A Promising Scenario Indeed!
The benchmark indices have been scaling new highs every week for the past six weeks at least. This reminds us of a verse from the poem by Maya Angelou, ‘Still I Rise’, which goes thus: “Leaving behind nights of terror and fear, I rise, into a daybreak that’s wondrously clear, I rise, bringing the gifts that my ancestors gave, I am the dream and the hope of the slave, I rise, I rise, I rise.”
The awe-struck recovery in the markets, from deep corrections in March, must have shell-shocked most market participants. Many who lost their nerve and sold off in summer are wondering whether it’s time to “buy” again. Many who remained invested are wondering whether it’s time to “take profit off the table”. So, in short, the market participants are in a state of flux, while on the other hand the FIIs seems to have a much clearer vision on the Indian equities as they have continued their love affair with them. Month till date they have poured a whopping Rs 33,657.90 crore. Moreover, there has not been a single day where they have turned net seller in this month.
But the million dollar question which everyone has on the top of their minds is whether we are in a new bull market since April 2020 and if the stock prices have a long way to travel north before any meaningful correction sets in. Or is it then a bear market rally that is normalising the steep fall in March 2020 in the wake of total lockdown announced post the outbreak of the pandemic?
The market structure looks very promising after the formation of higher high and higher low is seen on the chart and with volatility also receding from its elevated levels. Also, there is stability in volatility. Stability of volatility over time is a good thing because it allows market participants to estimate maximum potential gains and losses with greater accuracy. However, one thing which is concerning everyone is the alarming valuation of the market since it is trading at a historic valuation as per the traditional matrix of valuation indicators.
Yes, the valuation appears to be alarming but this is only when we look at it through the perspective of ‘half glass empty’. On the other hand, with the perspective of ‘half glass full’, the valuations don’t appear to be in dangerous territory to us, especially when seen against the background of where the cost of capital is and also the lack of prospects in other asset classes. As and when earnings play catch-up in the coming year, the same cynics will pronounce the valuations as realistic.
One needs to understand that no bull rally ever expects to have all ticks marked in its favour. The opinion is always divided. Also, if we analyze the structure of the markets since 2008, Nifty witnessed a drastic fall of nearly 65 per cent and thereafter in the next two and a half years the markets recorded a whopping 181 per cent gain from the lows of October 2008. In the current recovery phase the index has recorded gains of 83 per cent and we continue to remain bullish about equity markets in the long run. The period of consolidation and correction would be part of the long bull run but this correction and consolidation would offer an opportunity to buy good stocks.
In this frenzy of the markets, there is good news for traders as from January 11 the NSE would introduce futures and option of Nifty Financial Services index for trading. This index comprises 20 stocks as compared to Bank Nifty which comprises 12 banking stocks. The Nifty Financial Services index is designed to reflect the behaviour and performance of the Indian financial services’ market which includes banks, HFCs, NBFCs, insurance companies and other financial service providers. Market participants would be itching to trade in this new instrument.
