Is liquidity driving markets away from reality?
ET CONTRIBUTORS  Markets consolidated throughout the week after touching newer lifetime highs. Indias economy is on the road to recovery at a slow and steady pace, but certainly not at the same rate as the market. The stock market is factoring in a lot of future earnings growth and the uncertainties due to Covid might puncture some of those expectations to a certain extent, going forward.However, currently investors arent considering the future ifs and buts and are flocking towards stocks only for their inflation-beating nature. India VIX has fallen from 80 in early 2020s to 15 now, which indicates lack of fear, which is keeping the indices afloat.However, not all liquidity is being directed towards the right stocks, and across markets a host of meme stocks are emerging, where retail investors have been pumping in money without any fundamental reasons. What is worrisome is, stock markets are being seen as a game for making a quick buck.Same trend is being seen in IPOs, with seeing record subscriptions of 100x as liquidity remains rampant. Similarly, the unlisted space is also witnessing high demand, pushing share prices to exorbitant levels.From the listed stocks, travel, tourism and hospitality sectors have been trading near their highs despite the ground situation not being rosy. Given the undeterred rise in the markets despite the hurdles faced by the real economy, it is evident that valuations are accounting for high amounts of earnings growth which might not recover as fast as expected. Investors should, therefore, be cautious before entering such stocks just because of FOMO. Its time to take some profits.This week the Fed moved up its timeline for rate hikes as inflation rises in the US. This calls for some consideration as to what RBI would do in the next MPC, given that just two weeks back they were still dovish. Indias May retail inflation numbers came in at 6.3% above RBIs target inflation and WPI inflation is also rising sharply. While RBI expects our overall output to fall by Rs 2 lakh crore in FY22, what is driving inflation is the decline in bank deposits (savings) and rising discretionary expenditure towards services and products other than essentials.The low interest rate environment is also causing investors to look for higher yielding instruments, driving up meme stocks and IPO oversubscriptions in the process. It would be essential to watch how long RBI remains comfortable with the current scenario as the inflationary pressure is building fast.After four weeks of consecutive green candle, the Nifty50 index closed negative for the week. The benchmark index was rising on slow momentum and formed a rising wedge bearish pattern which has eventually broken down. As the market is still over-bought in the short term, Nifty in expected to test the 15,200 level in the short term. There might not be a major decline immediately, but profit booking cannot be ruled out. Immediate support and resistance are now placed at 15,350 and 15,900 levels.Going ahead, markets could witness some profit booking and range-bound correction in the near term on news swinging between the rapid progress of the inoculation drive and a new delta variant causing the third wave. Some form of credit incentive to boost healthcare infrastructure would be good news for equities, but off late, sectors such as entertainment, aviation, malls and hospitality & leisure have remained in focus just because of talks around loosening of restrictions in some states. Investors should maintain a safe distance from stocks rising on irrational exuberance.It would be prudent for investors to ride the bull wave in fundamental resilient companies only and avoid temptation in fancy fast moving stocks. Nifty50 closed the week at 15,683, down 0.73%.