Signs Of Fatigue Are Showing In The Large-caps

The coming week may usher in a consolidation as markets gear up for two major events i.e. Brexit and a possible US Fed rate hike. Global investors are keenly watching these events and may prefer to go easy till the smog clears on these counts.
While the Brexit is a major worry and could roil the international markets for some time, the US Fed may still not hike rates in June keeping the liquidity taps a bit loose for some more time.

In the meantime, however, foreign investors are not showing any signs of unease having been net buyers all the five trading days last week. But their intensity of purchases eased last week to Rs 1613.56 cr as compared to the immediate previous weeks Rs 2967.46 cr. Signs of fatigue are also showing as domestic investors have sold shares worth Rs 925 crore.
With the IIP data not looking optimistic coming in at -0.8 per cent for April, investors are likely to keep their fingers crossed in the coming weeks.

Besides, the domestic stock market surge of over 17.44 per cent since March 1 till its recent peak on June 8 has been without any hiccups, which is also making a correction quite overdue now. Bears are also expected to see the global events as a chance to overpower the bulls. As the intensity of purchases has slowed, short-term traders too are likely to offload and book some gains.

The frontline indices are at the beginning of the year levels of 26,600 levels. At this point, the markets are not overly expensive neither significantly inexpensive with the PE standing at 19.4 times.

However, the earnings momentum is gathering steam as metal and core sector companies see sparks of an earnings revival. Combine this with the steadily expanding consumption sector, and the earnings could get a significant boost in the coming quarters. This will make PE levels shrink.

And if the correction persists, PE levels will shrink faster.

Over the last month, the FMCG sector has gained a bit of ground on expectations of a better monsoon, a pick-up in rural demand and the rise in incomes due to the 7th Pay Commission. The BSE FMCG index gained 5.4 per cent last month.
Sugar stocks have surged the past few weeks as sugar becomes a scarce commodity in the global markets. BSE Metals sector has surged 2.4 last week showing investors are scouting for relatively undervalued sectors where an earnings pickup is on the cards.

While stocks are not at rock-bottom prices, the markets are clearly in the ‘buy on dips’ mode. Of course, it’s ideal to buy all out in the markets when the PE levels are around 15 times earnings, but for that markets have to dive back to 22,000-23,000.
But while that is quite unlikely, investors can still keep a ‘cash trove’ ready. The present correction, if it indeed persists, is going to give a decent chance to accumulate stocks, if not the best.