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Rajesh Jain, Director and CEO, Pranav Securities said, "One would expect some sort of a dead cat bounce, even a pullback accompanied by short covering, because there have been fresh shorts initiated over the last two days. A combination of all these three should give a Nifty an upmove of close to 150 points."

He believes that should the market find their feet around this point, then 150 point pullback on the Nifty is not ruled out. Markets will see value buying in this case across investor classes even if for a very brief 150-200 points on the Nifty. But should the market slip very sharply tomorrow morning, then expect the August 2000 lows much earlier than before, he warns.

Excerpts from CNBC-TV18's exclusive interview with Rajesh Jain:

Q: Can you expect a bit of a short covering pullback from these levels or do you think it is still headed down?

A: One would expect some sort of a dead cat bounce, even a pullback accompanied by short covering because there have been fresh shorts initiated over the last two days. A combination of all these three should give Nifty an upmove of close to 150 points.

Q: What are you hearing about the institutional activity today both domestic and foreign, has there been another spate of selling?

A: The foreign segment has been caught in a pincer on the currency and stock market tickers. There is a very sharp depreciation in their portfolios. It’s not surprising that they are probably looking to sell India and probably latch on to what is expected to be a good year for US equities in terms of our performance. That is explaining part of the huge selling we are seeing from the FII segment, but the domestic institutions and mutual funds have given two very positive clues. One - there isn’t too much of redemption pressure from retail. Investors have not been succumbing to panic and unwinding portfolios, which is a positive side on the domestic front. Two - the numbers are heading towards south because there is institutional buying going on in the Indian side even today.

Q: What do you see happening for the rest of this month, do you think we have put the worst behind us or is this going to shape up to be one of those January like months or worst?

A: We are at the tipping point. Should the markets really give away in a major way in the latter part of today or even early tomorrow morning maybe in sympathy with the Dow Jones or maybe in line with what the Asian markets do. We could be visiting August 2007 lows much sooner than we had expected. Currently the markets are at tipping point. Udayan Mukherjee began the show by saying that there has been a 50-point pullback on the Nifty and it would be interesting to watch the manner in which the markets close today.

Should the market find their feet around this point then 150-point pullback on the Nifty is not ruled out and you could see the visitation of value buying across investor classes in the market even if it is for a very brief 150-200 points on the Nifty. That is a crucial thing to watch, but should the markets slip very sharply tomorrow morning, then one can expect the August 2000 lows much earlier than before.

Q: What is your own gut feeling about where this will eventually end, even if you do get a pullback of 100-150 points on the Nifty, do you think that will signal the end of the problems or would that also get sold into?

A: It would be sold into because the problems, which have triggered off the FII selling, are not going to find solutions in a hurry. You may see some come off in the crude oil prices, interest rates could worsen for India, and inflation does not seem to be letting off. We should get some of the worst figures in a couple of weeks and even globally none of these parameters are expected to act in favour of the equity markets.

Bernanke has already signalled that one should not expect anymore relief on the interest rate side and the US dollar continues to yo-yo; even for India, the rupee is expected to continue to depreciate given the crude oil scenario. So, none of these problems are going to be solved in a hurry. If this is what has triggered off FII selling, there are number of strategists who are now saying that emerging markets like India could be a secondary destination for making money as compared to the developed US markets then you will see a reverse flow of funds. Any surge in the markets, 150 or 250 Nifty points will get sold into for sure.

Along with that, we are going to see a lot of mettle selling even from various segments of Indian investors. The worst will be the side market, the tier II and tier III stocks and the penny stocks, all these will find no takers. So you will have any number of investors, traders, speculators wanting to unwind positions and portfolios in such stocks and there will be no buyers practically. You will see a lot of the market at the site melt-away completely. So at every surge, we will face the threat of the fresh selling.

Q: Any thoughts on this whole pocket of capital goods like Lanco, GMR, Punj Lloyd and how things might shape up for them?

A: The entire capital goods sector and particular the stocks that you mentioned are suffering form twin factors. First, there is almost a confirmation that the investment cycle, which the economy was witnessing and benefiting from, is at the minimum likely to stall if not shrink. If that happens most of these stocks are going to see pruning of order books and even reductions in the margins.

