April will reveal the situation on the ground. Crude prices again have risen this week, crossing $ 120 per barrel, making the situation even more challenging.


Technical outlook


Nifty 50 ended the week on a negative note after consolidating in a narrow range of 400 points, and 17,500 level emerged as a critical resistance zone for the benchmark. While the trend this week hints that the bullish momentum is slowing, there is no evidence of bearish confirmation as of yet. The BankNifty index, like the benchmark, is showing relative weakness. We recommend that traders maintain a mild bullish bias for the coming week and continue to buy on dips. Traders should also keep an eye on how the market reacts to immediate support near 17,000. Any decisive break below this level can result in markets testing 16,400 levels on the downside.

AND CONTRIBUTORS

Expectations of the week

Apart from the China Covid outbreak and war developments, US macro data such as GDP growth rate and the unemployment rate will influence global markets. Back home, due to the last monthly expiry of this fiscal, volatility will be elevated. Further, considering that the monthly sales numbers of automobile companies are expected to be a mixed bag, D-Street will keep an eye on companies which miss market estimates. As markets are likely to remain range-bound in the absence of any positive news flow, investors are encouraged to continue investing in pockets which have reasonable margin of safety. Nifty50 closed the week at 17,153, down by 0.78%.

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