Volatility needs to cool down below 20 zones to support the bullish market setup
The Indian stock market ended the first full trading week of the new year on a buoyant note. The benchmark Nifty added two per cent on the weekly basis to close the week at 14,347.25, its biggest weekly gains in the last two months. The sentiment was upbeat from the beginning, largely driven by optimism in the global markets and continuous liquidity flow. This trend is expected to continue till the Nifty reaches 14,500 levels. Looking at the overall situation, there are fair chances that the benchmark may achieve the target next week.
During the week gone by, except FMCG, all the other sectoral indices ended in positive wherein metals was the top gainer (up by 9.1per cent), followed by IT (up by 5.6per cent) and capital goods (up by 5.1per cent). Nifty IT posted gains for the seventh week in a row, Metals and Auto posted the best week since June 7, while Nifty Bank gained nearly 3 per cent for the second consecutive week.
Amongst the broader markets indices, the outperformance of the midcap and small-cap index continued even during the last week as they ended higher by 5.2 per cent and 3.8 per cent respectively.
The halt in FMCG index rising may have been impacted by the rising retail inflation. The Reserve Bank of India (RBI) is expected to release the figures for wholesale and retail inflation next week. Going ahead, this factor may prove to be a spoilsport in the rally and market participants may switch over to other traditional sectors that have underperformed for the last couple of years and have not participated in the current bull run. These underperforming sectors are cyclical, industrial, and capital- intensive industries and may become investors’ favourite going ahead.
Dr. Joseph Thomas, Head of Research - Emkay Wealth Management, said, “The market draws its strength from the relatively better economic fundamentals, resulting from the easy liquidity conditions and the accommodative stance of fiscal and monetary policy. Any challenges to the sustainability of the economic rebound would pose a problem for the markets.”
Another important development for the market participants to keep in mind is that Gold prices crashed by Rs 2,000 per 10 gms on Saturday. This was in anticipation of USD becoming stronger in the late trades on Saturday. As the dollar index gained 4 per cent in a day, there was a sell-off in the yellow metal across the global markets.
With all the hurdles getting cleared for Joe Biden to take-over as the next US President, the optimism of a larger stimulus package is strengthening. The yield on the US treasury spiked on Saturday and equity prices closing at an all-time high in the US, weighed on gold prices.
The Indian markets may react to this and the TCS results declared on Friday last, post-market closing, in the Monday opening trades. Market participants will be closing eyeing macroeconomic data like the index of industrial production (IIP), Consumer Price Index (CPI), and Wholesale Price Index (WPI) inflation scheduled during the week. Besides, global cues and progress on the vaccine drive will also be in focus.
On the earnings front, three other IT majors viz. Infosys, Wipro, and HCL Technologies will declare their numbers along with several others.
Ajit Mishra, VP - Research, Religare Broking said, “We suggest continuing with a sector/stock-specific trading approach as we’re seeing rotational buying across the sectors. However, traders should limit their leveraged positions and avoid contrarian trades”.
India's Volatility Index (VIX) was up marginally by 0.1 per cent to 20.64 levels. Volatility needs to cool down below 20 zones to support the bullish market setup and fuel the next rally with the higher market base.
Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services, said, “As the long-term market structure remains positive, we would advise investors to adopt Buying on Dips strategy to accumulate quality stocks.”
Though there are signals of a faster recovery in the economy, the lending activity has not picked up as expected.
Nirali Shah, Senior Research Analyst, Samco Securities, said, “This moderation in loan growth shows that the banking sector as a whole is yet to reach its peak in terms of business growth and there is still an opportunity for investors to enter financials on dips”, she concluded.