The benchmark Indian indices extended a rally for the sixth straight session on December 5 with the Nifty breaching the 20,800 barrier. The 50-share index is likely to surpass the 21,000 psychological mark by the end of this year or in the first week of January 2024, according to Rohit Srivastava, founder of Indiacharts.
Technical data suggests that there is upside potential for Nifty to touch new highs in the coming weeks, he added.
From the start of November, there was a significant buildup of a short position on the institutional FII side, the second-highest on record. This substantial position had to be covered, and interestingly, the covering began only last week after expiration. As of December 1, the position was reduced to around 47,000 contracts, still maintaining a short stance, said Srivastava.
"Traditionally, as the market reaches new highs, a shift towards the long side is observed, often reaching 50,000 to 60,000 contracts or even one lakh contracts long before signalling a potential overextension to the upside. Given this data point, it suggests that there might be more upside ahead," he added.
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On the economic front, India has thrown up robust results with both the GDP and earnings making significant strides. The Nifty group has recorded a near-27 percent earnings growth, while midcaps have surged over 100 percent, according to a Motilal Oswal report. "This impressive growth has, to some extent, justified the elevated market valuations," Srivastava told Moneycontrol.
The critical question now revolves around the sustainability of this growth amid global headwinds such as potential shifts in interest rates and fluctuations in dollar value, he said, adding that as long as these external challenges remain at bay, possibly for the next few weeks or even months, "we have the opportunity to engage in several trades and navigate the market landscape before potential impacts materialise, likely around January 2024 or thereafter".
Pre-election market rally
In the last two terms when the BJP came to power, markets rallied ahead of elections. The benchmarks zoomed around 19 percent in six months before the general election in 2014 and almost 11 percent in 2019.
Will there be a rally before the election in 2024? Srivastava said the perspective on a pre-election rally requires an open mind, considering historical trends and broader market sentiments. Markets tend to exhibit anticipatory behaviour, as observed in prior elections where they anticipated electoral victories.
According to the social theory, a bullish market environment increases the likelihood of the current government's reelection, while a strongly negative market environment around the time of elections suggests a potential shift in the electorate's stance. Closer to the election date, a clearer understanding will emerge, but predicting a specific pattern is challenging.
Unlike previous instances, global factors, particularly that concerning rates and the dollar trajectory, introduce additional uncertainties, he said, adding that a better sense of the situation will likely emerge in March or April, determining whether a rally will take place in the run-up to the polls.
Also read | Nifty extends bull run to 6th session to climb 20,800; Bank Nifty crosses 47,000 for first time
Outlook
While an upside to 21,000 is seen by the year-end or the first week of January 2024, it is essential to factor in the seasonally challenging period that typically emerges in the first quarter of the new calendar year, marked by a pause in January as the budget approaches. Despite this year's budget being a vote-on-account, the recurring seasonal effect persists, Shrivasta told Moneycontrol.
After the recent remarkable performance, mid-cap indices are likely to experience a slowdown, while large caps are expected to gain traction. The banking sector, a laggard in 2023, is set for positive momentum.
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