Volatility is the new normal; what should be your strategy in such a market?

The Indian market has been swinging both ways for the last couple of months when the country started to see the new wave of COVID 19.

Flagship indices the Sensex and the Nifty hit their record highs of 52,516.76 and 15,431.75, respectively, in February and at the current juncture, Sensex is down 9 percent while Nifty is down 7 percent from their respective peaks.

Volatility seems to be the new normal now as COVID-19 continues to weigh on market sentiment. Every rise in the market meets profit-booking. On April 20, market barometer Sensex rose 529 points in the intraday trade but witnessed profit-booking at the fag end and ended 244 points lower at 47,705.80.

Sombre outlook

Most experts are of the view that the market will remain volatile and uncertain in the short term due to the second wave of the coronavirus pandemic.

However, experts point out that after last year's experience and with the ongoing vaccination drive, markets might not correct as swiftly as the year 2020 and the situation may improve too as the government has announced vaccination for all adults.

The current alarming rise in COVID-19 cases is indicating that the market may remain under pressure in the short term. On the technical front, Nifty now has support in the range of 13,600-13,800.

Gaurav Garg, Head of Research at CapitalVia Global Research is of the view that the market might consolidate with negative bias for the next few months, however, 13,600-13,800 is a major support level for the Nifty in the coming months.

Nirali Shah, Head of Equity Research, Samco Securities believes benchmark indices may consolidate in a narrow range till June 2021 and profit-booking may take place on every rise.

"The level of 14,250 is strong support for Nifty, below which it can head towards 13,800 if the situation worsens. However long-term trend for the markets remains positive," Shah said.

The range of 14,250-14,200 is a good support of Nifty and the index is above these levels as of now. However, a break below 14,200 can drag the index towards 13,500 rather quickly.

"Till June, Nifty would have the range of 14,200 as support and 15,500 as resistance. If Nifty breaks 14,200 decisively, then the next major support levels would be 13,500," said Vaishali Parekh, AVP-Tech Research, Prabhudas Lilladher.

Nitin Shahi, Executive Director of FINDOC expects Nifty not to cross 14,800 on the upside till the COVID-19 pandemic eases out.

"With news of curfew in Delhi and restrictions expected in other states, the index can retest support of 13,800-14,000 on the downside," Shahi said.

What should be the strategy?

Parekh of Prabhudas Lilladher believes the long-term trend is intact and a buy-on-dips strategy is what one needs to follow in this market.

"IT, pharma and metals are the outperformers. It is time to focus on banking and auto stocks," Parekh said.

Garg also pointed out that investors should implement buy on dips strategy at any correction and add quality large-caps to their portfolio.

"Pharma and technology stocks might give decent returns in the next three months. However, banking, NBFC and real estate might witness some pressure in the next few months on partial lockdowns which eventually put pressure on their earnings and quality of assets," Garg said.

Even though many states have announced stricter restrictions, the central government is unlikely to announce a complete lockdown. States, too, may not go for longer lockdowns as now the vaccination is expected to pick pace. This should give relief to the market.

"Things are not that bad as compared to the last year as full lockdown is not expected. Investors should look to invest with medium and long-term perspectives. Market volatility should be used to invest partially at every dip," said Shahi.

"Private banks like HDFC Bank and ICICI Bank, IT heavyweights TCS and Infosys, pharma stocks and cement stocks provide a good opportunity for medium to long-term investment. Tourism, hospitality and airline stocks are the sectors to be completely avoided," Shahi said.

Shah of Samco Securities pointed out as Nifty looks to consolidate, participants should trade stock-specific with proper risk management in place. Long-term investors can start adding quality stocks to their portfolio on major dips.

"Investors should be looking to increase allocations in defensive sectors such as pharma and IT which will be least affected by any COVID-related restrictions. On the other hand, it would be safer to avoid highly leveraged stocks with low growth prospects in any sector. Sectors such as travel and tourism, cinemas can be avoided due to the uncertainty and high risk in the near-term," said Shah.