Not the time to buy stocks at these levels; avoid mid, small-cap counters

The exit poll might have reduced some nervousness in the market, but it still remains reasonably high, given the current IVs. Only after India VIX falls back to normal levels,things shall get even.

With Monday's sharp rally that took the Sensex past the 76,000 mark and the Nifty50 past the 23,300 levels for the first time ever, equity markets seem to have fully priced in the consensus exit poll results. That said, the implied volatility continues to remain fairly high as compared to the average seen historically. So unless we get a confirmation on the actual Lok Sabha election numbers on June 04, the undertone still remains edgy.

That said, the exit poll numbers might have reduced some nervousness from the system, which can be seen from the sharp dip in the India Volatility Index (India VIX) on June 03. However, nervousness still remains reasonably high. Unless, India VIX falls back to normal levels, then only one can be sure that the anxiousness is out of the system, and things are on an even ground.

 

Secondly, there are lots of shorts in the market, including foreign institutional investors (FIIs), which have not been squared-off yet. Some short traders are still hoping that things could be different on Tuesday on the vote counting day. In the event of these shorts forced to be covered, the Nifty50 index could witness another 1-2 per cent further upside from the current levels.

Maybe, only after existing short positions are taken out from the system, one can expect some profit-taking in the market. The FIIs, too, may cover their shorts but may remain on the sidelines till the Budget, as there could be some nervousness in the run-up to the Budget.

In fact, Foreign Portfolio Investors (FPIs) may want to take advantage of any such dip then. Post Budget, the FIIs may take a fresh perspective on the Indian market.

Similarly, it is advisable for medium-term investors to wait for the market to stabilise rather than chasing stocks at these levels. From a long-term perspective, large-cap space, especially stocks from infrastructure and manufacturing, should be on investors’ radar.

At the same time, one should avoid mid-and small-cap stocks at this juncture. Anticipated market volatility ahead of the Union Budget may be a good time for investors to venture out in the broader market space.

Disclaimer: U R Bhat, co-founder & director, Alphaniti Fintech. Views expressed are his own.

(As told to Rex Cano)