Sensex breaks below 38,000: 4 factors that could be pulling the market lower

The S&P BSE Sensex plunged more than 300 points to break below 38,000 on intraday basis on May 8 largely weighed by weak global cues. The Nifty50 also breached 11,400 level on the downside.

The fall in Sensex was led by losses in RIL, HDFC Bank, HDFC, ITC, Infosys, and ICICI Bank. On Nifty, the fall was led by ZEE Entertainment, Vedanta, RIL, Bajaj Finserv and Tata Motors.

Mixed corporate results and caution ahead of election verdict on May 23 also weighed on the sentiment.

Investors are advised to use dips to get into quality stocks, suggest experts.

“Indian market has been on shaky ground for the past couple of days driven by ambiguity associated with the US-China trade negotiations and less-than-inspiring ongoing corporate earnings season,” Jagannadham Thunuguntla, Sr. VP and Head of Research (Wealth), Centrum Broking Limited told Moneycontrol.

Here are top 4 factors which could be weighing on markets:

Global Cues:

D-Street woke up to weak global cues on Wednesday on renewed concerns over trade talks between the US and China. Investors across the globe switched to safe-haven government bonds as risk appetite was dented on worries about unsuccessful US-China trade negotiations.

Chinese Vice Premier Liu He will travel to Washington for a two-day meet beginning Thursday in a last-ditch attempt to avoid a sharp increase in tariff on $200 billion worth of Chinese goods, said a Reuters report.

US officials have accused China of backtracking in the past week on substantial commitments made during months of negotiations aimed at ending their bruising trade war, prompting President Donald Trump to issue a Friday deadline to raise tariffs on USD 200 billion worth of Chinese goods to 25 percent from 10 percent, it said.

FIIs turn net sellers:

Foreign institutional investors (FIIs) turned net sellers in May after pouring about Rs 60,000 crore in Indian markets so far in 2019. The timing of FIIs pulling out of India is of importance because it comes right before the election results on May 23, 2019.

FIIs pulled out nearly Rs 1,400 crore from Indian equity markets so far in the month of May while DIIs were net buyers to the tune of Rs 174 crore in the same period, Moneycontrol.com data showed.

“FII flow depends on multiple factors and few factors which are turning against our global liquidity situation, stable government in India, growth or economic activity. Now with credit crisis still at large is impacting economic activity in a big way,” AK Prabhakar, Head -Research at IDBI Capital told Moneycontrol.

“Added to that we need a stable government if the reform process has to move forward. While growth in Realty, Auto, and FMCG suggest that there is a general slowdown in the economy result season is mixed,” he said.

Pledge Shares:

Data around pledge shares also made the Street nervous and led to some weakness in stock specific counters. Companies with high promoter pledged shares are considered to be extremely risky especially during tightening liquidity conditions, suggest experts.

Pledging of shares essentially means promoters take a loan against the shares held and use the proceeds for personal as well as business purposes.

The BSE500 stocks in which promoters increased pledge shareholding include JK Tyre, Reliance Capital, Reliance Infra, Dish TV, VA Tech Wabag, Adani Transmission, Parag Milk, ZEE Entertainment, JSW Energy, Max India, and Sun Pharma, as listed by the Kotak study.

Promoters of 116 companies pledged their holdings among the BSE-500 index. In the March quarter, six companies had more than 90 percent of their promoter holdings pledged - CG Power, Reliance Infra, Reliance Capital, Sterlite Technologies, Dish TV, and Gayatri Projects.

Technical Factors:

The Nifty50 broke below 11400 levels in trade on Wednesday. The Supertrend indicator on daily charts gave a sell signal which suggests that the trend is likely to shift south as long as Nifty trade below 11800 levels.

“The breakdown of the trading range is likely to create sell on the rise kind of market where the previous support zone of 11600-11650 is expected to act as resistance zone,” Rupak De, Technical Research Analyst at Bonanza Portfolio Ltd told Moneycontrol.

“Whereas on the lower end the Nifty may drift down towards 11300-11200 over the short term,” he said.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.