The market continues to reel under bear pressure. We are certainly undergoing a correction, and every day there is hope that the markets will end this short move. But the markets are not relenting as yet.
There is additional news flow from FMCG stocks in the last couple of days. Nestle’s chairman came out and said that they are facing pressure even from the urban side of the market. The middle class is shrinking. He stated that Hindustan Unilever has come out with very poor numbers, lower profits than last year, and the volume growth is also not there. Suddenly, there is concern about autos; two-wheeler concerns were raised a couple of days back, and now FMCG is also affected. This entire consumption story that was building on has suddenly been dented, and that is not good for the market going forward. We’ll discuss this more towards the second half of the video.
Where is the market headed?
Market Overview
The market is headed lower gradually. It is pausing after every significant down move for a few days and then going down. We are certainly in a down move. Post this pattern, as I mentioned earlier, the potential target looks to be around 23,400. But first, maybe this pivotal support at 24,000 may kick in; that’s still about 400 points away. In case there is some external development, we may have a great bounce as well because the market remains towards the oversold part of the sentiment.
Nifty overall is down 0.15%. There was a point during the day when Nifty was green, but we are now closing at 0.15% down.
Nifty Next 50
Nifty Junior also showed no gains from yesterday, closing at 0.08% negative from the previous day, and it is very precariously poised because one sharp move down can really set the cat among the pigeons, where every other person will then want to sell off. We are still somewhere near the support zone; as long as it stays around here, we are okay. Otherwise, we are going much, much lower. So let’s hope that we don’t get any such news that can really trigger a further downturn.
Nifty Mid and Small Cap
Mid caps are reasonably stable, I would say, down a quarter percent today after the half percent gain of yesterday. So, there again, hovering near the support point, while small caps are losing 0.6% from yesterday. The downtrend is definitely on. We are bouncing on one day and then recovering back lower on the next day.
Nifty Bank Overview
Bank Nifty, however, is showing slightly different signs. There was a second day of bounce today, 0.57%. While that is a bit hopeful, one must remember that Bank Nifty had already fallen quite a bit in the earlier part of the month and is now stagnating in this area, not having performed at all in the last four to five months.
We are sort of catching up in terms of a time correction that is going on, with some mild price correction also on the way, and the market is waiting for some positive cues going forward.
Advanced Declined Ratio Trends
The advanced decline ratio is somewhat tilted towards declines, at 300 to 200 in favor of declines. The top five stocks are slightly skewed towards the downside, but reasonably even.
FIIs continue to sell, with 5,600 crores sold on the 23rd of October. DIIs continue to buy, with 6,000 crores bought on the same date. While it may seem that DIIs can continue to counter FIIs, it’s important to note that FIIs own almost 19% of Indian equities. So, it’s not a small number. Even if they continue to sell, they have now sold the most in a month in a long while. That probably may indicate that some end to this continuous selling may be there because all records have already been made. However, you never know; it could continue for the rest of the quarter as well.
So, there is no relief from FII selling as of yet.
Nifty Heatmap
Looking at the Nifty Next 50 heat map, you can see that the big reds are in Hindustan Unilever, down 6%. At one point, it was more than 7% down. You don’t often see Hindustan Unilever with that kind of a cut. Nestle India is down another 3%, having lost significantly since its recent top. ITC is also down 1.8% in sympathy with the rest of the FMCG group.
In the Nifty Next 50, significant losers include Mother Son, Zomato, Varun Beverages, Dabur, TVS Motors, Dmart, Knockery, ABB, and Lodha. Adani stocks are picking up again on news of them raising more funds, with Adani Total Gas up 8% and Adani Power up 2.9%. Power stocks in general, such as Power Finance and public sector enterprise stocks, are gaining some ground. PHEL and ICICI Prudential are also up, so it’s a mixed bag in Nifty Next 50. However, some strong down moves are happening in otherwise strong stocks.
Zomato announced that they are going to raise the commissions they charge for the festive season from 7 rupees to 10 rupees. This should have been a positive move for Zomato’s stock price, but they have been down 3.69% today.
Sectoral Overview
In terms of sectoral trends, FMCG has been thrashed by 2.8%, which is not a usual sight for consumption stocks, while real estate is down another 1.1%, and the rest are very minor. PSU banks are just doing a sort of a dead cat bounce, up by 1.2%.
FMCG is now down 11.3% in the last month, along with real estate at 12%. The 12% drop in real estate is still digestible because they had gone up 68% in the last 12 months. However, FMCG has not performed as well in the last year; they are only up 13.6%, just a bit ahead of private banks at 13.4%. These two major sub-segments of the market have really underperformed the rest of the market, and that’s where the heavyweights are. Many strategies that target high-quality stocks are currently stuck in these stocks.
