Sensex tanks 661 points, Nifty settles at 10,607; 5 key reasons for the selloff

A strong, across the board selloff engulfed the Indian equity market on July 14, exhibiting high correlation with the global markets.

BSE Sensex closed 661 points, or 1.80 percent down at 36,033.06 and Nifty settled 195 points, or 1.81 percent, down at 10,607.35.

In sync with the benchmarks, broader Midcap and Smallcap indices on BSE also fell about a percent each. Among the sectoral indices, Bankex fell over 3 percent while financials, auto, metal and power fell more than 2 percent each.

The market appears to be torn between hope and fear. On one side is the hope of gradual economic recovery along with positive management commentary, on the other side, there is a fear of rising coronavirus cases leading to lockdown again.

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“The price of many positive surprises has already been set and the Sensex would remain under pressure. There will be the pressure of profit-taking at every resistance level until the market goes above 37,022 levels,” said Shrikant Chouhan, Executive Vice President – Equity Technical Research at Kotak Securities.

Here are five key reasons for the selloff:

Rising COVID-19 cases

India continues to witness a steep rise in coronavirus cases every day.

India has, so far, recorded 9, 06, 752 cases, which includes 23,727 deaths. Maharashtra, Tamil Nadu, Delhi and Gujarat have reported the highest number of infections.

However, the recovery rate is rising and stands at 63.02 percent. Today is the 112th day since India implemented a nationwide lockdown to check the spread of the highly contagious virus.

Weak global cues

Weak global cues punctured the sentiment of the domestic market.

“The market is down today as global markets are worried about a lockdown again. California has withdrawn plans to reopen. Since April 2020, our market and other emerging markets have been closely following the US market trend,” said Chouhan of Kotak Securities.

The S&P 500 and Nasdaq ended lower on July 13, pulled down by Amazon, Microsoft and other big-name leaders of Wall Street’s recent rally.

The Dow Jones Industrial Average rose 0.04 percent to end at 26,085.8 points, while the S&P 500 SPX lost 0.94 percent to 3,155.22. The Nasdaq Composite dropped 2.13 percent to 10,390.84.

Among the Asian peers, Shanghai Composite Index, Hang Seng, Nikkei and Kospi all fell amid concerns over a spike in coronavirus cases.

 Growth worries getting stronger

The concern over deteriorating global and domestic macroeconomic health continues to remain an overhang.

The Economic Outlook Survey by the Federation of Indian Chambers of Commerce & Industry (FICCI) foresees annual GDP growth forecast for 2020-21 between (-) 6.4 percent and 1.5 percent.

“There were already signs of an impending slowdown in the economy, which have been sharply accentuated by the COVID-19 pandemic induced lockdown. The spread of COVID-19 pandemic has severely hit global as well as domestic growth,” the report said.

Rating agency S&P Global has cut its emerging market growth forecasts, predicting a 4.7 percent slump on an average this year and warned that all countries would be left with permanent scars too.

The firm said the downward GDP revisions mostly reflected the overall worsening pandemic for many emerging markets and a larger hit to foreign trade compared to its last set of expectations in April that predicted a 1.8 percent contraction.

“We project the average EM GDP (excluding China) to decline by 4.7 percent this year and to grow 5.9 percent in 2021. Risks remain mostly on the downside and tied to pandemic developments,” S&P said.

Earnings show deeper stress

While the June quarter numbers were expected to be lower, investors wanted to hear encouraging commentary, which is missing so far.

“Recent results show that top quality companies have also taken a big hit on profitability without any certain future of reversal that will adjust the indices to the EPS drag this quarter,” said Sameer Kalra, Founder, Target Investing.

Technical factors

The Nifty failed to hold on to its 200-DMA due to a selloff in banking and financials in the previous session.

Experts say that the Nifty has been in a consolidation mode since last week, moving in a narrow range. Until the index breaks and closes above 10,900 or 200-DMA, a major upside is unlikely.

For the time, Mazhar Mohammad of advised traders to focus on stock-specific opportunities rather than betting on a trendless index.

“The Nifty50 appears to have witnessed profit-booking from intraday high of 10,894, after a strong gap up opening, as it tested its 200-day simple moving average whose value is placed at 10,885. This price action resulted in a bearish candle on intraday charts, thereby dissipating the enthusiasm of the bulls as they made a failed attempt for a range breakout,” Mohammad said.

The trajectory of the market will continue to remain directionless till the Nifty registers a strong close above 10,900, he said.