Markets to see profit booking; good opportunity to buy strong fundamental stocks in decline

By Rahul Shah

After a good run last month, we had quite a bit of expiry last week as markets took a break ahead of the much needed Jackson hole event to take a bullish break before a run. The equity benchmark was down more than 1% from the previous week’s close in a highly volatile week due to the August F&O series expiry and investors remained cautious in the waiting for clues on Fed rate hike following a key Jackson Hole event. Nifty slid 200 points or 1.20% to close at 17,559 while Sensex lost more than 800 points or 1.4% to close at 58,834. Traders booked profits on global market weakness and relentless buying of Indian stocks over the past two months (gain of 18% Nifty). Defense inventories increased due to a strong domestic and foreign order book after the government announced the expansion of the supply of locally produced products in the manufacturing process in India.

Metals stocks saw further buying as China announces $146/billion stimulus to boost demand for metals. Expect the Indian stock market to react negatively next week after US Federal Reserve Chairman Jerome Powell’s hawkish speech on inflation at the Jackson Hole meeting. Markets in the US and Europe fell 2-4% yesterday after US Federal Reserve Chairman Jerome Powell pledged to continue the fight against inflation, even at the expense of growth economic. In a highly anticipated speech, Powell said the Fed must keep raising interest rates and keep them high until inflation is brought under control. His comments disappointed investors who had hoped inflation had peaked and the Fed would swing from raising rates to lowering sometime next year.

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However, Jerome Powell has signaled that interest rates will remain high for some time, which could complicate his war on inflation. The US Fed is expected to raise interest rates by more than 75 basis points at the next policy meeting and continue until inflation falls to a reasonable level. US 10-year bonds closed above 3% while 2-year bonds closed near 3.4% on expectation of more near-term pain. The US Volatility Index (US Vix) jumped 25% to close a one-month high of 25.56% from the previous week, while yesterday it jumped 17% after the declaration of the US Fed. Ahead of the next central bank meeting, investors will scan the monthly US jobs report, due September 2, for any signs of easing in the tight labor market. They will also get another reading on inflation.

Back home, expect Indian markets to post some gains due to weak global markets. However, the underlying bullish sentiment in the domestic market due to stable inflation, 8% above normal monsoon until Aug 26 according to IMD, continued buying interest from FII and l impressive announcement of quarterly results continues. This will be a good opportunity to buy Indian stock exchanges due to the growth of the Indian economy being the highest among global peers. Recently, Indian stocks have recovered 18% (Nifty Jun 16 to Aug 19 Nifty – 15200 to 17900) and many traders missed the opportunity. Thus, any sharp drop will be a good opportunity for the Indian market to buy strong fundamental stocks.

Clever – Nifty created a Bearish Hanging Man candle on the weekly frame and reversed its formation of the nine-session highs. Now it needs to hold above the 17500 areas to once again attract positive momentum towards the 17666 and 17777 areas while support is intact at the 17442 and 17350 areas.

CMP: Rs 258 | SL: Rs 250 | Target price: Rs 280

Zee Ltd gave a breakout of the cup and handle pattern on the daily scale and it formed a strong bullish candle that indicates buying interest. On a weekly basis, the stock formed a strong bullish candle and closed above the 20-week average with good volumes, indicating that the bullish momentum will continue. There is strong momentum in media stocks that will support prices higher. The RSI oscillator is also positively placed on the daily and weekly charts. Given the current chart structure, we advise traders to buy the stock to move up towards 280 with a stop loss of 250.

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Eicher engines
CMP: Rs 3,355 | SL: Rs 3290 | Target price: Rs 3550

Eicher Motors is hitting higher highs for the past 3 weeks indicating strength in the meter. On a daily scale, it has been meeting the 20 DEMAs for the last 44 sessions and progressing little by little. The overall chart setup is strong, which will take prices to higher levels. The RSI oscillator is also positively placed on the daily and weekly charts. Given the current chart structure, we advise traders to buy the stock to move up towards 3550 with a stop loss of 3290

(Rahul Shah is Senior Vice President, Group Advisory Leader-PCG, Broking & Distribution, Motilal Oswal Financial Services. Opinions expressed are those of the author. Please consult your financial advisor before investing)