According to Shah, the near-term trend will depend on inflation. "If it comes in double-digits, it will be bad. One needs to watch out for political developments on the nuclear deal. Uncertainty regarding politics will add more pressure on the market. Crude remains a concern, which will decide the market course."
Technicals don't look promising, he said. "There is small buying by domestic financial institutions. Foreign Institutional Investors, or FIIs, continue to be sellers. It is difficult to draw any comfort from it."
Excerpts from CNBC-TV18's exclusive interview with Nilesh Shah:
Q: Are we back within that grinding range, or is the market threatening to break down?
A: It will depend on a couple of events, which will unfold in the next few days. One is inflation, which is already close to about 9%. If it threatens to go above that and if it probably goes towards the 10% mark, we could definitely have one more leg down. What really emerged over the last one or two days is some kind of a political development related to the nuclear treaty. If there are more developments, which the market perceives that to be negative, it could probably pull the market down further.
In addition, crude oil is trying to break above the USD 136-138 per barrel mark. If crude makes a new high, it is another important event to watch out for. So, before the earnings season unfolds, it's basically inflation crude oil, and political developments which could decide the course of the markets.
Q: What is the worse-case scenario or the best case scenario that you can think of for the Nifty or the Sensex?
Shah: It is going to be difficult for this market to break 14,000. The bias is more on the downside and probably a majority of people are bearish. But at that level of around 14,000, give or take 200-300 points here or there, there should be some amount of value buying.
By and large, whatever negative developments we can think of, would probably get adequately factored in barring any political developments. Apart from that, things like inflation should get factored in that kind of levels.
A lot of pain and damage would still be seen if the market were to correct at 15,000 to 14,000 points. I don’t see a case for this market to sustain below 14,000 at this point of time.
Q: How do you map the technicals of the market right now with the shorts on the derivatives side and the relentless FII selling on one side and the cash lying with mutual funds on the other side? How are the technicals balanced?
A: The technicals do not look all that promising. The reality is that mutual funds are sitting on cash and they are coming in and buying.But that buying is not good enough.
Buying is probably in the region of Rs 200-500 crore on a daily basis but against that the FIIs are selling anywhere between Rs 500-1,500 crore on a daily basis. It is really difficult to pinpoint at what level the FIIs will stop selling or the levels the mutual funds will stop buying. For the FIIs, it is also some kind of global unwinding or deleveraging exercise which is really happening at their end.
There is really not much comfort coming in from a technical perspective. The selling is relentless and it is difficult to draw any kind of comfort on that front. It is still very early days for that.