Markets seeing a pull-back rally. Should you sell?

This is not the first time in recent history that the markets have seen a sharp intra-day upswing that has taken the S&P BSE Sensex close to the 21,000 mark. In fact, the gush of liquidity of over $16-billion in calendar year 2013 has taken seen the S&P BSE Sensex cross the 20,000 mark six times during this period; and one occasion, it did touch an all-time high after nearly six years in early November.

The rally on Monday came on the back of renewed optimism that the US Federal Reserve (US Fed) may continue its $85-billion-a-month bond buying programme (quantitative easing, or QE) as the US economy and labour market are both performing far short of their potential, and that recovery needs to be stronger before the US Fed will reduce QE. Also adding to the sentiment was the Reserve Bank of India’s (RBI’s) renewed resolve last week to tame inflation and check the rupee’s slide against the US dollar.

On Monday, both the benchmark indices – the S&P BSE Sensex and the CNX Nifty – surged nearly 1.6% each on broad-based buying that saw high beta names gain ground. Sectorally, S&P BSE Capital Goods index and the banking index – S&P BSE Bankex logged gains of nearly 2.4% each in intra-day deals. BSE FMCG, Oil & gas and IT (information technology) sectors were also among the top gainers that moved up between 1.4 – 1.9%.

“The trigger for the market rally came in last week with the Reserve Bank of India (RBI) taking proactive stand yet again as regards cooling the currency. There were ample indications last week that the flow of FII (foreign institutional investors) money will again come back with force. Also, we’ll have a clearer picture on the outcome of State elections and most FIIs, I believe, have concluded that in case there is a change, it would be a pre-cursor to the General Elections in scheduled for 2014,” said Deven Choksey, MD & CEO, K R Choksey Shares and Securities.

“As regards banking stocks, investors are now getting an indication that inflation will remain under control; and as a result, interest rates will also remain under check. The RBI is now proactively managing the Monetary Policy. The two biggest culprits in the banking space – the mark-to-market (MTM) provisioning on the bond yield portfolio and the non-performing asset (NPA) portfolio provisioning – have seen their worst and things can only improve from here on. A number of stocks are available at around 1x price-to-book value (P/BV),” he added.

Says Shardul Kulkarni, senior technical analyst at Angel Broking: “Going forward 6,180 is the next important hurdle for the CNX Nifty. A breach on the higher side can take it to 6,220 or higher. But my sense is that this is a pull-back rally which is likely to exhaust at some point in time. I would look to sell in the current market. Stock selection is extremely crucial at this juncture. My top sell recommendations on a rally are State Bank of India (SBI), BHEL and DLF.”

Chandan Taparia, derivatives analyst at Anand Rathi, on the other hand, feels that one can use a correction in the markets as a buying opportunity.  

“Nifty has slipped sharply from 6,383 levels and has started to move up on the back of positive domestic and global cues. Key levels for the Nifty are 6189, 6239, 6250 and there is support on the downside at 6135 level. Maximum puts are at 6,000 strike price and because of this; the markets (Nifty) are not slipping below the 6,000 mark. On the other hand, the maximum call strike is at 6,300 level followed by 6,200. The Nifty will face some resistance at 6,250 levels,” Taparia says.

“Auto stocks like Mahindra & Mahindra (M&M), Tata Motors and Maruti Suzuki are looking positive as per the F&O data. Ranbaxy in the pharma space; Kotak Mahindra Bank, YES Bank in the banking pack are looking positive. However, Bajaj Auto, CESC and Coal India could see some profit booking kick-in,” he adds.

Points out Andrew Holland, CEO, Ambit Investment Advisors: “I think overall, the picture for Indian markets still remains positive as the economic growth is likely to pick up next year. Valuation for the Indian market is close to its historical average and the broader market looks cheap. I expect flows into the Indian equity markets continuing and picking up in the second half of the next calendar year,” he says.