Sectors of the Day
Nifty PSU Bank Index
The PSU banking sector saw the most bounce today, although the chart doesn’t look bullish at all. But banks like Bank of Baroda, Yuko Bank, and PNB have bounced for the day.
Stock of the Day
Piramal Pharma
In stock spotlight, Piramal Pharma has come back up very strongly from sub-100 rupees, being up 17% today. It made a new all-time high at 255. A few of our strategies hold this stock. The longer-term trend shows a complete mess at the start, with the market coming in at 170 to 190 rupees, going down to as low as 60 odd rupees, and then climbing back up 4x from there.
This unnerved a lot of the initial investors, and they probably got out. However, if you didn’t participate earlier and looked at this stock fresh once it started to show positive momentum, you would have had a chance to ride it nicely. A lot of psychological issues arise when going through a drawdown in a stock. You often don’t feel like holding it once it starts to come up. But if you are following a strategy, you won’t have those thoughts towards the stock.
Story of the Day
Returning to FMCG stocks, they are sending a red alert. Poor volume growth in the Indian markets, along with statements from heavyweight companies like Nestle, indicate that the middle class is shrinking and not buying products as much. These are alarming signs. Autos were already reeling under inventory pressure, with two-wheeler sales getting damaged. If this is the kind of anecdotal evidence from the real marketplace, then we are in some trouble.
We are hinging on the hope that funds will continue to flow into the market, buying these stocks. But at the end of the day, if the reason for buying is only fund flow, how long can that last? Fund flows must be backed by actual real growth in the markets as well.
What we are seeing is a reversion to the mean. The Nifty FMCG chart index shows that it had gone much beyond its 200 DMA and has now reverted to the mean. The good part is that in the last eight years, whenever the FMCG index has returned to the 200 DMA, it has been a reasonably safe spot to start accumulating FMCG stocks if you are a discretionary investor looking for value buys.
Currently, we are approaching that same mark, which may provide solace to many investors going forward. Nestle India, as a direct stock, has collapsed below the 200-day moving average. It is now more than 10% below the 200-day moving average, which probably hasn’t happened in a long time. More consolidation may need to happen before this starts to go up.
Hindustan Unilever also saw a rise from 2200 in the last four months based on a lot of hopes. Those hopes have now been denied, and we are back to where we were two to three years ago. This pattern is evident in many stocks, including Asian Paints. Many consumption stocks are currently priced to the moon.
Looking at the price-earnings ratios, Hindustan Unilever is at 57 times, Nestle at 68 times, Varun Beverages at 78 times, Britannia at 61 times, and Godrej Consumer at 73 times. These are unreal numbers. Such high valuations have lost real meaning, as you cannot expect a company to grow at that kind of base without an alternative. Hence, funds are flowing into these stocks at every drop.
This is always a risky business because when you buy stocks that are, let’s say, very high quality, it raises questions. For instance, Hindustan Unilever was 65 times earnings last week and was considered the highest quality stock. Today, at 57 times, it is still the highest quality stock. How do you determine if 65 was a good point to enter and 57 is a good point to exit?
This entire exercise of earnings and valuation becomes meaningless beyond a certain point. You only end up looking at whether funds are going into or coming out of that stock, best measured by momentum scores. Many of these buy-at-any-price stocks beyond FMCG are suffering from the same issue, as there is no longer any metric left to measure them.
With nearly three-digit price earnings, it’s tough to determine where to buy and when to exit. You might be investing for the future and hoping the company will continue to grow; if it doesn’t, you’re basically doomed. These are real issues investors are learning the hard way because many influencers and fund managers keep promoting these stocks for their perceived safety.
There’s a catch-22 situation. Let’s say a fund manager raises 10,000 crores. He doesn’t want his fund to lose money, so he invests in the safest stocks. When he puts in another 10,000 crores, those stocks rise further. Then another fund manager comes in with 20,000 crores, also wanting to invest in those same stocks. This cycle keeps repeating until all of them eventually take a beating.
I apologize for my rant, but this is a disease that has continued with us for many years. It has disoriented many new investors regarding how they should be investing. When you are already priced for the next five years, it’s challenging to find rationality in terms of entry and exit points.
The best you can do may be to look at relative pricing, such as comparing 30 times to 50 times earnings, where 30 times looks better. Alternatively, adding price action to your decision-making can provide a logical way to invest and exit.
