The market went into a bear hug on the second day of new year with the benchmark indices ending in the red amid rush to book profits.
At close, the Sensex was down 379.46 points or 0.53 percent at 71,892.48, and the Nifty was down 76.10 points or 0.35 percent at 21,667.
About 1,696 shares advanced, 1,629 declined, and 69 were unchanged.
Profit-booking was visible at higher levels as lingering concerns over the Red Sea disruptions pose short-term risks to global supply chains and freight costs, said Vinod Nair, research head at Geojit Financial Services. Investors are also cautious about the possibility of euphoria building up in pockets of the market, particularly in smaller stocks.
Expensive valuations have slowed down exuberant investors as they gear their portfolios towards the upcoming Q3 earnings season which begins next week with TCS and Infosys leading the show on January 11.
In the broader markets, both BSE Smallcap and BSE Midcap index ended marginally lower.
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Sectorally, Nifty Auto was the top loser falling nearly 1.3 percent after December sales data. The below-expectation numbers led to the fall in the index with Eicher Motors and Ashok Leyland leading losses with a fall of around 3 percent each.
Nifty Bank, Nifty IT, Nifty Infra, Nifty FMCG, and Nifty PSU Bank were the other sectoral losers. On the other side, Nifty Energy, Nifty Metal, Nifty Pharma indices ended marginally higher.
Experts cautioned investors against chasing stocks with inflated valuations. The 1,000-point rally in the Nifty in the last month has imparted momentum to the market. Retail investors encouraged by the excellent returns of 2023 have turned exuberant and are chasing stocks, unmindful of the high valuations, particularly in the midcap and smallcap segments.
"However, investors should not fall into the trap of 'recency bias' and chase low-grade stocks in the broader market," said VK Vijayakumar, chief investment strategist at Geojit Financial Services.
Declining dollar and US bond yields provide a favourable global context for equities, he said, adding that FII inflows in 2024 are likely to be huge and have the potential to lift high-quality largecaps, particularly in segments like banking where valuations are fair, he said.
"An important trend to watch is the spike in the volatility index VIX to 14.5 which indicates that high volatility is around the corner. The sell-off in the last 30 minutes on January 1 is a warning that at higher levels there can be bouts of big selling," Vijayakumar added.
Considering around 3,000 points or 14 percent move in the Nifty in just two months, traders should secure some profit at higher levels, according to Rajesh Bhosale, technical analyst at Angel One.
Another reason to book profits is that the indicators are overbought for a long time and the in-between reality check can be brutal, he said.
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According to Vinod Nair, head of research at Geojit Financial Services, the spotlight of this week is on FOMC minutes which will provide insight for 2024 rate cuts. "Momentum in mid & small caps remains strong, buoyed by a positive macro-outlook however private banks experienced a reversal trend," he said.
Technical view
"A bearish candle has emerged on the daily Nifty chart, indicating a potential bearish trend in the near future. Sentiment is expected to stay bearish as long as it remains below 21,750," said Rupak De, Senior Technical Analyst at LKP Securities.
"Any upward movement toward 21,750 could encounter selling pressure. However, a clear breakout above 21,750 could shift sentiment in favor of the bulls. Support is established at 21,500 on the lower end," he added.
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