The market seems to be taking a breather after a sharp rally in the previous week that saw the Sensex, the Nifty, the Nifty Bank and midcap and smallcap indices hitting new highs.
The market opened lower on September 20, extending the losses of the previous session and experts said volatility and consolidation may persist in the coming sessions as well.
The biggest reason for it is the outcome of the Federal Reserve meeting to be held on September 21 and 22. Even though easing prices have raised optimism that the Fed may not embark on tapering exercise earlier than anticipated, investors will be looking for cues on how the American central bank sees the inflation trajectory and economic growth.
"The global focus will be on the policy meetings of a few central banks, including the Fed. With weak US job data and inflation increasing at a slower pace, Fed is not expected to give hints on taper plans in the upcoming meeting," said Vinod Nair, Head of Research at Geojit Financial Services.
The sharp run in the equities has pushed the valuation to lofty levels and some selling may be in order.
"Valuations are not comfortable and hence could lead to bouts of profit-booking. Weak global cues on account of worry over slower economic growth and rising Delta variant cases globally would keep market oscillating between greed and fear," said Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services.
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The market would be nervous this week ahead of Federal Reserve and European Central Bank meetings, which could provide some indications on when the central banks will start withdrawing their monetary stimulus and start raising interest rates, he said.
The price action of the last week formed a bull candle with a small higher shadow, indicating profit-booking at higher levels.
Brokerage firm ICICI Direct expects momentum to taper and the Nifty to undergo a healthy consolidation in the broad range of 17,200-17,800 this week.
"Broader market indices have extended their winning streak for a fourth successive week, wherein they gained around 15 percent each. Such sharp gains have led weekly stochastic oscillators into the overbought zone with reading in excess of 90," ICICI Direct said in a report.
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said with valuations stretched, corrections are possible, particularly in the broader market.
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"The market is likely to turn volatile from now on. A possible tapering timeline from the Fed this week, rising bond yields in the US, strengthening dollar (dollar index above 93) and news of the crisis in the large Chinese real estate developer Evergrande are likely to weigh on sentiment," Vijayakumar said.
It remains a bull market
The short-term correction is a healthy sign for the market as it settles the concern of valuations. In the coming months, when the economic indicators turn healthier and corporate earnings come on a brighter side, the market may scale fresh highs.
So, the overall sentiment in the market remains optimistic due to improving macroeconomic indicators and positive earnings expectations.
The reforms announced by the government are also expected to keep the bulls charged as they are going to have a long-term impact on the economy.
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Experts point out that the PLI schemes, government's focus on infra projects and relief measures for stressed sectors such as telecom augur well for the economy.
"The PLI schemes announced by the government show their strong intent to address the sectors’ challenges and pave way for the development of local capabilities and capacities, thus enabling companies to rightly capture the opportunity thrown open by China+1 (China and other countries) strategy," said Khemka.
The setting up of the bad bank is a positive development, as the focus remains on a faster resolution of stressed assets, which will improve the balance sheet of banks. The upfront cash payment would also aid in providing incremental cashflows and will enable banks to focus more on their core operations, he said.
Gaurav Udani, the founder and CEO, ThincRedBlu Securities said both the Nifty and the Bank Nifty have given good returns in the past week and the bullish trend will continue despite occasional corrections.
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"The Nifty and the Bank Nifty have strong support near 17,400 and 37,000, respectively, which further pushes the case for a bullish week ahead," he said.
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