Sensex rallies 305 pts to close above 36,000; 5 factors driving market uptrend

The Nifty after falling more than 10 percent from its record highs has showed a gradual rebound of more than 9 percent. It is currently trading above 10,900 levels after hitting a 2018 low of 9,998.05 in March.

The 30-share BSE Sensex rallied 304.90 points or 0.85 percent to close at 36239.62 and the 50-share NSE Nifty gained 94.40 points or 0.87 percent at 10,947.30.

Experts said the market has taken all negatives into its stride: global trade tensions, carnage in mid and smallcaps, interest rate hike concerns, et al.

"The market is trading rock steady right now despite rising oil prices and global trade war tensions. Some investors were a little bit circumspect after the stellar rally in 2017. I am not bearish right now, but maintain a selectively bullish bias," said Dipen Sheth of HDFC Securities.

However, Vivek Ranjan Misra, Head-Fundamental Research, Karvy Stock Broking, said the Nifty is currently trading at 12-month forward price-to-earnings ratio of 18.3 times, which can hardly be described as ‘cheap’.

Here are five factors that have been driving this rally:

Last Friday, US imposed tariffs on $34 billion Chinese goods. China immediately retaliating with duties on the same amount of US products. Experts said that concerns over a looming trade war that has dominated headlines for the past one month seem to have eased for the time being and is completely priced in. "That is driving the relief rally or recovery in global markets."

Globally, investors have shifted their focus from trade tensions to June earnings. Experts said hopes of a major earnings recovery in the second half of FY19 is driving the market rally.

“We have seen seeing a significant improvement in the demand environment over the last 4 quarters, which is evident from the revenue growth of Sensex companies, up 10 percent year-on-year compared to average growth of 2 percent YoY over the past 12 quarters,” ICICIDirect said in a note.

It expects revenue growth to further accelerate to 15 percent YoY in Q1 FY19e, given the broad-based pick-up across sectors, except telecom. "Going forward, with much of the asset quality pain already recorded, bankruptcy resolutions underway in the banking space, firm rural demand and pick-up in industrial activity, we expect earnings to stage an impressive recovery, growing in excess of 20 percent CAGR over FY18-20e,” it stated.

The carnage in mid-and smallcaps was the major cause for concern. Small and midcap indices have corrected by around 25-30 percent, while some stocks have plunged over 50 percent. But they seem to be nearing their bottom, Vivek Ranjan Misra, Head-Fundamental Research, Karvy Stock Broking said.

Nandish Shah, Technical & Derivatives Analyst at HDFC Securities, seconded Misra. "Though the positional set-up for the midcap and smallcap indices is still bearish, with lower tops and bottoms, both indices seem to have reached the oversold zone, which could trigger a relief or pullback rally in coming days," he explained.

Depreciation in the rupee versus the dollar led to a correction in the market, but that seems to have stabilised now. The Indian unit touched an all-time low of 69.09 against the dollar in June, but since then it has been trading in a range of 68-69.

"The rupee depreciation should be seen largely in the context of depreciation of emerging markets (EMs) and strengthening of the dollar. This is on account of higher US rates. A few additional factors are driving the trend, the first is the risk of a widening current account deficit on account of oil prices. Secondly, with general elections approaching political risk is rising," Vivek Ranjan Misra said.

"While a big part of the move is probably done, expect the currency markets to remain weak, he added.

The Nifty reclaimed the 10,900 mark for the first time since February 1, which means it took more than 5 months to hit that level again. It also surpassed its near term resistance level of 10,920 today and hit an intraday high of 10,922.30.

Technically, this indicates that the upward move could continue if the index holds around 10,900 levels for few more days.

"The Nifty managed to close above its crucial resistance level of 10,800 on Monday, derived from the downward sloping trend line adjoining the all-time high of 11,171 (January 29) and the intermediate top of 10,929 (May 15), indicating a bullish trend reversal," Shah said.