Sensex, Nifty jump higher despite rising COVID-19 cases, stronger dollar; what's giving comfort to the market?

These strong gains, which come after the market closed a percent higher in the previous session on March 26, come as a relief for participants as it reinforces the belief that barring intermittent profit-taking, the bull run will continue.

Having said that, it is also true that the market has a lot of negatives to deal with, so all-is-well thinking may prove to be harmful.

As reported by Reuters, the dollar climbed to a one-year high on March 30 amid a spike in treasury yields. Besides, global investors appear worried about the fallout of the collapse of the hedge fund Archegos Capital.

At home, rising COVID-19 cases are looming as a threat that can derail the economic recovery, denting market sentiment. All these are enough to spoil the part at Dalal Street.

"There are many concerns like surge in COVID cases, particularly in economically crucial Maharashtra, appreciation in US 10- year bond yield above 1.7 percent and the dollar index moving up to 92.8 levels," V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services pointed out.

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Bear with volatility

The market looks to be in uncertain territory and volatility is here to stay.

"This week is a holiday-shortened one and we expect volatility to remain high. The recent surge in the COVID cases combined with feeble global cues has turned the participants cautious. Besides, the divergence between the Nifty and the banking index amid excessive volatility is keeping the traders guessing over the next directional move," Ajit Mishra, VP Research, Religare Broking said.

Nirali Shah, Head - Equity Research, Samco Securities, said with no major events this week, markets may continue to remain volatile, especially because of rising COVID-19 cases and fears of a lockdown.

"As it will be a three-day week, investors can look for knee-jerk reactions in stocks as an interesting opportunity to buy and commit a tiny proportion of fresh capital for the long term before the start of Q4 earnings in April," said Shah.

Aanalysts believe that the market will take cues from the fourth-quarter earnings, which will start in the days to come and also the pace of vaccination. In the meantime, the market may continue to swing between gains and losses but a deep correction is unlikely.

What is giving comfort to the market?

The market seems to be taking comfort from the fall in FII selling and also on the front of valuations as, after the recent correction, many pockets are looking attractive.

"A sharp decline in FII selling coupled with large buying by DIIs can support the market and even take it higher. DIIs and retail investors are likely to be buyers in banking, IT, cement and metal stocks, which look attractive at present levels. Year-end considerations also are likely to lead to further DII buying," Vijayakumar said.

Also, improvement in economic indicators and broadening reach of vaccination is underpinning the sentiment.

"The global equity markets are unlikely to see any significant fall in the short-term as economic conditions are improving and also aggressive vaccination plan is being implemented," said G Chokkalingam, Founder and MD of Equinomics Research & Advisory Private Limited.

Another interesting factor is the sharp surge in retail investors, which may keep supporting the domestic market.

Active equity investor accounts rose by a record 1.04 crore in 2020, according to the data from the country’s two main depositories.

Since the beginning of 2021, nearly 20 lakh newly registered investors have entered the stock markets in India, as per the BSE. Retail ownership in more than 1,500 companies listed on the NSE jumped to 9 percent in the third quarter of 2020, the highest since March 2018, Chokkalingam said.

"Steady inflow of individual investors (is) likely to continue which could provide support especially to small and mid-cap stocks," Chokkalingam said.

Besides, the low base effect of the March and June 2020 quarters in corporate earnings will also improve the market sentiments in the short-term.

In the long-term, Chokkalingam expects a huge inflow of foreign capital into Indian equities through both foreign direct investment (FDI) and foreign portfolio investment.

"Such major flows should come into mid-sized companies (mid-cap stocks). Hence, we do not see any scope for a major fall in the markets in the short-term due to the spread of COVID-19. Investors may accumulate deep value small and mid-cap stocks on any possible declines," said Chokkalingam.

On the COVID-19 front, while the rise in cases is a cause of worry, it is unlikely to impact the economic output substantially like 2020, so its adverse impact could be manageable, he said.

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