At a record high, the Indian equity market is brimming with optimism. Even though the market benchmarks logged mild gains of about half-a-percent and mid and smallcaps witnessed profit-booking in the week gone by week, analysts and investors are positive on the long-term prospects.
However, at this juncture, a cautious approach is called for and the market will favour only a prudent investor as key upcoming events such as the Budget 2021, December quarter earnings, RBI MPC outcome and US stimulus will decide its direction in the weeks to come.
For earnings, the domestic market will shift its focus on the banking and finance sector, as major banks and NBFCs are to release their quarterly result.
The BSE Sensex closed with gains of 0.5 percent, while the Nifty was up 0.6 percent for the week ended January 15. BSE midcap and smallcap indices ended 1.2 percent down.
This hints at a slight shift in the sentiment. Experts say profit booking could extend in the small and midcap space in the run-up to the Budget as money will move from broader markets to defensives.
"Going forward, US stimulus, earnings season and budget expectations could determine the market movement. We expect the Nifty to trade with a positive bias from here till the Budget," said Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities.
The MSCI Emerging Market index broke the pre-GFC (global financial crisis) peak of 1,345 seen in 2007. If it sustains above 1,350 for one-two more weeks, then it would confirm the breakout and go into a new zone, he said. Any structural up move in the MSCI Emerging Markets index would have a positive impact on Indian markets, he added.
On the technical charts, the Nifty formed a bearish 'Shooting Star' candlestick pattern on the weekly chart. As the market is overstretched on the upside, this can cause a short-term dip or weakness in the near term.
Nirali Shah, Senior Research Analyst, Samco Securities, said S&P 500 index, which has been dictating the trend in global equity indices, was trading negative for the week and other emerging markets such as Taiwan (TAIEX) and South Korea (KOSPI), too, were moving with a sideways to mild negative bias.
"A break below 14,430 can trigger a profit-booking move in the Nifty. Immediate support and resistance in the short term are now placed at 14,430 and 14,640, respectively, and a break on either side will lead to a directional move in the short term," Shah said.
Shah agreed that until the Budget, markets could witness unusual hype and hysteria on hopes and expectations driving the volatility even higher.
"Taking a holistic view, large-cap players might not see a significant rise but there could be a lot of buzz in small and mid-caps. At current price points, market participants may look for trading bets rather than invest for the long haul. Medium-term investment opportunities are still available in pockets like metals, commodities and cyclical, though they have turned risky," Shah said.
The volatility index India VIX surged more than 16 percent in the previous week, which is a sign of caution.
Nilesh Jain, Technical and Derivatives Research- (Equity Research) at Anand Rathi Shares and Stock Brokers, expects volatility to increase towards 28-30 levels ahead of the Budget.
This should warn us to stay cautious and refrain from creating aggressive long or short positions.
The current trend can be used to accumulate quality stocks.
Ajit Mishra, VP - Research, Religare Broking, said since the overall trend was, it would be prudent for the participants sitting on the sidelines for correction to buy quality stocks on dips.
He, however, added that it would be difficult for traders to manage positions as both indices and stocks usually see volatile swings during such phase and the beginning of earnings season added to the choppiness.
"It’s prudent to avoid naked leveraged positions for now and prefer hedged strategies. In case of a further slide, the Nifty would find immediate support at 14,250 and then 14,100 zone," Mishra said.
Caution is not a negative word. Being cautious in the market should be taken as being prudent. Avoid getting carried away, pick your stocks wisely and remain aware of the factors that can influence the market.
The bouts of profit booking after a sharp rally is a common phenomenon in a bull market. Therefore, a brief consolidation from here cannot be ruled out, experts said.
“The Nifty could consolidate in the near term, but we do not expect the index to breach the key support threshold of 14000-13800. Thus, any extended breather from here on should not be construed as negative instead it should be capitalised as an incremental buying opportunity,” Dharmesh Shah, Head–Technical, ICICI direct told Moneycontrol.
“We believe, ongoing temporary breather would make market healthy by cooling off the weekly stochastic oscillator (placed at 93) and pave the way for next leg of an up move towards 14,900 by the end of January 2021. In the process, the stock-specific activity would continue as we enter the Q3FY21 result season,” he said.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.