Sensex drops 938 points, Nifty settles below 14,000; 5 factors that weighed on market

Extending their losing streak into the fourth consecutive session, Indian equity benchmarks ended with deep cuts on January 27, tracking weak global cues.

Sensex opened lower and dropped 1,078 points in intraday trade. Nifty fell below 13,950 indicating that investors are taking money off the table ahead of mega-policy event Union Budget 2021.

At close, Sensex was 938 points, or 1.94 percent, down at 47,409.93 and Nifty was 271 points, or 1.91 percent, down at 13,967.50.

Mid and smallcaps outperformed their larger peers as the BSE Midcap and Smallcap indices closed 1.38 percent and 0.52 percent lower, respectively.

Here are the top 5 factors that led to the sharp decline in the market

Weak global markets: The Indian market benchmarks were mirroring the sentiment prevailing at the major global markets. Investors were cautious ahead of US Fed meet outcome later today while uncertainty around US stimulus also weighed on sentiment.

Caution ahead of Budget: At the domestic front, investors kept their moves low ahead of the Union Budget which is expected to focus on growth.

"The market valuations have become stretched and most of the positives are factored in the price. The upcoming Budget will be a tight rope walk for the government and negative surprises of higher taxation, that could impact consumption, cannot be ruled out," said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

"Needless to say, the market has become jittery ahead of this major event. Investors should build for a defensive portfolio and also hold cash, as there will be good buying opportunities in the future."

Axis Securities in its pre-Budget note highlighted that despite limited fiscal space, policy reforms are likely to continue.

History suggests that past Budgets have disappointed the equity markets more often, but this time the finance minister has promised a landmark Budget for FY22.

Whether landmark or not, the FY22 Budget will be historic in the face of an unprecedented pandemic that has caused great economic loss, said the note from Axis.

Some selling by FPIs: Foreign institutional investors (FIIs) have sold Indian equities in the last two consecutive sessions. On January 25, they net sold shares worth Rs 765.3 crore in the Indian equity market while on January 22 they sold shares worth Rs 635.69 crore.

This shows a temporary change in FPIs' stance.

However, so far in the month of January they have been net buyers of Rs 19,344 crore, data from NSDL showed.

Profit-taking at rich valuation: Analysts point out that the market was ripe for some consolidation at the peak valuation.

"The recent upswing in the market has pushed valuation levels to the highest levels since 2008 with the market trading at a trailing P/B of 4.15 times and P/E of more than 20 on FY22 earnings," said Hemant Kanawala, Head - Equity, Kotak Mahindra Life Insurance.

"The risk-return equation does not look favourable in the short-term and one cannot rule out an interim correction, although the structural support in terms of earnings visibility continues to hold," he added.

Technical factors: Nandish Shah, Senior Derivatives and Technical Analyst at HDFC Securities pointed out that Nifty made a 'dark cloud cover' bearish reversal pattern on the daily chart last Thursday while it made a spinning top on the weekly chart.

"This indicates that the bears dominated the bulls as the markets corrected and most of the gains were eroded during the latter part of last week. Now, the intermediate uptrend has shifted downward," he said.

"RSI (14) has now breached 60 levels on the daily chart and is showing signs of negative divergence. Nifty also closed below its 20-day EMA. This is the first time after November 2, 2020, that Nifty has closed below its 20-day EMA," Shah added.

In the derivative segment, as per Shah, FIIs' long to short ratio fell to 1.50 level from 4 levels, indicating FIIs have started reducing their longs in the index futures segment.

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