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Nifty may correct 8-10%, target 15000 soon, 15900 sooner; move to defensive, financial stocks

Nifty, Bank Nifty, Stock marketsThe current rally has helped investors pocket 118% returns in 73 weeks.
(Image: REUTERS)

NSE Nifty 50’s fall in the last two sessions could just be the beginning of a correction that could see the benchmark index fall close to the 15000 mark. Analysts at Bank of America believe that after the 118% rally in the last 73 weeks, there could be limited further runway for domestic equities. “We see risk of estimate cuts and with valuations at a peak, we expect markets to correct 9% near term with our Nifty target at 15000,” they said. Separately, Rahul Sharma, Director & Head – Research, JM Financial, also expects a correction to 15900 as early as in the next 2-3 weeks.

Muted IPO gains may hurt retail participation

Taper talks in the US, potentially higher US bond yields and US Dollar, consensus EPS cuts, and recent muted IPO gains that are negatively impacting retail investor sentiment could act as negative triggers for domestic stock markets, according to the BofA report. The current rally has been supported by retail investors, who have contributed to 64% of daily volumes since March 2020. However, with the recent muted listing gains of IPOs the interest pose a risk to levered retail positions, BofA said. None of the listings in August have soared more than 37% so far. CarTrade made its stock market debut today at a discount to IPO price.

“Our analysis of past bull and bear rallies suggests a typical run of about 75 weeks, providing an average 106% return. After such rallies, markets typically correct about 30% over a 4-month period,” they added. The current rally has helped investors pocket 118% returns in 73 weeks.

Prefer large caps, defensives

Analysts are advising investors to prefer large cap and defensive stocks. We remain overweight Industrials, given our expectation of multi-year capex upcycle, and Financials on likely peaking credit costs and a pick-up in credit growth,” BofA analysts said. On the other hand, the rally in metal stocks is expected to have run its course now and BofA analysts expect any tapering from the US Fed to weigh on commodities, hence materials have been downgraded to underweight. “Nifty’s valuation premium against mid caps and small caps has narrowed to just 9% and 3%, respectively, given sharp outperformance of mid and small caps. We expect this trend to reverse and with a cautious market view, prefer large caps near term,” they added.

Charts suggest near term correction

In the more immediate future, Rahul Sharma, Director & Head – Research, JM Financial, believes a correction to 15,900 could come in the next 2-3 weeks. “Nifty volumes are declining month after month as we go higher indicating lower participation at higher levels indicating a case for correction,” he said in a note. “Caution is advised below 16400 on Longs,” he added.

On the sectoral front, Rahul Sharma sees the FMCG sector making a comeback. “Historically, FMCG has done well as a defensive when markets have gone in correction/consolidation,” he said while picking Britannia, Hindustan Unilever, and Nestle as his top picks in the space. “Nifty IT Index has seen a relentless rally of 17 months. Monthly RSI entering into 2000 Bull run territory. Advise investors to keep booking profits at regular intervals and strictly be traders until correction happens,” he added. Metal stocks, Rahul Sharam said are at or below 50DEMA along with Bearish Divergences on Weekly Charts except for Tata Steel.

Correction may help Nifty scale 18000

A correction of 8-10% from the peak will only make the overall setup more attractive, said Rahul Sharma. Nifty finds support at 15,900 /15,500/15,000 levels. Meanwhile, post this correction, Nifty may have legs to run up to 17,500/18,000 by November this year, he said.

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