Weekly Market Recap

I begun where I stopped last week, in my last weekly blog I concluded on positive note and mentioned that perhaps, sellers might have gone beneath the surface and they may get re-surface themselves aggressively at higher level, however, the Iran drone attack on Saudi oil field on last Saturday caused the crude oil price to rally +15% on Monday. Consequently, seller became active sooner than I anticipated, caused the market drifted lower continuously till Friday morning. And then all of a sudden weekly climax changed drastically and emphatically post FM announcement on reduction of corporate tax that caused the ruckus, eventually, market rallied precipitously recorded of the rare single day biggest surge in last 6 years. Major indices rallied more than 5% in a day.

In the week gone by, the benchmark SENSEX closed up by 629 points, or 1.68% at 38014, similarly, NIFTY gained 198 points, or 1.79% to closed at 11274, whereas, BANKNIFTY outperform the market and gained 882 points, or 3.14%.

Current Outlook

The highlight of the week was reduction on corporate tax of domestic companies, effective tax rate including surcharge and cess has brought down to 25.17% from 34.9% earlier, along with reduction in MAT (minimum alternate tax) reduced to 15% from earlier 18.5% and biggest beneficiaries are manufacturing companies whose tax has been reduced to 15%. I think for background, we need to be generally aware of how these change in tax rate affect the fundamentals of the companies, but on a deeper level, I don’t really care enough to get into a tedious analysis of them.

Fundamentally, some key ratios like PE, ROE, EPS will improve significantly provided total revenue and expenses are unchanged in next quarter as these ratio’s used PAT (net profit after tax) in calculation, however, some key ratios and components like P/S (Price/Sales ratio), P/EBITDA, EBITDA and operating profit margin would be unchanged. I normally, don’t look at PAT as most of the time it is being manipulated by adding one time gain or loss adjustment in EBIDTA. Operating profit is much more important to me to know the sustainability of the business that shows how efficient and viable the business model is.

Technically, picture began to improve last week seems deteriorated again early this week, but, eventually, ended up improved substantially. Although, the massive up move we witnessed on Friday was news led, however, that move has not only managed to brought out the NIFTY from last two months trading range of 10700-11150, but also closed above 200 DMA (simple daily moving average – black line) as depicted in chart below. Moreover, the upside momentum generated after the news is quite strong which may continue for a while and can lead the market higher. However, these big move may act like an exhaustion or initiation, to find out which one it is there is no harm to wait patiently for day or two. So far, outlook seems to be in favour of bulls.

Conclusion

Short-term indicators have become over-bought, while intermediate and long-term have enough room before they become over-bought. If the rally continues, there is a possibility for NIFTY to form a double top in the vicinity of the previous peak. However, I still believe that that kind of bold move by the government indicates further weakness in the economy going forward and that makes me to be cautious and avoid aggressive buying as market is quite vulnerable to correct at any time in foreseeable future.

I welcome any feedback or suggestion you may have about the content of this article.  

Be patient..!; Be a Savvy Investor..!!

Pankaj