Private bank stocks outlook: Top private sector banks likely to see more selling pressure going forward

Given that we are stepping into a very volatile expiry week, is your expectation that we are likely to see more chop and churn?
I will call it one of the better months for the markets. Yes, the last couple of days were a bit more choppy, especially on Friday where the indices were a bit volatile. However, the way the markets have rallied in February starting from the Budget day itself has been spectacular. When you see a 7,000-point rally on the Bank Nifty, a 1,700 to 1,800-point jump on the Nifty in just a matter of two-three weeks, there are bound to be some bit of corrections and aberrations.

What we saw on Friday and the second half of the previous week had more or less to do with the mean reversion process, which the markets were going through. What has also happened, after previous weeks’ price correction, the Nifty and the Bank Nifty both have formed some bearish candlestick patterns. Typically, when we see those bearish patterns, it has a follow through and a spill over. In that aspect, it is possible that the action on the indices could remain a bit muted.

The 15,000 level on the index remains to be a very crucial support zone. We managed to break below that on Friday and just about have a touch and go closing towards the 15,000-mark. Next week, this level could be an important level. If we break and sustain below the 15,000 level, then a follow through downside of 500 points on the Nifty could be a high probability.

What is it that you are spotting in this entire PSU trade? Do you think it is short-lived or does it seem like there is some base building up for a bigger move?
Whether it is the PSU banking pack or specific insurance stocks like GIC Housing, etc, or the gas distribution names; if you look at it, there is a specific news flow and a certain theme which has been attached towards these stocks. We have seen that the markets were in a risk-on mode and whenever the news flow comes out to be positive for a certain set of stocks or particular sector, we have seen the stocks in the sector going to a buzzing uptrend.

Now the bigger question is, once the news flow is digested by the market and once the events are out of play, how will the stocks react because traders who trade on the momentum are the ones who specifically look out for such kind of news flow and even try to trade these kinds of plays. But once the momentum is out, whether the trading interest will be there or not is the biggest question mark that could be in line for many of these stocks.

For example, in a classic sector like the Nifty IT and pharma, many of the stocks and the news flow had just about gone a bit low and you have seen the price action for these two sectors. They went into a gradual correction, a minor downtrend or cool off. I would sense that if the PSU banking pack and the PSU pack overall goes into a similar or very slow gradual downtrend when there is devoid of news flow, then I believe you can build in a classic case that these stocks are more on the upside. But if they go through a very sharp reversal, almost a V-shaped kind of reversal on the back of no news flow, then I believe that that could probably dent the trend for many of these PSU names.

I think over the next couple of days, the outlook could be far more clearer on whether this is just a gradual correction or the stocks have run up steeply high or whether there is a sharp correction in these names.

Sectorally or stock wise, what is the lead indicator for the markets to actually see some rebound from here?
What could probably be one of the indicators which could result in the markets stabilising? I think one of them is the balancing effect, which the sectors tend to give across every time when we see a round of correction. If you look at the last three weeks or four weeks of price action, there have been three-four key sectors– IT, pharma, FMCG and auto stocks–which have gone through a corrective phase.

When you look at these stocks, many of these stocks have fallen around 10%-15% and some of the high beta pockets in the sectors have been down 20%. Now whether there is a resumption of a bounce into this space or not, that could be the first round of stability, which the index would probably get from these names. If I am not wrong, on Friday also you saw some green shoots coming across TCS, Dr Reddy and Nestle and many of these stocks were bouncing back from the intraday lows in the fag end of the session. This typically happens when you go into a risk-off mode or into a defensive mode.

Which are the sectors which could probably continue to see some selling pressure? I still believe that if there is a lot of call writing and selling of derivatives that is more riskier in the private sector banking stocks. I believe that they could be more under pressure and especially the top two-three names. When you look at the composition of the derivatives data,

, ICICI Bank and and even are three-four names where you have seen a lot of high risk call writing. I think if there is any kind of incremental pressure, which the markets would probably signal, one has to watch out for these three-four names because they could probably signal another round of cool off into the Bank Nifty, which could also have an effect on the Nifty as well.

The general insurance space had a terrific rally. , for instance, also saw a strong move. What is your view on the charts?
Excellent chart. Frankly, the moment IDFC First Bank came out of that 50 band or 50 or 47.5-48 band in December end and January start, from there on, the texture of the stock has changed completely. Remember that it has given a breakout of almost three years of downward sloping trend lines. For the last three years, from 2017 or 2018, the stock was going into that pattern of lower highs and lower lows on the monthly charts. So for a stock to break past those monthly negative patterns, it requires a lot of firepower and a lot of volume and we saw that happening for IDFC First.

It remained sideways for almost a month. From December end, it was at sideways 50 plus or minus; Rs 2 or Rs 3 was the trading range for the index. So it managed to digest and absorb a lot of volatility, and tried to shake out even the weaker hands in between. But then the way in which the stock charged up, it is just an indication of how the trends could probably lie ahead for IDFC First Bank.

I believe that the stock over the next three to six months could be a candidate for Rs 75 to Rs 85 kind of a target range from the current levels. I think it is a classic candidate for a buy on dips. At Rs 60-62 levels, where the stock closed on Friday, if there is any kind of a dip towards Rs 55 levels or 5% to 10% dip on an average, that should be taken as a very good buying opportunity for the stock.