market outlook: volatility loop: has global uncertainty led the market into a bear trap?

Markets ranged this week, remaining largely indecisive. Prior to this week, national benchmark indices managed to quickly recover from recent losses. While there currently appears to be a positive bias, the bigger question is whether this rally is sustainable.

Typically, when a bullish rally ends, the first stage of the correction is followed by a strong recovery, popularly known as a “relief rally”. The relief rally leads market participants to believe that the correction phase is over, but eventually leads to an even steeper correction.

Historically, after the 1999-2000 bull run peaked, domestic markets rallied more than 30% after the first stage of the correction. However, investors who mistook this for a continuation of the bull cycle were caught when the indices plunged 45% thereafter. Even in the midst of this 45% drop, there were 3 significant relief rallies. Similarly, the 2008 bear market saw two, while the 2011 bear market saw four such relief rallies.

Returning to the present, the worst seems to be over. Markets have discounted the possibility of a global war, have adjusted to projected rate hikes by the US Fed and have discounted, to some extent, the impact of the Covid outbreak in China. In addition, the RBI Governor has eased some problems by ensuring that Indian inflation remains transitory.

So while the chances of this rally being a bear trap are slim, markets are expected to be volatile and consolidate within a range in the near term, at least while some dark clouds are still hanging over us. . The ultimate economic impact of the Russian-Ukrainian war will only be known over time and will be further analyzed. In addition, the possibility of the US going through a phase of recession, as well as the potential disruption to economic activities should the new variant spread to other countries, including India, will continue to keep Mr. Market on edge. . Investors should therefore tread carefully and invest for the long term in a phased manner.

event of the week

As the war between Russia and Ukraine resulted in another battle between inflation and the final consumer, price increases on all products were the talk of the town. India Inc has tried to pass on rising commodity prices to consumers to address concerns about margins.

The prices of gasoline, diesel and LPG rose this week. Additionally, auto OEMs, FMCG players, major steelmakers, airlines, and paper companies have also raised their prices and even signaled further increases. These increases will be fully reflected in the inflation data for the month of April.

While RBI anticipates that inflation will moderate in the coming months and ultimately stay within its tolerance band, April’s inflation numbers will reveal the situation on the ground. Crude oil prices have risen again this week, crossing $120 a barrel, making the situation even more challenging.

technical perspective

The Nifty 50 ended the week on a negative note after consolidating in a tight 400-point range, with the 17,500 level emerging as a critical resistance zone for the benchmark. While this week’s trend suggests that the bullish momentum is slowing, there is no bearish confirmation evidence so far. The BankNifty index, like the benchmark, shows relative weakness. We recommend that traders maintain a slight bullish bias over the coming week and continue to buy dips. Traders should also keep an eye on how the market reacts to the immediate support near 17,000. Any decisive break below this level may result in the markets testing the 16,400 levels to the downside.

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expectations of the week

In addition to the China Covid outbreak and war developments, US macro data such as GDP growth rate and unemployment rate will influence global markets. At home, due to the last monthly expiration of this fiscal year, volatility will be high. Also, with car companies’ monthly sales numbers expected to be mixed, D-Street will be keeping an eye on companies that don’t meet market estimates. As markets are likely to remain range bound in the absence of positive news flow, investors are encouraged to continue investing in pockets that have a reasonable margin of safety. Nifty50 closed the week at 17,153, down 0.78%.

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