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Will Covid second wave create a second chance to ride equity rally?

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The domestic equity market experienced high volatility during the week gone by, with India VIX rising 16.22% on Monday, even as the US equity indices continued to hit fresh highs despite concerns of a hike in corporate tax rate by the Biden administration.

Dow continued to inch higher, while the Indian bourses showed signs of weakness. In fact, Nifty registered its second-biggest single-day fall in 2021 with heavy volumes. FPIs have been net sellers so far this month, as India struggled to cope with the pace of infections. But this seems to be a healthy correction in the making amid fears of the potential impact of the second wave of Covid-19.

Just when everyone expected a stronger recovery for the economy, markets have faltered over vaccine issues and rising infections that brought in partial lockdowns in some parts of the country. However, once the vaccination drive starts in full swing, things should come under control.

Investors must, therefore, look at corrections as a good opportunity for portfolio allocation to rejig their stock holdings and invest in quality names.

Another macro data point that sent out adverse signals last week was the rupee, which experienced a depreciation till Rs 75.5 level to the dollar, a level last seen in June, 2020. The rupee also turned into Asia’s worst performing currency this quarter after it had the best last quarter. The reasons can be attributed to none other than rising coronavirus cases and heightened unwinding of short dollar positions against the rupee.

In order to keep the 10-year G-Sec yields at or below 6 per cent, RBI announced massive bond purchases to the tune of Rs 1 lakh crore from the market, which added to the existing liquidity in the system. Going ahead, higher commodity prices can also lead to a current account deficit from the existing surplus situation.

All these factors are casting a cloud of worry over the USD-INR pair. Currency traders should remain cautious until the existing headwinds fade off.

Event of the Week
Despite much fanfare over Q4 earnings, largecap IT players delivered mildly tepid earnings with softer

deal wins and modest sequential growth in revenues and margins. Although the pandemic triggered a new tech upcycle, the company managements categorically signaled no room for further margin expansion, as travel costs and wage hikes swelled expenditure for the sector.

With this and most other positives priced in, the market took a more cautious stance around sustenance of growth and pushed prices downwards. However, from a broader point of view, there is a long runway of growth for IT companies, and investors looking to invest currently for the long haul must not hesitate to accumulate stocks on every dip.

Technical Outlook
Nifty ended the week negative. However, it formed a Hammer candlestick pattern just around channel support and at the previous support. The 14,250 mark has now become a make-or-break level for Nifty.

Any breach below the current support will trigger bearish sentiment across broader markets, even as other global and emerging market indices continue to trade at all-time highs. We suggest traders to maintain a cautiously bullish bias on the index and initiate long positions around the support by maintaining a strict stop loss just below the support. Resistance on the higher side is now placed at 14,900 level.

A58ET CONTRIBUTORS

Expectations of the Week
Major cities in India have announced restrictions and markets may continue to remain volatile until the uncertainty recedes. With the ongoing earnings season, market participants should not read much into India Inc’s numbers and should give more importance to the management commentaries, which will enhance future growth prospects amidst the second wave of Covid-19. However, this correction may turn out to be a blessing in disguise for the ones, who got left out in last year’s rally.

Equity investors can keep their shopping lists ready to enter resilient stocks from the pharma, IT, FMCG sectors in a staggered manner. Nifty50 closed the week at 14,617 level, down 1.46%.