Mild correction may be seen in the week ahead as the market seems to have priced in earnings that were not affected by the note ban in November, even as the results of state Assembly elections are keenly awaited.
The market continued its good run for a third straight week, with the Nifty rising 0.6 percent amid consolidation backed by stable or better-than-expected earnings in the face of demonetisation and hopes of a global recovery suggested by US President Donald Trump.
The Reserve Bank of India's surprise decision not to cut rates and the change in the central bank's stance to neutral from accommodative failed did not manage to dampen the market's spirits.
However, after 5 percent gains in the past three weeks, the positive trend is unlikely to continue in the coming week. Apart from the earnings season, which will end on February 15, there are no major events lined up. Hence, consolidation and mild correction may be seen as the market seems to have priced in earnings that were not affected by November's note ban.
That said, the upside is not necessarily over. Investors are eagerly awaiting the outcome of five state Assembly elections, the results of which are due on March 11. Favourable outcomes can propel the Nifty beyond the 9000 level. The index could even cross 8900 in the coming week given consistent liquidity support.
As far as the assembly elections go, Uttar Pradesh is the most important one as the state sends the maximum number of legislators to Parliament. It is also vital for the futures of Prime Minister Narendra Modi, Chief Minister Akhilesh Yadav and Congress Vice-President Rahul Gandhi.
According to Ashwani Gujral of ashwanigujral.com, one should expect another week of sideways movement for the market because after a three-week rally, it is likely that the market needs to consolidate or correct before going to fresh highs.
However, there is no real cause for worry because the Nifty is still trading around 8700-8800, and so it is still a buy on decline market, he adds.
Mehraboon Irani of Nirmal Bang is not comfortable with current valuations, but he feels ample liquidity in the market may propel it upwards. According to him, the main trigger could be the state elections results that are a month away. If the market likes the results, then they are sure to rally, he says.
However, US President Donald Trump’s policies pose a huge risk for the market, UR Bhat of Dalton Capital feels.
“The big problem we have is what can come out of the Trump administration," Bhat says. "There are lot of uncertainties, especially regarding the relationship with China or the border tax."
He added that there is not much clarity with what US is going to do and this will keep the market guessing.
On Monday, the market will first react to disappointing industrial output that fell by 0.4 percent in December on the back of demonetisation, against 5.7 percent growth in November and expectations of 1 percent growth. Consumer durables were lower by 10.3 percent (9.8 percent growth in November), the manufacturing sector witnessed a degrowth of 2 percent (5.5 percent growth) and capital goods contracted by 3 percent (15 percent growth).
Stocks such as Idea Cellular, Sun TV Network, GAIL, Bank of Baroda, Techno Electric, Dhampur Sugar, Jagran Prakashan, Tamil Nadu Newsprint, Reliance Capital, Engineers India, Suzlon Energy, IL&FS Engineering, which announced earnings after markets hours on Friday, will react on Monday.
Tata Motors, Sun Pharma, Hindalco, Vedanta, DLF, HPCL, Motherson Sumi, NMDC, Britannia, Power Finance, Piramal Enterprises, Petronet LNG, Adani Ports, REC, Aditya Birla Nuvo, Apollo Hospital, Natco Pharma and Nestle are yet to announce their third quarter results.
On the economic data front, Consumer Price Index inflation for the month of January will be announced on Monday, which is expected to be 3.21 percent against 3.41 percent in December, followed by the Wholesale Price Index on Tuesday. Core inflation is likely to be 5 percent against 4.9 percent on month-on-month basis.
PSU oil companies BPCL, HPCL and IOC will also be in focus as there is a practice of fortnightly revision in fuel rates. Hence, aviation companies will also be closely watched on account of jet fuel price revision if any.
Coming to corporate action, South Indian Bank and Canara Bank will trade ex-rights from February 16 and 17 respectively. Orbit Exports shares will adjust for bonus shares in the ratio of 1:1 on February 14 and Compuage Infocom's face value will be split from Rs 10 to Rs 2 on February 16.
Globally, Japan & Europe's Q4 GDP and China & US' January CPI etc will be closely watched.