Market ends in the green for three consecutive days. Is this a cusp of a trend reversal?

The three consecutive days of gains are no less than a great respite for investors at a time when the concerns over inflation, rate hikes and slowing economies loom while the end of the Ukraine war looks remote.

On May 30, the equity benchmark Sensex settled with a gain of 1041 points, or 1.90 percent, at 55,925.74 while the Nifty50 closed at 16,661.40, up 309 points, or 1.89 percent. The BSE Midcap and Smallcap indices ended 2.28 percent and 2.23 percent higher, respectively.

In the last three sessions of gains, Sensex and Nifty have jumped 4 percent while the overall market capitalisation of BSE-listed firms has jumped by ₹10.2 lakh crore.

A trend reversal?

It is early to say so, for the market has many points to worry about at present. The upcoming India GDP data, US FOMC meeting and RBI MPC meet in June and updates on the Ukraine war will dictate the trends of the market. However, some analysts feel that since most negatives are on the table for the market, investors are picking stocks at cheaper valuations at this point.

“With clarity now arising from last week's US FOMC meeting about another 50 bps rate hike in the next few months, the market seems to be taking in its stride the future rate hikes and is now seen reversing the bearish trend. While fears of global recession and a further rise in oil prices lurk, investors are currently engaged in buying after the recent free fall," Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities, observed.

"There is a near-term trend reversal," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"There is a view gaining ground that inflation has peaked in the US and, therefore, the Fed may hike rates less aggressively than the markets discounted. The rebound in the mother market, the US, is helping emerging markets like India too to rebound," said Vijayakumar.

He pointed out that in India, specifically, there are signs of selling exhaustion by FPIs and DII plus retail buying is effectively countering FPI selling. Some segments like financials are at attractive valuations and liquidity is chasing value stocks facilitating a smart market rebound.

Vinod Nair, Head Of Research at Geojit Financial Services is also of the view that the Indian market is witnessing a short term trend reversal.

"A near term trend reversal is visible in the domestic market, supported by valuation comfort and positive trend in the global counterparts. US Stocks were boosted on softening inflation worries which will be a crucial factor in deciding the tone of the upcoming Fed policy meeting," Nair said.

"The easing of long-running lockdown in China also helped in lifting the sentiments across Asian markets. The market is expected to have a positive run in the near term; however, the impact of central bank policies will be a key factor to be monitored," Nair added.

Inflation remains a concern for investors and as long as it remains elevated, the risk of aggressive rate hikes will keep haunting the market. Besides, elevated inflation is also likely to dent the prospects of corporate earnings in the current and coming quarters. All this could keep the market subdued.

"The outlook for earnings growth in the current year (FY22-23) is uninspiring for many sectors and is a concern. The earnings growth in FY22-23 and FY23-24 could moderate to a range of 10-12 percent, with the higher base of FY22 and a likely difficulty in the ability of corporates to pass on their higher costs (unless demand picks up strongly)," said Shyamsunder Bhat, CIO at Exide Life Insurance.

If we talk about the technicals, the short covering has been ruling the markets for the last two-three days after the recent fall.

What should investors do?

For now, buy on dips, say analysts. Stick to quality stocks and sectors such as financials, IT and even auto may be rise for investment.

"The banking sector is well-poised and is likely to do well in terms of margins in a rising interest rate scenario (as loans are likely to be repriced higher at a faster rate than deposits) and with credit costs under control," said Bhat.

"The auto sector has borne the brunt of metal price-led inflation over the past few quarters, and could now become a beneficiary of the reversal in metal prices. We also believe that the recent sharp correction in IT stocks has resulted in valuations becoming reasonable. The recent sharp correction in some of the sectors has resulted in opportunities for long-term equity investors who are willing to look beyond the next couple of years," Bhat added.

Analysts point out that buying on dips should be the preferred strategy in the short term as fear of missing out (FOMO) is ruling traders’ mindset.

As per Prashanth Tapse, Vice President (Research), Mehta Equities, all eyes will now be on India’s GDP numbers to trickle in on May 31, followed by GST data for May-22 along with Manufacturing PMI numbers that will come on June 1. May Auto sales numbers will trickle in on the same day.

"With short covering seen in the last two three days, we believe markets are probably discounting a possible better than expected economic data," said Mehta.

Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.