Modest Pullback Likely To Occur In The Short-Term!
As anticipated in the last week’s Editorial, it’s time for the bulls to take a breather. Majorly, the stock market was seen juggling between the bulls and the bears and as a result of this, equity markets got sidelined.
Nifty has rallied 27 per cent since the announcement of the nationwide lockdown by Prime Minister Narendra Modi on March 24. Along the similar lines, between the onset of the lockdown and June 11 closing, Nifty 500 has jumped 28 per cent while, Nifty Mid-cap and Small-cap surged 27 per cent and 32 per cent, respectively.
Hence, it will not be wrong to say that small-cap companies have actually outperformed Nifty during the lockdown period. Surprisingly, this segment was expected to suffer the most by COVID-19 induced lockdown.
By looking at one side of the coin, many would jump to a conclusion that this is clearly a liquidity driven rally, which has resulted into this crazy moves of small-cap companies with no fundamental improvement. However, on analysing the other side of the same coin, one would agree to the fact that these small-cap companies did not actually participate whole-heartedly in the bull-run, which was witnessed during the recent time.
The valuations have become the talk of D-Street once again with a vertical rise from the lows of March. When it comes to valuation, the P/E ratio is one of the most frequently used multiple. Nifty 50 PE is now at 23.90 and this shows that the valuations are on a higher side. However, by looking at another parameter, which helps us to gauge market valuation is the price-to-book value (P/B), which is at 2.89X; much below the five-year average of 3.40X.
Hence, this indicates that there is still room left on the upside. Time and again, the debate about the valuations pops up but as the big bulls of Indian markets have said, “If I heard economists all my life, I would have never made money.” It has also been said, “With all due respect to economists, market moves and economy can move differently at different times.”
Meanwhile, in the global markets, Dow and S&P 500 have pulled back from their recent swing highs as the traders opted to take profits off the table after an astonishing run-up. However, the tech-heavy index Nasdaq Composite reached new milestone as it marked its first-ever close above 10,000 mark. Besides, the mostclosely watched global event was US Fed meet outcome and its decision to keep its interest rates unchanged while at the same time, signalling that they intend to hold interest rates near to zero until at least 2022.
The stock markets worldwide have staged an extraordinary rally over the past few months. While, we like seeing the stocks rise, we are also witnessing the emblems of overbought and stretched sentiments in the market indicators. We wish the long-term prospect remain in the pink of the health but we also think that a modest pullback may be looking increasingly probable too cool off this overbought conditions.
During this pullback phase, the zone of 9,700-9,800 is likely to act as a strong support level and investors/traders should actually utilise this dip to buy the stocks that have seen an outperformance relatively in the recent times along with, strong financials.
