The National Stock Exchange's benchmark index — Nifty — is now more than 5 percent down in May with more than half of the month still left.
Brokerage firm ICICI Direct, however, is of the view that a 'technical' pullback is on cards.
"Nifty reversed lower after making highs of 18,115 tracking a host of negative global developments. Hence, contrary to our expectation the Nifty breached the key support of 16,800 and drifted southward as an unscheduled rate hike announcement by RBI followed by US Federal Reserve rate hike dented market sentiment," said ICICI Direct.
Going forward, key support for the Nifty is at 15,600, said the brokerage firm. It expects the Nifty to hold the 15,600 mark and gradually stage a pullback rally towards 17,100 in the coming months. As on 12.49 pm, Nifty is trading at 15, 823 points, down 2.13%.
So, dips should be attributed to constructing a portfolio by accumulating quality stocks in a staggered manner.
The brokerage said the last four weeks’ corrective move hauled daily and weekly stochastic oscillator in extreme oversold territory (currently at eight and 16, respectively). On earlier occasions, during CY18-20, after approaching such lower reading below 20, markets have witnessed a pullback.
A technical pullback is a signal indicating a temporary dip in price, but from which a rebound can be expected, Investopedia says.
Over the last two decades, in a secular bull market, barring two instances average intermediate correction in Dow Jones, and Nasdaq indices have been around 15 percent and 25 percent, respectively.
"In the current scenario, we expect both indices to stage a bounce from oversold territory as they have already corrected 14 percent and 28 percent, respectively," ICICI Direct said.
The empirical evidence displays that in the last three cycles of the Fed rate hike, despite initial knee-jerk reaction post interest rate hike US and Indian equities have rallied over the medium term, the brokerage firm pointed out.
The Nifty midcap, smallcap indices are maintaining the rhythm since the calendar year 2006 of arresting secondary correction within 20 percent and 30 percent, respectively, in the framework of a structural bull market.
"Last five weeks correction hauled both indices to 50 percent and 61.8 percent retracement level of their CY21 rally amid extreme oversold condition, indicating impending technical pullback in coming weeks," said the brokerage.
Disclaimer: The views and recommendations made above are of the broking company and not of MintGenie.