August ended well for the domestic markets despite volatility and heightened concerns over aggressive rate hikes and a recession.
Equity benchmarks the Sensex (up 3.4%) and the Nifty (3.5%) rose more than 3% each in August, extending their gains into the second consecutive month. In July, both indices had jumped about 9%.
Mid and small-caps outperformed their larger peers; while the Nifty Midcap 100 index rose 6.2%, the Nifty Smallcap 100 index clocked a gain of 4.9% in August.
Metals and PSU banks hogged the limelight. Nifty Metal and PSU Bank indices jumped 8% each in the month under review.
On the other hand, Nifty IT ended as the top laggard among the sectoral indices, falling 2.6% in August. Nifty Pharma (down 0.6%) and Media (down 0.5%) ended marginally lower. Rest all ended in the green.
What is the near-term outlook?
The domestic market showed a strong recovery of nearly 3% on August 30, a day after it suffered strong losses of over a percent. The rebound could be attributed to the resilience of the domestic market underpinned by hopes that the Indian economy may outperform emerging markets this year.
However, concerns over rate hikes and rich valuation remain a worrisome overhang. Analysts expect some more correction in the market.
"It is important to appreciate the fact that valuations in India are high. Nifty is trading around 20 times forward earnings. MSCI India is trading at a 100% premium to emerging market rivals. This calls for some caution. There is a possibility of further correction in the market in the near term," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
On the technical front, the Nifty ended at the highest point on the monthly chart and the index can face resistance above 17,950.
"Nifty has nullified the bearish signals from the down gap created on August 29 and has filled that down gap. It has closed at the highest ever on monthly charts. It will now face resistance at 17,965-17,992 band while 17,522-17,623 band could offer support," said Deepak Jasani, Head of Retail Research, HDFC Securities.
Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities believes due to temporarily overbought conditions, we may see range-bound activity in the near future.
"For traders 17,550 or the 20-day SMA (simple moving average) could be an important level to notice. Above the same, the index could accelerate to the level of 17,800-17,850. On the other hand, an uptrend below 17,500 would be weak. If the Nifty crosses the 18,000 level then the index could surge to 18,300-18,350,” said Chouhan.
What should you do?
Volatility is expected to prevail while the market will take cues from global trends and macroeconomic data. Analysts advise caution and avoid aggressive bets.
"Markets have completely engulfed the recent decline with a decisive up move however sustainability would be critical for a further uptick. While the global cues are still mixed, upcoming domestic data like core sector and auto sales numbers will be on the radar for cues. We recommend maintaining a positive yet cautious stance and suggest preferring top-performing sectors like banking, financials, auto, FMCG and realty for long positions," said Ajit Mishra, VP - Research, Religare Broking.
Vinod Nair, Head of Research at Geojit Financial Services is of the view that although the markets are currently at premium valuations, continued support from foreign investors aided domestic stocks to inch higher. Sectors in swing with the progress of the domestic economy should be able to do well compared to the rest.
Disclaimer: The views and recommendations are those of individual analysts or broking firms, not MintGenie.