Market washes away recent gains as profit booking kicks in: Key factors behind fall

The July F&O series marked the fourth straight month of net gains in the market.

Benchmark indices washed out all the gains made in the previous session as profit booking seeped in the market on July 27. As a result, the Sensex shed over 500 points while the Nifty slipped below 19,650 at the day's low. Moreover, sharp losses in several frontline stocks further weighed on the benchmark indices.

At close, the Sensex was down 440.38 points or 0.66 percent at 66,266.82, and the Nifty was down 118.40 points or 0.60 percent at 19,659.90.

Here are the key factors that led to the decline:

F&O Expiry

Some volatility in the market can be attributed to the expiry of the July F&O series. The Nifty50 has flushed out net gains for the fourth straight derivatives series in July, which would have prompted some traders to unwound their long positions triggering a fall in the market.

It is worthy to note that the long positions taken by foreign institutional investors at the start of the July F&O series was up nearly three-fold from that seen at the start of the June F&O series.

FOMC signals possibility of more hikes 

The Federal Reserve's decision to raise interest rates by 25 basis points came in in-line with the market expectations. However, Fed Chair Jerome Powell's comments, which signaled the possibility of more hikes if inflation did not cool down as anticipated, triggered investors to book profit.

"Markets witnessed wild gyration on the expiry day as the US Fed signalling one more rate hike dampened the sentiment and prompted investors to book profit in automobile, banking and oil & gas shares," said Shrikant Chouhan, Head of Research (Retail), Kotak Securities.

However, analysts do not see this as a major mood dampener for the markets but rather as a knee-jerk reaction to Powell's comments.

Stocks and Sectors

Sharp cuts in a few frontline stocks along with profit booking in other heavyweights dragged the headline indices lower.

Automobile major Mahindra & Mahindra was the biggest laggard on the Nifty 50, plunging over six percent after investors shun the company's decision to buy a stake in RBL Bank.

Another major loser was Tech Mahindra, which slumped over three percent on the back of its weak quarterly numbers.  Nestle India was also down over two percent due to a sequential fall in its quarterly numbers.

Several other heavyweight counters, including RIL, HDFC Bank, ITC declined 1-3 percent as investors chose to book profits following the recent run-up in these counters.

A  fall across all frontline banks, a sector that has the maximum weightage within the Nifty 50 only put more pressure on the index.

The banking, FMCG, energy and automobile sectors were among the worst hit as they settled around 0.7-1.2 percent lower.

Also Read: Taking Stock: Bulls fail to hold grip; Nifty around 19,650, Sensex dips 440 points

However, some outliers also persisted in the market like pharmaceutical major Cipla, which soared around 10 percent following a stellar quarterly show. Dr Reddy's Labs, Alkem Laboratories, Aurobindo Pharma were other gainers within the sector which pushed the Nifty Pharma index shot up over three percent.

Other sectoral gainers included realty and PSU Banks which rose around 2 percent and 0.5 percent, respectively.

The broader market fared better as the Nifty Midcap 100 index rose 0.3 percent, while Nifty Smallcap 100 index ended on a flat note.

Some hiccups but outlook positive

Despite the profit booking seen in the market today, the overall sentiment remains robust. Analysts also believe that as long as the Nifty holds above 19,400-19,500, the overall sentiment will remain bullish. They too had predicted some bouts of profit booking to hit the market following the bullish run seen over the past month.

"We are in a consolidation phase so it is normal to see volatile swings. The key is to manage risk until the trend resumes. Meanwhile , we feel it is prudent to restrict positions and use intermediate dips to gradually add quality stocks," said Ajit Mishra, SVP - Technical Research, Religare Broking.

Om Mehra, equity research analyst at Choice Broking also seconded the view as he sees the consolidation in the market as a healthy one. "Despite the recent turbulence, experts believe that after a pause and some consolidation, the benchmark indices may scale to new highs in the near to medium-term," he added.

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