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Fundamental Analyst Gul Teckchandani said today's correction is the beginning of a downward move. "Investors must not enter at these levels. There is a lot of confusion in the market and investors must keep an eye on valuations."

The market needs to fall further from here before it can go up again, he said. "One needs to be cautious. It looks like an ideal time to sit on cash in your portfolio." Investors should not try to call direction in the near-term, he added.

Neppolian Pillai, Head Institutional Equity, Modern Shares & Stock Brokers, said the market might fall further. "The little pullback today was not surprising. This is the third occasion when the 50-day moving average has been tested."

The Nifty is likely to see a lower top around 6,150 levels, he said. "It can fall to 5,760 and then to 5,285 in case of a deeper correction."

Excerpts from CNBC-TV18’s exclusive interview with Gul Teckchandani and Neppolian Pillai:

Q: What is going on for the last couple of days?

Teckchandani: We just started a downward movement. It is just the beginning and I don’t think one should enter this market now. From a trading perspective, people would do what they have to but from a fundamental perspective, I would rather sit on cash to the extent of about 50-60%. I would wait for things to kind of slide down and come into the right valuation perspective.

There is tremendous confusion in terms of the mindset of people. Everybody has kind of seen and instilled surgically into their minds that India is a great story for 10 years or may be 20-30 years. There is no denying that fact but one has to constantly keep an eye on valuations and stock prices. People believe every time there is a correction, it is an opportunity to go in and we don’t care if we get hurt.

That is right to some point. If your capital gets eroded by 30%, 40%, or 50%, you need to hang in there, which I think is very easily said but very difficult to follow in practice. This market has to head down before it moves up, on the basis of what is happening in the world and our own valuations. Today, you have nearly 1.7 times GDP in terms of market capitalization, which is USD 1.7 trillion in market capitalization or thereabouts and USD 1 trillion economic environment. To put into context, this is where Japan had a problem.

This is exactly where the US had a problem. When you have these kinds of situations being created, I don’t think India is going to be treated any differently. You have to look at valuations, you can’t throw that away completely. Don’t forget those textbook kinds of things, which are there. We have to come back to basics and it will be an ideal time, though the market has come off 1,000-points. I have been maintaining from December that one needs to be very cautious. If you see people are now into buying dreams, particularly when it comes to IPOs.

So, one has to be very vigilant and not try to call which way this is going to go and how far. Let it first settle down, let the valuations come down properly. There is so much of an IPO pipeline. There is negative news in terms of the world. There is a slowdown domestically. You will see that probably in February and March, when the numbers start coming out from automobiles. The cement industry doesn’t look very well placed come September-October. You have to think six-months in advance, so from my perspective it is an ideal time to sit on cash.

Q: From a technical perspective, do you think we will get away with that 5,850 on the Nifty or do you think the cuts will be deeper?

Pillai: To some extent, I must agree with Teckchandani that this market may come down further. But the way it has pulled back here was not a surprise. I must put a theory in perspective here that every time the market falls from the top, the 50-day moving average comes as the first saviour. This is the third time that the 50-day moving average is trying to save the market. Past evidence from the first two times shows that when the market falls up to the 50-day moving average, it then goes and makes a new high. The third time it tries to do that, it normally makes a lower high. Then, when it rolls down below the 50-day moving average, it is when the pain starts getting inflicted on the people, because the third time people believe that it will go and make a new high. But this time around it is the third time it has done that. I feel that it went close to about 5,880, it recovered from 5,825 and closed around 5,950.

Going forward, I look at the markets to go up to 6,028 and about 6,150 as the best-case scenario. 6,150 is going to be the top we are looking at, which should be the lower top. And then, when eventually on the downside it rolls over to 5,905, where the 50-day moving average is, after that the real trouble for the market would start. On the downside, I feel the first top for the Nifty would be around 5,760.

On a larger pain kind of situation, it can go up to about 5,285. So, the idea is right from 5,950 up to 6,150 ‑ a 200-point range on the upside ‑ the best thing to do will be to cut down on positions and sit on cash. Depending on what kind of cash limit, you could either go up to 60% cash or 30% cash based on your position and your perspective on the market. Ideally, there is nothing wrong in creating more cash on the books going forward in the next 100 to 200 point range on the Nifty, then wait for a proper time to come in and buy back stocks at a lower level. So, to that extent, I would agree with Teckchandani.

Q: There is more attention on the primary market now than the secondary market. What is your take on the IPOs that are open and how people are approaching them?

Teckchandani: People are buying into the IPOs but are not necessarily looking at the fundamentals. For the past five years, from 3,000 to about 21,000, all of us have made very hefty returns. Every correction ultimately resulted in the market going up. This time around, people are confident that the same is going to repeat. But you have to look at valuations. We are not talking about just a corrective kind of situation here, let us say, a couple of thousand points down. But it has to be deeper.

People have conjured it up in their minds that this is a permanent gravy train and we are going to make money permanently, there won’t be any downside. If you look at any asset class in India, it is completely out of whack compared to what is happening elsewhere in the world.

Yes these bumps will come, where the market may probably go up because of technical reasons, but one should take a cautious attitude.

I think you need to take some surgical measures. From 3,000 to 21,000, the index has gone up seven times, even if I take out 50% of my money, it effectively means that I still have 350% more than what I invested, assuming you invested Re1. You are still riding on 250% profit. You have to save capital and have to safeguard that and not all the time remain bullish.

You have got to close your bet sometimes. What you are seeing on the Street is that making money has become exceedingly easy. People are just kind of buying whatever is in sight.

I have not been negative on the market through this whole run of five years. However, I would recommend investors to exit midcaps and smallcaps, where P/E ratios have gone out of whack, and keep the money on the sidelines. Don’t be in a hurry to come back until a reality check takes place here and people have to come back from their dizzying levels of their own thought processes.

These are all flights of fancy that you are seeing in the market place today, where stocks are giving you 20% and 40% returns in a week. You have to control your greed. It is exceedingly difficult unless you pound the people and that pounding will happen when the markets come down. Then, there will be a sense of reality. I hope for my own sake and for everybody else’s sake, I am wrong. But the way the valuations are, I can only hope.

Source: Moneycontrol.com