RIDER: Enthused by the bullish announcements of Friday, I issued a bullish note on the market in the article below (written on 22-9-19). However, we live in the age of disruption, and on this very day, there’s news that Reliance Capital’s debt has been graded a s junk.
Rel Cap’s debt is 93,900 crores and if trouble happens, then all bets are off. The company claims the interest repayment was delayed because of a technical glitch, but the rating agencies like CARE will not issue a 8 point downgrade because of a technical glitch. Obviously, there’s something we don’t know about, and if trouble breaks out, the financial sector will tumble again, because as you recall, the whole problem started with the 95,000 crore ILFS default.
Therefore, as we are in suspense, the strategy to play the market is SIP or Intraday, until there’s surety that ADAG will not default on Rel Cap debt.
Now here’s the rest of the article – note that all views are subject to the above rider.
With the announcement of a tax cut, the game has changed for the India indices, and here are some factors to track on on 22 Sep 2019:
NIFTY LEVELS TO TRACK
We were at 7,950 or so prior to demonetization in 2016, and it’s been 3 years now.
Let’s say that Nifty would have appreciated 10% per year. This gives us a market bottom of 10,580.
We have tested 10700 twice and this is almost close to the compounded rate, and therefore we can say that market has strong support at 10,600.
Now, one prior support exists at 9850 levels. So that makes Support 2.
On the upside, we are in a blind range between 11,275 (Friday’s close) and the prior high of 12,160. Chances are that the high will be tested.
If the high is broken, we head into uncharted territory of 12200-12700-13000.
Now let’s analyze the factors that will determine market levels.
1. Friday’s tax cuts will benefit many index heavyweights which are already paying 27% to 33% taxes, and these companies will make additional profits. This will cause a Nifty re-rating and there are high chances of Nifty breaking out above its previous highs. This is a positive and should help the Nifty test previous highs.
2. There are high chances that the government will announce dramatic reforms that put money in the hand of consumers – for example, bringing petro products under GST, or simplifying the GST process. This is a bigger positive than (1) above, but it is unsure whether this will happen. If it happens, Nifty should break out of previous highs.
3. Check the charts above. Friday’s stellar movement was backed by very heavy volumes. Even the prior candle is solidly bullish because there’s a rejection of lows. This is a huge positive.
4. On the flip side, the measures above will blow a massive hole in the fiscal deficit. The government does not have sources to fill in gaps and the only recourse available to it is RBI reserves. If these are touched again, or if the money is somehow extracted from the public, then demand will plummet further and this factor will be a huge negative, but it will not play out immediately – it will set in after the initial euphoria is done with.
5. The problem in India is of demand. The Indian mentality is that of a saver, and post demo and job losses, the average Indian Jaani has withdrawn into a shell. He wants to save and it seems like even if some money is put in his pocket, he will keep it, just like the corporates will keep the tax savings. If despite giving discounts. This factor is negative, but it will not play out immediately.
6. The next niggle is mismanagement. The tax cuts announced are like going for broke – these also have been announced under a regulation that can be activated in times of economic emergencies. Therefore, this whole program has to be managed efficiently and it is the government’s job to ensure that new manufacturing facilities are opened in India under the new friendly clauses. If this doesn’t happen, it will be a huge negative, which will play out sometime in December 2019-January 2020.
7. We’ve had many ministers come out and say that there will be an effort to take over POK. If this happens, and if there’s conflict, then all bets are off and we can even test the lows mentioned above. If it happens, this will be a negative.
1. Aramco will be out with an IPO n 2020 and every effort will be made to boost the price of oil. there was an attack on Saudi oil producing facilities that sent oil soaring 20%. Though some sanity has been restored in the prices, and the Iranians are smoking peace signals. However, it is unclear what the Saudis and USA will do. These countries want to sell as much oil as they can before electric mobility catches up, and if they do anything to upset the word order, it will be a negative.
2. The US China trade war can actually indirectly help India. If we manage to sign a deal with USA to outsource their manufacturing here, we can see a lot of jobs created over the next decade. This can be a positive, or a negative, depending on political will.
3. If our neighbors – Pakistan and China – start creating trouble for whatever reason, then this would be a negative.
Summing up,, this then is the market outlook as on 22 September 2019. Many events will play out in the coming weeks and the market ride will be exciting with money to be made on both bullish and bearish events.
For the time being, we are in a bull grip, so fasten your seat belts for a joy ride, and let us hope the negatives do not play out.
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