Analysts advise caution as Nifty extends record rally to 13th session

A recent note by Samco Securities highlights instances where the Nifty 50 has enjoyed a winning streak of more than eight days while staying within 1 percent of its all-time high. Historically, the average 1-month forward return shows a 3 percent decline, indicating a tendency for a short-term pullback following such strong gains.

India's Nifty index has set a new record with a 13-day winning streak, fuelled by optimism over a potential rate cut by the US Federal Reserve and strong liquidity support, especially from domestic institutions and retail investors.

The 50-share benchmark rose on each of the trading sessions starting August 13 till September 3 with the cumulative gains pegged at around five percent. The benchmark has surpassed its previous longest rally of 11 days in October 2007, which, more importantly, led to strong returns over the next three months.

A recent note by Samco Securities highlights instances where the Nifty 50 has enjoyed a winning streak of more than eight days while staying within 1 percent of its all-time high. Historically, the average one-month forward return shows a 3 percent decline, indicating a tendency for a short-term pullback following such strong gains.

On September 2, the Nifty 50 achieved a remarkable 13-day winning streak while closing at a fresh record high. This is only the second occurrence since 2000 when the index has registered a winning streak of over 11 days.

The last time the Nifty 50 recorded an 11-day streak was in 2007, post which the one-month, two-month, and three-month forward returns were 14 percent, 13 percent, and 18 percent, respectively, according to a Samco Securities analysis. The analysis highlights other long winning streaks as well along with the manner in which the index moved after such winning streaks.

Looking at the two- and three-month forward returns, the index shows mixed results, with three instances of declines and three instances of gains. On average, the two- and three-month forward returns show a decline of about 1 percent each.

The recent rally, apart from US Fed cut expectations, was also driven by several factors including post-budget rally, continued focus on capex and other infrastructure building, improved sentiments towards policy continuity, domestic inflows, valuation comfort after the correction, and Q1FY25 earnings season in line with expectations.

August was a volatile month for the global market. In recent developments, the market experienced increased volatility during the first week of the month due to the unwinding of the Yen carry trade. However, later in the month, some recovery was seen across the world, supported by the strengthening narrative of the expectation of a rate cut in September 2024.

Analysts believe the recent market rally has priced in most of the positive sentiment, leading to near-term consolidation with sector and style rotation driving gains. Midcaps and small-caps have caught up, but their valuation safety margin has narrowed compared to large-caps. As a result, the broader market may experience a period of correction, with investment flows likely shifting to large-caps, potentially pushing the Nifty 50 to a new high soon. Nonetheless, the long-term outlook for the broader market remains strong.

According to a recent note by Axis Securities, the Indian economy remains a standout performer among emerging markets and is expected to maintain its growth momentum and stability in 2024 despite global volatility. Strong corporate earnings, successful capital raising, and deleveraging efforts have put Indian companies in a solid position to grow, justifying their premium valuations in a turbulent global environment, it said.

“We can't rule out the possibility of consolidation in September following the recent surge, but we don't anticipate any major decline, given the ongoing global buoyancy and supportive domestic factors,” says Ajit Mishra - SVP, Research, Religare Broking.