Here's what led to Nifty shedding 500 points from day's high; is market rally over? Watch this level

Valuations have been a major concern for markets and profit-booking at this peak was much needed, say analysts

As bulls took a step back, bears gripped Dalal Street in the late hours of December 20. Frontline indices - Sensex crashed 1,611 points from its record high of 71,913, while the NSE Nifty 50 tumbled 506 points from its all-time high of 21,593. Market observers view this correction as 'long overdue' and expect Nifty to test 21,000 levels on the downside in the couple of days, but are not very worried about the rally coming to a halt.

"The selloff has been warranted. We can see Nifty testing the 21,000 levels on the downside in the next couple of days," said Vinit Bolinjkar, Head of Research at Ventura Securities.

He added that the valuations have been a major concern for markets and profit-booking at this peak was much needed. Bolinjkar suggested investors can fly to safe bets and partly remain 'risk-off on equities' until Nifty breaches below 21,000-barrier.

ALSO READ: F&O Manual | Bank Nifty faces selling pressure beyond 48,100, likely expiry around 48,000

Adding to this sentiment, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said that the profit-booking is 'very normal' for markets. "Markets won't run in a linear fashion all the time. Correction was long overdue and will make markets healthy," he said.

Valuation-wise, Vijayakumar said that midcap and smallcap pockets were trading at 26 times (x) price-to-earnings (PE) ratio based on FY24 earnings as against 21x PE ratio of benchmark Nifty.

On December 20, Nifty Midcap 100 index plunged 4.5 percent from day’s high and is on track for biggest single-day fall since October 2023. Nifty Smallcap 100 index, meanwhile, declined 5 percent from day’s high to a low of 14,951.

Sectorally, the sell-off was broad-based as investors chose to book profits across the counter.

Vijayakumar of Geojit Financial Services said that this correction will bring bloated valuations to normal levels as they had run up beyond their fundamentals.

The worst sectoral performer on December 20 was Nifty Media index as it slipped nearly 6 percent. Metal, PSU Bank, Realty, Oil & Gas, and Auto indices were among other top sectoral losers.