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Nifty: Nifty overbought, market may see sectoral rotation in the near term

The domestic equity market took a breather during the week gone by after registering a steep one-day drop in the previous week. FPIs and DIIs also balanced out their buying and selling respectively during the week. Investor nerves are stressed globally ahead of the outcome of US election. Markets appear to have entered a phase of status quo, at least until November 3, when every decline should be bought into. Until then, the market is likely to face resistance in every bid to hit new highs. Broadly, the market is entering a sideways trading zone.

Contrary to expectations, India’s power consumption grew in double digits YoY at 11.4 per cent in the first half of this month. This signals buoyancy in industrial and commercial activities after months of subdued activity and indicates that India as an economy is in now a superior position compared with other developed countries.

This could be one of the salient rationales for a massive amount of FPI inflows into the market. On the contrary, heightened selling by DIIs can largely be attributed to redemption pressures by frugal Indians, who are now encashing their investments to overcome liquidity issues forced upon by stringent lockdowns.

All in all, the worst seems to be behind us and the situation seems to be improving steadily. Echoing on the current resilient state of the economy, data released by the Reserve Bank of India showed India’s foreign exchange reserves have surged to $551.505 billion and the current account showed an unusual surplus amid a steady flow of portfolio money. It is quite astonishing that the current forex figure has nearly doubled from $275 billion back in 2013, which by most standards is considered adequate.

All this adds up to depict a state of an economy with solid underlying vis-à-vis the uncertainty reflected in the developed world due to the slow demand revival from the Covid disruption.

Event of the week
India Inc’s second quarter earnings performance continues to show a pickup in the economy and sectors such as cement thoroughly surprised Dalal Street with robust volume and margin growth reinforcing the fact that the ground-level economy has indeed fared better.

Further, pharma and FMCG numbers suggested rapid demand revival. IT players, too, have performed as expected and clocked healthy top line as well as bottom line growth in the second quarter. Banks have reported stable asset quality, however, this was mainly on account of the Supreme Court decision to not let accounts slip into NPA even after moratorium period ended.

Technical outlook

After a swift rally from the channel support, Nifty50 has become overbought and is facing a resistance at the 12,000 level. The index traded in a narrow range throughout the week. While Nifty has been hovering around the recent resistance range, global indices such as S&P500, DAX and CAC continued to underperform.

Sustained weakness in the global indices can lead to short-term pressure in equity globally. As for Nifty, the short-term immediate support and resistances are now placed at 11,600 and 12,050 levels. Going forward, the market is likely to take cues from US election results, which may have a significant impact in the short term. Till then avoid short-term swings and stay on the sidelines.

Expectations for the week

Mr Market’s mood is expected to remain positive as major indices are hovering around their all-time high levels. The corporate scorecard is ticking all the boxes and the bourses are likely to crawl higher on lack of any negative news. However, in the near term, we may witness some sectoral rotation thanks to profit booking in cement, FMCG, pharma as well as IT names and buying in infrastructure, refinery, oil & gas, hotels and tourism. Broadly, the market should keep an upbeat mood, at least till the first week of November. Investors are advised to wait and watch and buy only on healthy declines.

However, well-capitalised private lenders can be accumulated at lower levels. Nifty50 closed the week 1.4 per cent higher at 11,930.

Read More: Nifty: Nifty overbought, market may see sectoral rotation in the near term

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