Banking and Power sectors poised to lead market recovery: Dharmesh Shah

“If you look at the market breadth again this is a good indicator, sentimental indicator to understand how the things pan out going forward. The percentage of total 200-day moving average of total CNX 500 is currently around 12% to 13%,” says Dharmesh Shah, ICICI Direct.

This is the fourth consecutive session where we are pretty range bound on Nifty. In fact, today we even broke down below the psychological support levels of 22,800. Tell us from here on what are the levels that you are watching out for, for next week?
Dharmesh Shah: Yes, definitely, if you look at the market for last five to six trading sessions, we have been trading this range of 23,000 to 22,800. So, almost 200 to 300 points trading range has been. Now, the point is that if you look at the trading range, it is getting more of contracting. The range is getting more and more narrow. We believe 22,800 remains to be the very strong support for the Nifty.

Anyhow, if it breaches these levels, we can see some bit of a panic selling on the closing basis, maybe 22,600 remains to be the very strong support for the Nifty. But eventually for the next week we believe technical pullback is on cards.
If you look at the market breadth again this is a good indicator, sentimental indicator to understand how the things pan out going forward. The percentage of total 200-day moving average of total CNX 500 is currently around 12% to 13%.

So, whenever the percentage approach to reading of 12% to 13% are just trading about 200-day moving average of total CNX 500, there are six occasions in last two decades wherever such occasions have been panned out market has found a durable bottom during those phases.

So, we believe we are not near the bottom but maybe short term we are near the bottom of 22,800 to 22,600 and we are expecting a pullback for the next week towards 23,300 to 23,500. So, buy the dip should be the strategy going forward. But in this pullback which sectors can actually participate, any sector that is standing out for you?
Dharmesh Shah: Definitely, if you look at the Nifty, Bank Nifty is something which has been relatively outperforming. No doubt in current corrective phase we are seeing a drawdown in the Bank Nifty, but 48,000 to 47,700 remains to be the very strong support for Bank Nifty and banking is one sector which should lead the rally going forward because Bank Nifty contributes 35% of the weightage to the Nifty. So, apart from banking again PSU as a sector we have seen a good sell-off in last almost the index level around 25% to 26%, but inside the PSU now power space has been one which has been seeing a regaining of momentum in last few trading sessions.

The stocks like NTPC or JSW Energy should be back in action. Apart from that power space, again metal as a space clearly relatively outperforming even in this corrective phase. So, metal as a sector we remain to be positive for going forward.

So, across I will say that we will see more of a short covering happening. So, maybe real estate, infra, capital goods, so these are the spaces we are expecting a pullback happening in the next week.

Also, tell us about the broader market. Now, up until yesterday for the two sessions we saw broader markets outperforming the benchmark and today, also we were outperforming but midcap has slowed down that pace. But any signs of reversal coming in on the broader markets because there has been a fair bit of correction that has happened there?
Dharmesh Shah: So, just want to share with you the data. If you look at the history of the midcaps and the smallcaps. So, inside the bull market, corrections are part and parcel. So, if you go back to the history of the last two decades, inside the bull market midcaps and smallcap has a tendency to correct on an average around 25% to 30% and post that we have seen a very decent pullback happening in both the indices.

If you look at the current context, the correction which has happened in the midcap and the smallcap, in midcap we are done with 21% and in the smallcap we are around 24%. So, maybe 3% to 4% corrections cannot be ruled out in the midcaps and the smallcap.

But if you look at the historical data, maybe price-wise risk-reward looks more favourable at the current levels and maybe we may see more of a bottoming out formation for the midcaps and the smallcaps and can be seen a rally in the next three months for the midcaps and the smallcaps.

So, looking at the historical data, it suggests so maybe the downside may be limited from the current levels and we are expecting more of a base formation in the midcaps and smallcap. So, my suggestion to you is that look at the good quality stocks in the midcaps and the smallcaps. It is a good time to accumulate and construct the portfolio at the current market price.