Why are the Markets Crashing?

What a lousy day!

Indian stock markets are undergoing a sharp correction driven by sharp fall in global markets.

Benchmark indices witnessed its worst one-day sell-off of calendar year 2022 on Monday. Panic selling in international markets weighed on domestic indices as investors worried about geopolitical tensions and rising crude oil prices.

The BSE Sensex plummeted over 1,800 points intra-day, while the NSE Nifty slipped below the 16,850-mark. Both indices clocked their biggest intraday decline since 26 November 2021.

With today's fall, the BSE Sensex is now down around 2,500 points. Investors have lost Rs 9.6 tn of wealth in just two straight sessions.

The sell-off gave social media users enough content and they were like even the market is red on valentine's day.

To help you navigate the markets and make sense of the current volatility, we reached out to Brijesh Bhatia, Research Analyst at Equitymaster for his views on the current market sell-off.

In this interview, Brijesh talked about the factors behind the market meltdown and how investors should tackle the given situation.

Read on for a very insightful interview...

Equitymaster - The stock markets are falling. Why do you think there was this sudden sell off?

Brijesh - The sudden sell-off is due to the market's many concerns. These include th..e geo-political tension between Russia and Ukraine, 40-year high US inflation, upcoming interest rate hikes, and the US 10-year bond yield moving above 2%.

Equity traders and investors are worried about the outcome of the war between Russian and Ukraine. Hence, the money from equities is flowing into commodities and bonds as they offer returns at lower risk compared to equities.

The sell-off in the tech-giants like Facebook, Amazon, Tesla, Google, and Alibaba in the past few weeks triggered selling pressure in Indian IT stocks as well. I did a video on this.

Also, the US smallcap index Russell 2000 index is trading at a 52-weeks low. This indicates negative sentiments on Wall Street.

The panic and fear in the market is highlighted by the rising CBOE VIX (Volatility Index).

Equitymaster - What are you charts suggesting when it comes to support levels? Please elaborate for various segments of the market.

Brijesh - The long-term charts are still trending bullish for the widely traded equity indices like the Dow Jones, DAX, FTSE100, and Sensex.

Most of the analysts on Wall Street expected an end of the bullish trend as the indices fell below the 200DMA (Daily Moving Average) and hit a 9 months low. But the reversal was fast and furious back above the 200DMA.

As per the distribution structure, a reversal above 5% isn't so expedient and I believe can result in rangebound trading for the next few weeks.

Similarly, Nifty has closed below the 17,000 mark for the first time in 2022. It's trading just above the 200DMA (16,798) which will be tested after 19 months.

Also, the previous swing low of 16,400 will act as a major support zone for an ongoing trend.

Undoubtedly, there is fear on Dalal Street which can be seen in this chart.

Nifty Monthly Chart

 

After the 2020 crash and rebound, the fear ended in August 2020 when the market started reversing at a faster pace.

For the first time since August 2020, the Fear & Greed indicator has entered the fear zone in February 2022. This suggests that it's not a trader's market.

Equitymaster - Which sectors look the weakest, even after the sell off? Any sectors, that are likely to miss the worst of this sell off?

Brijesh - I highlighted the selling pressure in US and in Indian IT stocks. I believe this pressure will prolong. I recorded a detailed video explaining this.

As we have the TCS buy-back, which holds highest weightage in IT index, there can be volatility, but the broader IT basket seems to be under pressure.

The sector which is likely to miss the worst sell-off could be Metals and commodity driven stocks.

Equitymaster - What sectors should investors and traders look at if they want to tap into this market? Both from a going long and / or short perspective.

Brijesh - The Thomson Reuters Commodity CRB Index has broken out of 69 months consolidation and is trending higher. Even metals prices are trading near their all-time high levels. Hence, I believe commodity stocks can be a buy-the-dip opportunity. Investors should have these stocks on their watchlist.

For traders, the 'gap opening' is not a rewarding strategy. This is because stop-loss can go deep or sometimes even out of pocket. Gap ups and gap downs are always a threat for traders, be it a discretionary trader or a system-based trader.

As the Nifty is trends in the range of 16,500-18,000, traders need to time it well. That can be the only option for traders to make money.

Since October 2021, the markets have been volatile. We have seen increasing stock specific momentum. In such scenario, traders tend to lose money as timing the hit-and-run scenario is very difficult.

I suggest traders sit-back and relax for a few weeks and trade only when they spot the best risk-reward strategy.

Equitymaster - How do you see the broad markets playing out in the next few weeks and months? How important will be the upcoming Fed meeting in March 2022?

Brijesh - The ongoing discussion in the market seems to suggest the Fed meeting in March is discounted as the positions are already building up.

Global equities and crypto sell-off signals to us that money is moving from riskier assets to bonds and commodities.

Even if the Fed hikes the interest rate, there could be a knee-jerk reaction as the US 30-year bond yield is still trading near the 2021 highs. It means that the buildup in positions can be for the short-term. Once the outcome is known, profit booking can be expected in bonds. Money may flow back into equities, post Fed meet.

I foresee a new all-time high on Dow Jones and Sensex in second or third quarter of 2022. It is just the matter of time. The equity markets may dip and remain volatile but the future prospects look bullish.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...