Consolidation largely seen in May but market direction dependent on COVID-19 vaccine and stimulus measures

After a brutal sell-off seen in March, the market saw a relief rally in April with the benchmark indices rising more than 14 percent as against a 23 percent correction in March.

In fact, the indices recovered more than 31 percent from March lows after falling 40 percent from its record high seen in January this year.

There are many reasons that can be attributed to the April rally such as -stability in global markets, slowing rate of new infections in major countries like US and Europe, expectations of partial opening of economies, reports of progress in finding a treatment for COVID-19, slowdown in FII outflows among others. But what hit home in effect was the liquidity after big stimulus packages announced by governments and central banks.

The picture, however, can't possibly be painted with the same brush in May, feel experts. The likely re-emergence of US-China trade tensions, delay in fiscal stimulus, actual impact of COVID-19-led lockdown once economic activity start kicking in partially, distortion across sectors in coming months among other reasons that may spoil the mood.

Experts largely expect the month to be a consolidation period for the market, though stock specific action could continue due to March quarter earnings.

"The May month will be a consolidation period and then the market will mainly depend upon on earnings, macro factors, how the lockdown will ease from hereon and progress on vaccine for COVID-19," Sanjiv Bhasin of IIFL told Moneycontrol.

Bhasin thinks Mount 10,000 on the Nifty will be a margin point and index may remain rangebound with 300 points move on either side in May.

Kedar S Kadam, DGM & Head of Research at Cholamandalam Securities also feels that from here the Nifty may remain in the range of 9,000-10,000 as most of the optimism (with respect to drug discovery, slowing infections in US and Europe, signs of opening economy in some regions of the US and Europe, and hope of stimulus) has been already priced in.

Rally/Selling Pressure?

The rally is expected to depend upon the progress in the development of a vaccine for COVID-19 patients (which seems to be later than sooner). Moreover, the amount of expected stimulus package and how soon the entire economy will reopen are other factors that experts think can decide the possibility of a rally but even then major upside is largely impossible.

However, the selling pressure can't be ruled out given the fragile relationship between US and China, earnings expectations after volume degrowth reported by FMCG major HUL and if there is a delay or lower than expected fiscal stimulus from the government, experts suggest.

"I feel the rally is overdone. As fundamentals are not good and across sectors completely distorted, there could be rangebound trade in May and the range could be 8,800 on the downside and 10,200 on the upside. Historically May has been a dangerous month," Ajay Jaiswal, President, Strategies & Head of Research at Stewart & Mackertich told Moneycontrol.

According to Kedar Kadam, if there is any success on vaccine then the rally could be sharp. He adds, "Further upside will also depend upon the stimulus as too much expectations already priced in. If there is any disappointment then the market could fall significantly."

Shailendra Kumar, CIO at Narnolia Financial Services also feels if the rally continues and if the index reaches to a level where a lot of people are stuck with their positions then they will exit to some extent, and the selling pressure could extend if there is disappointment on the vaccine front.

Sanjiv Bhasin feels if 40 percent of workforce gets back on work then the market will get some confidence. As the government has not yet passed the oil benefits, there could be a stimulus package lined up for sectors like MSMEs, NBFCs or where the maximum pain is - such as airlines, travel and tourism etc, he believes.

What after May?

Experts feel that given reports of a likely reconsideration of US tariff on Chinese products especially after COVID-19 and expectations of a retaliation from China, any V-shaped recovery is unlikely not only in the market but also economy and earnings.

For the next six months, especially after COVID-19, geo-political tensions will be a key factor to look at globally that may have a severe impact, said Shailendra Kumar.

Sanjiv Bhasin said how the government will use the benefit of falling oil prices, money printing globally if any, and aversion of US-China tensions then it can get business in future from other countries, if it fails to do so then there could be a problem.

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