Sensex gains 700 points in two days; will the market rally last?

It has gained 826 pts in 2 days, global markets have also risen but experts doubt if this is sustainable and for how long

After falling five per cent in the first four trading days in September, the markets gained ground in the past two sessions. The pullback rally in these two sessions has pushed up the S&P BSE Sensex by 826 points, or 3.3 per cent; the CNX Nifty has rallied 260 points or 3.4 per cent.

Global markets, too, moved up during this period. The Nikkei rallied 7.2 per cent and saw its biggest single-day gain since 2008 on Wednesday. The sentiment was boosted after Japanese Prime Minister Shinzo Abe said he would seek to lower the corporate tax rate by at least 3.3 percentage points next financial year.

Meanwhile, Chinese authorities continued to unveil measures to stem their market rout. The government has proposed to halt all trading on its stock markets if they move five per cent or more. And, to promote long-term investment, Chinese investors holding a stock for more than one year will be exempted from a five per cent dividend tax; those who have held a stock for one month or less will have to pay 20 per cent of the dividend they receive as income tax when they sell the scrip.

“The recent moves by Chinese authorities suggest the currency might not be devalued more. The move on dividend tax is also a sentiment booster. What is needed are fiscal measures to get people to spend more and get the economy back on track. The possible hike in interest rates by the US Federal Reserve (Fed) is already factored in by the markets,” says Andrew Holland, chief executive, investment advisory, Ambit Capital.

Strategy

How long will this up-move last and is the worst behind us?

Technical analysts suggest that considering the daily chart structure, we might see an extension of this relief rally. However, they caution, traders shouldn’t be aggressively participating in this bounce, as they are not interpreting this as a trend reversal sign.

Explains Siddarth Bhamre, head of research (equity derivatives and technical) at Angel Broking: “I am keeping an eye on the liquidity and the global scenario, instead of watching key levels. Foreign institutional investors (FIIs) bought around Rs 1,000 crore worth of index futures but the cash market selling continues. This is not giving us comfort. I am not optimistic regarding this bounce-back continuing for too long, though the implied volatility might dip further. This is still a ‘sell on a rise’ market for us.”

Adding: “For the Nifty, 7,850–7,900 is a resistance zone and there is support at 7,500 levels. Having said that, the resistance levels can also get breached in case of a strong bounce-back. One should not be surprised if the Nifty continues to move up another 100 points.”

G Chokkalingam, managing director, Equinomics Research & Advisory, expects the markets to remain volatile with a downward bias till September 17, i.e till the Fed concludes its meeting. However, strong support by the Chinese government to its equity markets has led to a solid recovery in not only Chinese markets but across the world, he says.

“Having said that, concerns still remain in terms of slowdown in China and severe deficit in rainfall on the domestic front. Beside the MNC (multinationals') stocks, we also suggest buying Engineers India, MCX, Genus Power, Hindustan Zinc, Coal India, Bombay Burmah Trading Corporation, Axis Bank and KCP,” he added.

Ajay Bodke, chief portfolio manager at Prabhudas Lilladher, suggests playing the interest rate theme. “Expected pick-up in aggregate demand and likely lowering of interest rates lead us to bet on themes like interest rate-sensitive stocks and investment cycle revival through sectors such as automobile and auto ancillaries, banking and finance, capital goods and construction,” he says.

Adding: “Selective bottom-up plays in pharmaceuticals and information technology also figure in our portfolios. We remain underweight in consumer staples, as the valuations seem daunting. Our preference in the resources sector is on domestic cyclicals like autos and cement.”