Nifty, Sensex snap 5-day rally on profit-booking, analysts see corrections amid high valuations

Geopolitical developments, and below-expectation Q3 earnings have the potential to trigger corrections.

Benchmark indices Sensex and Nifty ended lower on January 16, snapping five days of gain, as investors rushed to book profits across counters. While analysts believe that the overall market trend is positive, geopolitical developments and below-expectation Q3 earnings can trigger corrections.

The Sensex closed 199.17 points or 0.27 percent down at 73,129, and the Nifty fell 66.00 points or 0.30 percent to 22,031. About 1,090 shares advanced, 2,197 declined, and 49 shares remained unchanged.

The broad market exhibited profit booking following a good performance by the IT sector amid weak global cues. BSE midcap and smallcap indices fell 0.31 percent and 0.43 percent, respectively.

Sectorally, Nifty IT and pharma led the losses, falling more than a percent. Except for Nifty PSU bank, FMCG and metal, all other sectoral indices ended in the red.

"Investors are contemplating whether the current euphoria in markets has gone farfetched, especially with elevated domestic valuations in mid & small caps," said Vinod Nair, Head of Research, Geojit Financial Services.

"FII flows are mixed due to a lack of fresh triggers. Oil prices stayed firm amid undeterred geopolitical tensions. The latest IIP growth signals near-term softness," he added.

The Nifty is now up three times from the Covid low of 7,511 in March 2020. "This is an indication of a strong bull market and it has a long way to go. But the rally from now on will not be smooth and sharp corrections are likely since valuations are high," said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

The Israel-Gaza war and skirmishes in the Red Sea region may pass without hurting the markets nut if these conflicts widen, then the market may have a reason to worry, he said. Largecaps in banking and IT and RIL are likely to remain resilient even in a downturn, he said.

"As a measure of abundant caution investors may consider booking some profits and moving the money to fixed income, where the returns are attractive," Vijayakumar said.

The earning season may determine the market trajectory. Trends in the global markets, domestic and global macroeconomic data, crude oil prices and the movement of the rupee will also weigh on sentiment, Arvinder Singh Nanda, senior vice president, Master Capital Services, said.

For Nifty, the immediate resistance is at 22,050 and support at 21,500 and 21,400, Nada said.

Also Read | Sensex, Nifty snaps 6-day winning streak on profit-booking but no 'trend reversal' yet

For Bank Nifty 48,000 is a significant hurdle, marked by substantial Call writing. A decisive breakthrough above the can trigger a sharp short-covering rally. Immediate support is at 47,200-47000, a breach of which will would trigger aggressive selling pressure, potentially leading to a downside, he said.

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