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D-Street veterans say market now too hot to sustain at these levels

NEW DELHI: There are two camps on Dalal Street right now; one is greedily enjoying the market rally and projecting the benchmark indices to gallop further, while the other is fearful and anticipates an imminent correction.

It took the benchmark Sensex merely 167 trading sessions to make the journey from 50,000 points to 60,000 points, the fastest pace ever for a 10,000-point move. Prior to this, the index had taken on average 931 sessions for a 10,000-point move.

Analysts were overjoyed on the Sensex hitting this milestone. However, some saw the lack of a correction in the market as a signal of maturity of Indian investors.

“[The rapid rally] shows the impact of return of FPIs and local investors continuing to invest despite headwinds that cropped up time and again. The absence of a 10 per cent correction in the indices over the past 18 months shows the maturity of local investors. But it also throws up the possibility of such a correction happening over the next few weeks/months,” said Dhiraj Relli, MD & CEO, HDFC Securities.

The market overlooked the concerns over an earlier-than-expected Fed tapering, possible rate hike by the US central bank and the climbing bond yield. Instead, it stayea focused on the positive corporate earnings forecasts, opening of economic activities and the government’s mass vaccination programs to rally further.

“Expectations of a solid economic recovery and sustained growth seen over the next couple of years are keeping the bulls enthused. Also from a global funds’ perspective, India remains an attractive destination, especially in the China+one scenario. Having said that, retail investors must have a diversified portfolio at this stage to face any kind of volatility,” said Sandeep Bharadwaj, CEO, IIFL Securities.

It is not just the benchmark indices that have rallied. The buying has been spread across the market, taking the broader market to fresh highs. In fact, the smallcap and midcap indices have outperformed their headline peers in this bull run.

These pockets were depressed during 2017-2019 due to a selloff, but after this relentless bull run, many of these parts of the market have now become overheated. This has turned many on the Street cautious.

“We remain watchful of the market weighing on rate hike prospects as US treasury yields have begun to firm up, following Fed’s taper signals,” said Anand James, Chief Market Strategist at Geojit Financial Services.

The market’s outperformance over the global peers is “stunning”. In September so far, the MSCI World Index is down 2.13 per cent but Nifty is up by over 4%.

“The poor performance of the Shanghai Composite due to a regulatory crackdown and the China Plus One policy have again made India an attractive investment destination for FIIs. But the market’s exuberance has pushed valuations to very high levels. India’s valuation premium to its emerging market peers is above 80% now. This is difficult to sustain,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Motilal Oswal, MD & CEO, Motilal Oswal Financial Services, said valuations are now at elevated levels and that demands consistent delivery on earnings expectations. But, he believes, the market is not ready to take a pause.

“Given the rich valuations, one cannot rule out intermittent volatility. However, we expect the positive momentum to continue on the back of improving economic activity and recovery in corporate earnings,” Oswal said.

Nifty is also set to hit a milestone. It is tantalisingly close to the 18,000 level. Analysts believe the index may top that level soon. But that level also remains the first major resistance for the index.

“In the near term, new highs for Nifty cannot be ruled out, as the bullish momentum remains very firm. However, we suggest keeping positions light at these levels and trading with tight stop losses,” said Abhishek Chinchalkar, Head of Education, FYERS.

“The immediate hurdle for Nifty now is the psychological 18,000 level. If the index manages to sustain above this, we could see an attempt towards the 18,345 level, which would mark the 1.618 Fibonacci extension of the rally from 14,151 (22-April low) to 15,901 (15-June high) extended from 15,513 (28-July low). On the downside, the 17,790 level is the immediate support, a break below which could lead to a modest correction towards the 17,560 level,” he said.

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