The benchmark Nifty retraced to it all time high level recorded on 14 January 2020. It erased all the losses incurred due to a disappointing budget (from market expectations perspective) and outbreak of Covid-19 pandemic leading to a nationwide shutdown. In a year full of disappointments and despondency, this small and seemingly irrelevant event brought cheers and ignited hope for a better new year. Not to undermine the enthusiasm and positivity around the event, I would just like to highlight three small points:
1. On a longer horizon, after spending a decade in a flat channel, equity markets had been broadly moving higher in a widening channel since 2003. There could be multiple reasons for this strong up move, punctuated with multiple deep corrections. However, if we have to narrow our search, I would list the following three reasons as the primary drivers of markets:
(a) Mostly easy monetary policies of the global central bankers.
(b) Change in valuation dynamics due to dominance of technology and innovation in business rather than the conventional man & material factors of production.
(c) Globalization of markets due to digitalization & dematerialization (of money, trade & commerce, securities, material, labor, information, etc.)
There is no reason to believe that this widening channel will contract or get sustainably violated anytime soon. Though there could be some temporary violations on either side like 2007 and 2009. The important point to note however is that going forward, as the channel widens further, the market moves could be even larger and volatile. The investors and traders therefore need to brace up for that.
2. The retracement of Nifty to its all time high is led by only two sectors, viz., Information Technology (IT) (up 32%) and Pharma (up 44%). The financial sector which had driven markets to its all time high in January is still down 15% since 14 January 2020 level. PSU Banks in particular are down 44%. Public sector in general is down 30% from 14 January 2020 level.
Again there is no evidence to suggest that this trend may not prevail for next many months also.
3. The market breadth in this period is materially negative even though the broader market indices have not materially underperformed the benchmark. This implies huge divergence in performance in the broader market also.
