Nifty could slide into bear market territory

One lead indicator could be the Bank Nifty. The Bank has a high beta with respect to the Nifty, and financials have a very high weight in both the Nifty and Sensex (and also in the Nifty Next 50)

The technical position in the stock market is interesting. Breadth indicators are down. Declines have vastly outnumbered advances in September. Volumes have risen as prices have fallen. The rupee has hit a set of lower troughs. The major indices have lost 5 per cent this month, while midcaps and smallcaps have lost even more. The FPIs have been consistent sellers - divesting a net Rs 108 billion of equity. 

We are some way short of definitively calling this a bear market, however. The Nifty and Sensex remain above their respective 200-day moving averages (200-DMA). While a pattern of falling tops and bottoms has been established, the correction is just about 6.75 per cent from the all-time high.  A bounce upwards from these levels is plausible enough. 

What are the factors worth watching? One key factor will be newsflow from abroad. The US-China trade war, Brexit, Iran sanctions, Syria, etc, will all influence attitude and market direction. Upcoming central bank actions will, as usual, influence interest rate and forex movements. So the Fed, ECB, Bank of Japan and RBI policy meetings are also likely to move and shake markets. 

The political controversy around the Rafale Deal could also influence domestic sentiment. On the business side of things, the IL&FS situation has to be contained. The NBFC has an incredibly convoluted structure with over 150 subsidiaries and a plethora of special purpose vehicles. It's hard to assess the potential for debt defaults if it goes under. 

IL&FS has classic asset-liability mismatches, due to the fact that most of its investments are long-gestation infrastructure projects, while it has to borrow money at much shorter tenures. It has already defaulted on a couple of obligations. It desperately needs cash injections to rollover debt and it's not clear if it can find the wherewithal. This sort of uncertainty can lead to yield spikes, or in the worst case, cause freezes in bond market actions. Hence the nervousness that led to a massive sell-off in NBFCs on the news that DSP had sold Dewan Housing paper at a discount. 

In technical terms, the trader has to look at the 10,750 Nifty level. That’s where the simple 200-DMA is ranged. A breakdown to say 2 per cent below the 200-DMA, or about 10,500-10,550 would indicate that we’re headed into a serious bear market. That would imply losses of 20 per cent or more from the peak and it would also indicate that prices would stay down for an appreciable period of time. 

One lead indicator could be the Bank Nifty. The Bank has a high beta with respect to the Nifty and financials have a very high weight in both Nifty and Sensex (and also in the Nifty Next 50). This means that the Bank Nifty can breakdown/ breakout past key trading levels before the Nifty itself does. There’s bad news on this front. The Bank Nifty broke below its own 200-DMA on September 19. The index was at 25,000 on September 24, while the 200-DMA was held at 26,100. This suggests that the Nifty could soon slide into the bear market territory. 

A confirmatory indicator could be Amfi data for September and October. One reason why the market move has been so strong is the movement of retail savings into equity mutuals. A substantial proportion of this has come in via the SIP route. SIPs have to be taken for a minimum period of six months and there was a big inflow starting in April 2018. Many of those SIPs will need to be renewed in October to keep the inflows. The October equity MF inflows could be an indicator of sentiment going forward.