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Dismal global cues and the possibility of a rate hike wreaked havoc with the markets. The Nifty closed at 4,266 down 81 points, while the Sensex shut shop at 14,293 down 278 points. Selling was seen in capital goods, metal, power, realty, auto, oil, pharma, and banking stocks.

Sangeeta Purushottam, Head-Institutional Business, Religare Securities, said the markets are heading toward some level of capitulation on negative news flows.

On money flows, she said there is no major redemption pressure in domestic mutual funds. "They are sitting on the sidelines. FIIs are putting off incremental fund raising, while insurance companies are buying."

According to Purushottam, crude is the key sentiment driver. "Domestic inflation is another worry. Good Q1 FY09 results may help sooth sentiment to some extent."

Sudarshan Sukhani of Technical Trends said we are in a current bear market. “The next support level for the Nifty could be anywhere between 3,600 and 4,200, which is very wide. So, it is not possible to make a call and say that the Nifty is going to find support here or there. But based on current momentum, we will certainly break 4,000 and then see where we stop. At this point, there is no sense in going and buying.”

Excerpts from CNBC-TV18’s exclusive interview with Sangeeta Purushottam and Sudarshan Sukhani:

Q: The markets nearly lost 10%, does it look there is more pain left in the near-term?

Purushottam: It is certainly not looking pretty at all. The flow of the negative news continues. The market does seem to be heading towards a certain level of capitulation, which is something that a lot of players have been talking about. Many people did expect the markets to re-test its earlier lows, and head a little lower than where we hit in January. That does seem to be playing out right now. It is also a little hard to call where the bottom is going to be, unless and until we see some turn in newsflow itself.

Q: What’s going to turn it, because flows are weak from global guys? With crude sort of cooling down dramatically, can you think of something in the near-term which can turn sentiment aside of the small short covering rallies which we see from time to time?

Purushottam: Crude is key. It remains to be seen whether we are going to see crude come down in the short-term. That is the most visible trigger. So, if crude shows some respite then that could help the markets.

The markets are also watching the inflation number very closely these days. It is certainly going to turn down in the next few weeks.

The other piece of news, which is likely to come out about two weeks from now, is the results season. Expectations have been toned down over the last few quarters. If for any reason that turns out to be a little better than what people expect to support the market, then that could turn bring some level of respite.

However, it’s what lies around the horizon, apart from crude, which is going to be the major trigger.

Q: Where does one see the end to the pain in banks because they get hammered before and after the news? When do start buying them?

Purushottam: Banks are beginning to look quite attractive in terms of valuations. The uncertainty about the market is preventing buying from coming in. One is not really sure whether they going to get cheaper. But if one takes a look at the banking sector as a whole, you tend to perform broadly inline with the market over the long-term. The good time to buy banking stocks is when they have gone through a huge bout of underperformance, which is what we are really seeing right now. That’s seems to be one sector which is in a way capitulating first.

We may see some meaningful bounce backs. It is a little hard to say whether it is completely bottomed out, till we get a sense about the overall market. But valuations on prices to book are beginning to look quite cheap. Many of them have actually come to the bottom of their 4-5 year trading ranges.

Q: What about infrastructure? L&T dashed very quickly to Rs 2,400 and BHEL is languishing. What are the fears, which are pegging infrastructure stocks down so much?

Purushottam: In infrastructure, the concern really hasn’t been so much on demand, because most of these companies are sitting on healthy order books. There is reasonable revenue visibility over the next couple of years, even if we assume that there is some slowdown in order inflows in the next few quarters. The bigger concern really there is on margins. How much will inflation actually hit margins? How many companies will be able to pass on the cost increases? Many of these orders were taken a few years earlier and they may not have completely passed through escalation clauses. That is really the bigger fear as far as the infrastructure sector is concerned. Part of the fall actually was a correction of fairly excessive valuations. Some of the stocks had become very expensive. The second concern really is the impact on margins.

Q: What's your take on liquidity after speaking to your institutional clients from both the FII perspective, which has been a continuous sell, and from mutual funds who have just sitting on quite a bit of cash but don’t seem to be in any tearing rush to deploy it?

Purushottam: Domestically, most people tell us that they haven’t really seen huge redemption pressures. Cash flow positions are fairly comfortable, so there is a fair amount of liquidity actually waiting under the sidelines, which is the silver lining. Whenever the news flow does turn, we would probably have a fairly strong rally. But as of now, there is really a lack of conviction in terms of what is the right time to get back into the market.

The international flow obviously has been negative for the last several months. We do hear of clients that some people are facing redemption pressures or putting off implemental fund raising. The liquidity picture there doesn’t look as comfortable. In fact, domestic liquidity has been better. The insurance sector has actually been buying consistently. So in times like these, they do come in and accumulate. Domestic liquidity overall has been lot more comfortable than the international one.

Q: How are you mapping the Nifty from hereon?

Sukhani: We have already broken down from that significant support level of 4,400. We are in a bear market and therefore we should not be surprised when prices fall, because that is what a bear market is all about. Once 4,400 is broken, what is the next level that we should be looking for? Unfortunately, there is a free fall after that.

The levels could be anywhere between 3,600 and 4,200, which is very wide. So, it is not possible to make a call and say that the Nifty is going to find support here or there. But based on current momentum, we will certainly break 4,000 and then see where we stop. At this point, there is no sense in going and buying. We are still trying to catch falling knives, but traders must be careful. These sharp vicious bear market rallies come and they wipe off all their short profits. One of them is likely to come tomorrow.

Q: If you get higher levels on the Nifty in some short covering rally, would you consider shorting that rally or is that dangerous as well?

Sukhani: It is not dangerous because this is a bear market. When the Nifty goes towards 4,400, you have to wait patiently for the rally to give signs of exhaustion. But once those signs start coming in, it will be a short selling candidate again, based on the current technical picture of the market. Short sellers should be rewarded repeatedly.

Q: Do you think we will see sub-4,000 levels in this leg of the downside?

Sukhani: Yes. I hope I am wrong. But it does appear that 4,000 will break down.

Q: What are you seeing on the charts of some of the heavyweights which are coming off very sharply like Reliance and SBI?

Sukhani: SBI has been underperforming, so the charts are telling us that the underperformance will continue. If the Nifty makes another decline, then we are likely to see banks go below Rs 1,000. The Reliance and Nifty are going hand in hand. So, any weakness in the Nifty tells us that Reliance will also fall.

Q: What about L&T which has collapsed to Rs 2,400?

Sukhani: L&T has broken support levels. There is a free fall and nothing to hold it. I am not saying it will reach there, but there is nothing to hold it before Rs 1,500-1,600. So, it can stop wherever it wants.

Source: Moneycontrol.com