Weekly Market Recap
In yet another strong week, indices continued to gain further to extend the longest weekly winning streak, however, sign of exhaustion appeared in last two trading days that may result into some sort of pullback in forthcoming week.
In the week gone by the benchmark SENSEX added 252 points, or .52% and achieved a new milestone of 49K mark, similarly, NIFTY gained 86 points, or .6% to close at 14433.
Current Outlook
It sure that markets are forward-looking and expecting a strong economic recovery, however, technically it makes me feel and looks like 2008. Time will tell, but no doubt markets have divorced themselves from reality that usually leads to a sharp reversal. Who knows markets might have made a new high this week just before the day COVID vaccination starts like the markets made a low just the day before the lock down announced? Only time will tell. I am not doubting the strong or mild recovery in the economy, but I doubt and don’t like the precipitous move that’s why it reminds me of year 2008 which started-off with euphoria but ended in doldrum and despair.
Fundamentally, markets are getting frothy and this is the most overvalued market ever. That is also confirmed by the perpendicular movement in the chart as well. After analysing gravely, I found that on the scale of over-valued, fair-valued, and under-valued markets have mostly remained above the over-valued zone since 2002 and it’s hardly been under-valued. We could say that this is the “new-normal”. And I have learnt that the excess of overvalued markets can persist for years and is not a condition that require immediate correction. However, it is a condition that can exacerbate declines because there is no intrinsic value present to incentivize potential buyers. And, for one reason or another, overvaluation suddenly begins to matter.
Furthermore, indispensable divergence also occurred between VIX and the NIFTY, both gained this week but VIX gained 16% that is an indication of some unlikely event. If VIX further accelerate that can produce a sharp pull back in NIFTY. Hence, this sign of exhaustion may invite the pull back of some magnitude that makes the outlook cautious.
Conclusion
Taking the current environment into consideration, this is what I am watching for in the markets: 2021 could be a dangerous year as volatility is making a base at a level which had been the higher reading in normal markets. Moreover, headwinds in economic data may cause a pandemonium in the markets. Remaining defensive will be key as risk/reward is not favorable now. Keeping stops close and trading around positions will be central to being successful. Buy-and-hold passive investing will be challenged and investors should place more emphasis on protecting their portfolios.
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Be disciplined…; Be a Savvy Investor..!!
Pankaj