Market Exuberance May Cool Down This Week

With all major events coming to an end and no significant trigger in sight for the next few weeks, the markets are expected to remain moving sideways in a narrow range in the coming seven days. An indication to this effect was visible in Friday’s subdued market movement. Nifty and Sensex closed the week at 14,924 and 50,731.

“Due to the lack of any major upcoming economic events, the market is expected to be stock-specific, based on the forthcoming quarterly results,” says Vinod Nair, Head of Research at Geojit Financial Services.

The market has broken all important levels in the current week and closed almost at the highest point of the week. The announcements from the Union Budget 2021 have helped the market move higher despite a sudden rise in crude prices and a spurt in the dollar index.

 The week that was

It was one of the best weekly closing for the Indian stock markets in past 10 months as both the benchmark indices – Nifty and Sensex – ended the week with gains in excess of 9.5 per cent. This was their best weekly performance since April 2020. During the week gone by, both the indices touched new peaks – Nifty crossed 15,000 mark, while the S&P Sensex crossed 51,000 level for the first time.

The exuberance during the week was such high that more than 20 stocks yielded in excess of 10 per cent and 47 of the Nifty-50 stocks gave positive returns last week. The cause for this exuberance was a positive Budget, accommodative policy by the Reserve Bank of India (RBI), encouraging global cues and a sustained buying support from foreign investors.

Positive Global Indicators

The US markets closed at record highs last week after another batch of upbeat earnings and positive jobs data spurred optimism about a recovery. This pushed the global shares near record highs on Friday and the dollar headed for its best weekly gain in three months, as progress in vaccine distribution and US stimulus hopes prompted bets on further normalisation in the global economy.

Germany’s 30-year government bond yield climbed back into positive territory for the first time since September. Other global equity indices, including emerging markets like KOSPI, TAIEX and DAX were all trading near all-time highs, while the risk-averse asset classes like gold and bonds are exhibiting weakness. Globally, earnings season is driving markets and aiding global investors’ sentiment.

 FPIs & Banking Sector Stocks

Strong buying support from foreign portfolio investors (FPIs) continued through the week ended February 5. FPIs turned net buyers during the week and bought over Rs 12,000 crore in the cash segment.

Financials seemed to be favourite for FPIs in this leg of rally and large-cap bank stocks were bought in bulk. This helped push the Bank Nifty to close above the levels of 35,500, which is approximately 6,000 points higher from the immediate lowest levels. Specific announcements in the Union Budget have sparked a rally in PSU banks, with SBI closing at a record 10 per cent up.

The PSU Bank Index continued to outperform, gaining 3.6 per cent with SBI (+11.3 per cent) being the top gainer in Nifty after posting stellar results. The Pharma Index (+1.7 per cent) regained some momentum after underperforming for the past few days. India VIX moved up marginally by 1.3 per cent to 23.41 levels.

After the Budget, the banking sector has come to the forefront in driving up Nifty-50. The Nifty Bank Index was up nearly 16-17 per cent for the week ended Friday last. SBI alone was up a whopping 39 per cent in one week followed by IndusInd Bank (up 21 per cent) and Kotak Mahindra Bank (up 16 per cent).

“Banks have further boosted risk on sentiment in the market. The banking sector seems to be a worthy candidate to book short-term profits as it witnessed a bout of optimism due to the Budget,” Nirali Shah, Head of Research, Samco Securities says.  

 Technical Analysis

Nifty has formed a small bodied candle on a daily scale but continues its northward surge – higher lows formation of the last five sessions. “Now, Nifty has to continue to hold above 14,750 zones to continue its bullish momentum towards 15,250 zones, while support can be seen around 14,600-14,500 zones,” Siddhartha Khemka, Financial Services says.

In the coming week, earlier crucial resistance of 14,750/49,750 level would act as a major support for the market.

“In the worst-case scenario, we might see the levels of 14,500/49,000. On the higher side, 15,250 and 15,350 would be major hurdles for Nifty. For the Sensex, it would be at 51,500 and 52,000 levels,” Shrikant Chouhan, Executive Vice-President, Equity Technical Research, Kotak Securities, says.

 Going Ahead

The market momentum is likely to continue with the focus now back to fundamentals like corporate earnings. The third quarter earnings season has maintained the momentum of the second quarter results season. Nifty profits for the 30 companies that have posted their results have grown 23 per cent YoY (as against expectation of 4 per cent growth). The government’s focus on fiscal expansion and capex spending augurs well to revive the long-anticipated private investment cycle.

“We expect the earnings momentum to sustain with further revival in the economy, the number of COVID-19 cases being contained, and the benefit of a low base ahead. The Budget, along with strong corporate commentary, reaffirms the positive long-term structure of the market. The focus should be on metals, insurance and pharmaceutical companies,” he says.

The results season is not over yet. As we go ahead into the results season, there could be some more future earnings upgrades. The 34 companies from Nfity-50 that have declared results so far have reported 34 per cent jump in earnings on a YOY basis. This is way ahead of the 20 per cent earnings growth forecast to come from Nifty-50 in third quarter earnings season.

“A combination of positive sentiment, positive FII flows and very healthy earnings could keep markets at elevated levels in the near future,” Rusmik Oza, Executive Vice-President, Head of Fundamental Research at Kotak Securities, says.

Shah has a different take on this. She feels that markets could take a pause next week to reflect upon the current exuberance and assimilate the upcoming corporate numbers. Markets being forward-looking have discounted a major chunk of growth expectations, “however, small-time corrections will be a part of this bull-favoured journey”, she said.

The metal sector may consolidate going ahead, given that commodity prices are cooling off. Lately, autos seem to have turned into a crowded trade and given that MoM growth in unit sales is seen maxing out, one needs to be cautious in this space. Broader indices might still have some steam left. Participants should, however, concentrate exclusively on quality names as the up-tide could slow down for the short term.

Investors can wait for a short correction before adding fresh monies, Shah points out.

Deepak Jasani, Head of Retail Research at HDFC Securities, is of the view that even as markets keep rising, portfolio and asset allocation review may help protect gains and/or release funds for deployment in happening stocks.

“We suggest traders maintain a bullish bias with an immediate support on the downside at 14,580,” he says.