Markets have been on a roll for the last couple of weeks. The equity barometer the Sensex is up over 14% from its 52-week low of 50,921.22 that it hit on June 17, 2022.
The market benchmarks clocked such strong gain despite the fact that the concerns over a looming recession, sticky inflation and rate hikes persist. In simple terms, the worst is not over yet.
So, why did the market rise?
Probably because the market has factored in most of the short-term negatives and even a small positive trigger is making the market happy.
"At this point, it is clear that the short-term negatives have been priced into the market and any positive news from the Indian market, as well as the international market, will have a positive impact on the market," Yash Gupta, Equity Research Analyst of Angel One said.
The market has some comforting points. The fears of a recession and weak economic indicators have fuelled hopes that the magnitude of rate hikes will not be as high as it was anticipated earlier. Besides, the valuations of the market have come down after the recent correction. Moreover, the return of foreign portfolio investors has also underpinned sentiment. Some analysts say since India's economic outlook is better than many of its peers, it is also giving hope to long-term investors.
Analysts expect more upside in the market in the short term and they advise picking quality stocks at reasonable valuations.
The FOMO factor
The great American poet Emily Dickinson has written: "Hope is the thing with feathers."
Hope is one of the biggest motivating factors for the market. There is hope that the US Fed won't lift rates aggressively; there is hope that the global economy will show resilience and bounce back; there is hope that the Ukraine war will end soon and inflation will cool off; there is hope that the US and China will not see a flare-up of tensions due to the US House of Representatives Speaker Nancy Pelosi's visit to Taiwan.
At present, it is only hope which is keeping the market aloft.
Even as the concerns persist, there seems to be some sense of FOMO (fear of missing out) in the market, as the market looked attractive after the correction and many investors believed it was time to go long.
"FIIs are turning buyers after relentless selling for nine months and there is FOMO feeling among investors as fundamentally Indian markets are much better placed compared to many global peers," Santosh Meena, Head of Research, Swastika Investmart, pointed out.
"Partly FOMO is the reason. However, over 20% oil price correction, steep fall in metal prices and normal monsoon give comfort that perhaps peak inflation is behind us," G. Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory, observed.
Chokkalingam believes the market may return to volatility with a downward bias by September or October. US FED balance reduction plan still remains a key risk factor for the emerging markets including the Indian market, he said.
What should you do?
Stay cautious and maintain quality bias. Analysts expect the market to be rangebound with an upside range of 18,000-18,300 and a downside range of 15,800-16,000. So, don't assume it is a bull market and focus on stock selections with good fundamentals, reasonable valuations and a healthy growth outlook.
Brokerage firm Edelweiss Securities underscored that historically, bull markets begin only after significant earnings downgrades of more than 15%, valuations cheapening to 1SD, more than 100bp fall in US 10-year bond yields, and Fed’s dovish pivot. Until then, markets stay subdued (with bear market rallies), growth concerns dominate and falling commodities are a pain, not a panacea.
At present, these milestones are distant, said Edelweiss Securities.
"The downgrade cycle has just begun, valuations are not cheap yet and the Fed’s inflation focus (lagging indicator) risks growth overkill. These warrant caution with a new Nifty low likely in 2022. Maintain quality bias. Easing of supply constraints poses an upside risk while credit events may cause capitulation," Edelweiss Securities said.
Disclaimer: The views and recommendations made above are those of individual analysts and brokerage firms and not of MintGenie.