Why investors cheering the current stock market rally need to be more cautious than before

Published: July 11, 2020 5:08 PM

The recent moves in the market were driven by liquidity mostly in the high-quality stocks. Since March, many growth sectors were beaten down on account of uncertainty regarding macro-economic growth.

Given the fact that the rally is fed by liquidity, investors should be nimble enough to save themselves from any sign of distress.

By Ravi Singh

The recent moves in the market were driven by liquidity mostly in high-quality stocks. Since March, many growth sectors were beaten down on account of uncertainty regarding macro-economic growth. However, with the unlock procedures being undertaken globally, the rally in heavyweight stocks fuelled by the stock-specific news such as in Reliance Industries and HDFC has supported the markets up move. While the recent market rally has been impressive, investors need to be very cautious going ahead. Market valuations have once again reached a higher end of the range so quickly. While the lead economic indicators have bounced back sharply in the month of June, it could be attributed to a favourable base effect. 

The risks of the second wave of the virus are increasing day-by-day.  Also, the number of new cases are refusing to subside, nevertheless, recoveries have picked up the pace. One big risk for the market could be the second dip in economic activity because the problem of labour shortage has not been addressed amid rising virus cases. Also, those plants which have started operations at lower capacities are prone to another lockdown as positive cases in these units are on the rise. Given the fact that the rally is fed by liquidity, investors should be nimble enough to save themselves from any sign of distress. Advice is to continue to remain invested in large-cap high-quality stocks and a portion of the portfolio is to be invested in defensive sectors. 

Technically, looking ahead for the short term, 11000 levels hold as resistance for the benchmark index Nifty50 above which the index may likely witness upside towards 11200 levels on a broad range. On the lower side, the index may find support around 10700 followed by the 10500 levels, which has seen a significant built up in open interest. The index is having strong support around the 10470-10500 zone and any sustenance below it may negate the current bullish sentiments in the market and may navigate lower in the near future. However, volatility is likely to persist until the growth in Covid-19 cases subsides.

(Ravi Singh is the Vice President and Head of Research at Karvy Stock Broking. Views expressed are the author’s own)

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