The first week of the New Year was no different from the weeks or months before. Volatility and negative news flow persisted as in the last three months. That brings us to an old point, that the market changes direction over economic events and not because a month or a year has changed. So, those who had expected a new trend for the market just because the calendar has changed were going against the basic principle.
The auto sales numbers, released on Wednesday, spooked the market, as these had come against an outperformance in November. Every company, except one, showed a decline in sales in December. On the face of it, the dip in numbers is a serious issue, as automobile sales are taken as an indicator of growth in disposable incomes. But this time around, there was a technical issue. In September 2018, when the IL&FS crisis hit the market, there was a sudden decline in credit availability, as most NBFCs clamped down on lending. This led to a situation of sales of all sorts of vehicles, be it two-wheelers or cars or heavy vehicles, coming to a grinding halt on lack of credit avaialbility.
Adding to the problem was that auto companies had pushed higher level of inventory into their dealer networks in anticipation of festive demand. As financing lagged, inventory levels at dealer networks soared. The financing is getting back to normal, but the effect of that would be felt more on dealers than on companies, as inventories are getting sold. That probably is the reason for the decline in December sales.
Only when financing reverts to normal, along with normal inventory levels, would companies be able to send more stocks from their factory gates to the dealers, and that probably might take eight to twelve weeks.
At the same, another issue comes to the fore. If the working of the auto sector was impacted, chances are that other sectors that depend on credit to push sales, will come up with subdued numbers for the December quarter.
The international market saw an interesting development last week. When the weaker Chinese PMI numbers were announced, not only the Chinese stocks but even the Dow Jones futures saw a sharp dip. The Chinese numbers were taken as an indicator of slowing global growth. Also, a slowdown in Chinese production can be traced back to the US, given that many Chinese firms are contract manufacturers for US companies.
Though last week saw signs of easing US-China positions, these were coming more as tweets from the US side, so these cannot be taken too seriously. Only when the Chinese side indicates a cooling in tensions would the market take it seriously.
Most short-term indicators have been moving in sideways direction and changing colours in short time spans. They have once again given sell signals. But, like in the last one month, the customary strength was missing on these charts.
The moving average convergence/divergence (MACD) on the daily charts has once again come into the sell mode, as it turns south on equilibrium territory. A confirmation of this sell signal would come only when it slips into negative territory.
The extreme short-term indicators have also slipped south from the range they had been moving in for sometime. It has to be seen if these indicators move into oversold territory and stay there or revert over the next three trading sessions. If they do, that would indicate a range-bound correction.
Coming to short-term resistance and support levels, the Nifty is placed at its 200-day moving average (DMA) and has been criss-crossing this average for sometime. Usually, when crosses over or breaks down from this average, the index tends to see sharp upward or downward movements. A movement close to this average indicates confusion over the medium-term trajectory, as certain factors are not letting the Nifty either break its range on the upper or on the lower side.
Coming to short-term support levels, the first support for the Nifty comes at 10,500 levels. If this is broken with bad market breadth, the index would then find support in the 10,300 to 10,350 range, a level where it formed a bottom when the election results were announced.
As for resistance levels, the bulls cannot take full charge until the Nifty crosses the 11,000-mark and stay above it for two to three sessions with good market breadth. Only then can they trigger another round of bear squeeze.