Secondly, most of these stocks have seen tremendous run-ups. Until January, there was huge over ownership, the valuations were very steep and most of them had great order books but these are all discounted. We have seen couple of cases where orders have been reversed and because of this there has been significant selling in this sector. There is lot of profit waiting to be booked and so in a market which has fallen steeply a lot of FIIs, institutional investors would like to book gains on some of these stocks because they had run up vertically.

A combination of all these things had made most of these stocks untouchable and there is no fresh buying emerging despite the sharp fall.

Q: You have been hearing on Anil Manghnani is sounding pessimistic, are you as pessimistic or do you think there is a chance that we may actually bounce off and not go to the lows that people are fearing?

A: There are vestiges of truth in what Anil Manghnani has just mentioned. We could be getting into a 2001-2002 kind of situation when this market saw all buyers just disappear because the funds flow picture did not offer any positive signs.

You may still have had the Indian economy chugging along but what this market lacked in that bear phase or in that bad period was a complete absence of buyers. This market has already been a ‘do not buy’ market for a August 200simple reason that there is this noise all around that you could be visiting the August 2007 lows, so you are sure that you could be able to buy all the good stocks that you want to buy cheaper. The second aspect is because of three economic factors FIIs have resorted to selling. So, even the funds flow picture could turn negative.

In such a situation, Anil Manghnani could be proved to be right. The grass root demand, which has been the main attraction for equity investments into India, has just been dented but not totally destroyed. What we could discover at the end of the first half of the numbers for the current fiscal is that despite the interest rate, inflation scenario and the rising aspirations of the large Indian population, the availability of disposable surplus incomes could both give an unexpected demand picture which has been able to tide over inflation, interest rates and currency as cost push across sectors. If this picture emerges then 2001-2002 will not be revisited. A 65% probability to that despite the hugely negative scenario around us can be expected.

Q: You spoke about 150 points bounce on the Nifty, if you had to trade that what sectors would you latch on to now, the beaten down ones like banks and infrastructure or the ones which have been relatively stronger like IT and pharma?

A: A combination of the two would be good. Pharma is a little overdone, particularly Ranbaxy, on news expectations, but we have, a) plans to buy IT and b) we think oil had once again faced too much hammering over the last couple of days. We had recommended buy on oil marketing companies yesterday and that has got vindicated today. ONGC will give a Rs 100 push even from the current levels. Defensive sectors, which have greater upside, will also be looked at. ITC would be a great buy at this point.

A momentum play like realty even though it seems to be completely out of fashion now is also good because the cut there has been sharp and on pure trading momentum pullback basis buying some of the better realty stocks could give good dividends for the next three to four days.

Q: There are some of those very valuable stocks or at least hither to held blue-chips like an HDFC Bank and an Axis Bank which have seen such severe falls probably 2006 lows getting pierced or nearing those kinds of levels, you see value in any of these or would you also say that momentum has quite shifted away from this category of stocks?

A: The banking space is right now suffering from a host of uncertainty. You have the great inflation interest rate question mark, you do not know which way the interest rates are going to pan out going forward, we do not have as transparent a system as perhaps the Fed in the US. So how will the banks grapple with the interest and most specifically the interest margin scenario?

On the other hand, you are not even sure whether the credit offtakes will maintain the rosy picture that we had last year. Given the fact that the banking sector was also fairly over owned, we are continuing to see a spate of buying on banking. You will be able to get a better picture on banking in October that is after the first half numbers are known and you are closer to the next credit policy.

As far as realty, infrastructure and all these sectors are concerned, there is a complete lack of fancy. The valuations in most of these sectors had been overdone. The order books were almost as a rule greater than five years and these were hyper-discounted and there was a host of placement activity whether it was domestic or overseas, Foreign Currency Borrowing (FCBs), Foreign Currency Convertible Bonds (FCCBs), all these led to a bubble in terms of the valuation. So even though today at the grass root level, the demand for housing, roads, infrastructure and all is very robust, there is a complete negative fancy for these stocks and there are no fresh buyers and all the over ownership is resulting in terms of sustained selling.

So, the value argument even though at a base level could give you an attractive picture vis-à-vis the 52-week high, the absence of buyers is what makes these stocks less attractive at this point.

Disclosures: It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.

Source: Moneycontrol.com