Nifty up nearly 10% since February; should investors buy more or book profits?

Nifty50 has rallied over 1,000 points from its recent low of 10,585 (recorded on February 19) to around 11,600 levels (registered on April 23). As we head towards expiry, volatility has increased.

Nifty50 touched a fresh record high of 11,856 last week and since then bulls have not been able to regain control on D-Street.

The India Volatility Index, the fear gauge for domestic equities, shot up to a three-year high of 24.64 on April 23 amid rising uncertainty over the new government formation and soaring crude oil prices.

As we approach elections, the uncertainty will increase and there is a higher probability of a further decline in markets, suggest experts. Investors are advised not to initiate any new positions, and wait for some dip to enter markets.

“Nifty has breached crucial support of its 13-days EMA on closing basis for the first time Since March 2019. There have been negative divergences in the various oscillators on Nifty daily charts even when Nifty was maintaining higher tops and higher bottoms,” Vinay Rajani, Technical & Derivative Analyst at HDFC securities told Moneycontrol.

“Instead of buying at current levels, it would be advisable to wait for a further slide in the Nifty. Nifty is heading for the downside target of 11,370 and 11,220, which happens to be 38.2 percent and 50 percent retracement levels of the entire rally which we saw from 10,585 (19 Feb low) to 11,856,” he said.

Rise in crude oil prices will not be a deal breaker but it would infuse volatility and cap any meaningful upside, suggest experts.

“The Indian markets have rallied smartly in the last two months largely led by rising optimism amongst market participants on the incumbent government returning back to power. Until the central election outcome, indices could exhibit high volatility and choppiness,” Jayant Manglik, President, Religare Broking Ltd told Moneycontrol.

“Further, other factors like rising crude oil prices due to a possible tightening of sanctions on Iran could keep the markets nervous in the near term,” he said.

Overseas investors have pumped in a net sum of Rs 11,012 crore into the Indian capital markets in April so far amid easing liquidity conditions globally.

Foreign portfolio investors (FPIs) were net buyers for the previous two months as well, infusing a net amount of Rs 11,182 crore in February and Rs 45,981 crore in March 2019.

The recent rally was led by strong FII flows and some consolidation, especially ahead of the event, will be positive for D-Street. It would help the index to form a strong base. Thanks to a gush of liquidity, market has largely ignored the deteriorating macros and lower earnings growth which could come from non-banking stocks in Nifty.

At the recent peak, Nifty was trading at 18.5x forward PE, which leaves very little room for any further re-rating, suggest experts. Deteriorating macros, rich valuations as well as a slowdown in many sectors are a perfect recipe which could lead to a fall in markets.

“Nifty has made an impressive rally in the past two months from lows of 10,585 right up to highs of 11,856. According to the mean reversion theory, since the up-rally was steep correction was imminent,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.

“However, this is just the beginning and market participants must let correction by time to unfold and wait till elections before taking any decisive bets,” he said.