Vijay Kumar Gaba

The benchmark Nifty50 scaled a new all-time high-level yesterday. Analyzing the current market trends, I get some signals that suggest that a significant correction (8% to 10%) in the benchmark Nifty50, though not imminent, is certainly on its way. I feel not imminent, because (i) the top stocks that could have caused an immediate slump are notably underperforming the Index, and (ii) a much deeper correction ought to occur first in the broader market indices that materially outperformed Nifty50 in the past one year.

YTD2024, the benchmark Nifty50 has been supported mostly by the energy, healthcare, and auto sectors; while the heavyweight financials and consumers have massively underperformed. Though there are no significant triggers for a strong recovery in the financial and consumer sectors, a technical upmove cannot be ruled. This might result in a Nifty50 spurt before a correction sets in.

It is pertinent to note that a correction in the outperforming energy (ex-Reliance), auto, and healthcare sectors may not trigger a material correction in Nifty50, as the weightage of these sectors is not enough to trigger a major correction in Nifty50.

I guess that a deeper and more meaningful correction is more likely to occur in a traditionally weaker market period of May and June. I say so for five simple reasons.

a)    The number of large daily movements in benchmark indices on closing, as well as intraday basis, has increased substantially in the past month. This trend usually weakens the technical fabric of the market.

b)    There are clear category preferences visible in investors' activities along with unreasonably higher valuations in preferred categories. Normally a sign of a bubble in the market.

c)     Policy focus is driven by the market and the market is obsessed with policy focus. Usually, this harmony of market and policy is unsustainable - because it leads to misallocation of resources and higher volatility due to political events.

d)    Despite higher interest rates, a larger number of household investors are driven to equities. Logically, it is an unsustainable trend.

e)     The household investors’ participation in highly speculative options trading is scaling new highs. Historically this trend has never ended well. (more on this tomorrow)

f)      Policy rate cut speculations, that had initially driven the global equity rally, are losing steam. A hawkish Fed in March might adversely impact the risk-on mood.

I will be the happiest person on this earth to be proven thoroughly wrong on this count. But till it happens, I shall hold this view and stay cautious on my equity portfolio.