Liquidity-driven rally since September 2013 has seen the benchmark indices – the S&P BSE Sensex and the CNX Nifty – gain nearly 10%. Renewed optimism that the US Federal Reserve (US Fed) will continue with its bond-buying programme and economic reforms unveiled by China in the third Communist Party Plenum saw these indices record their highest single-day gains on Monday since October 18.
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.
Despite the dream run, the markets have failed to cling on to higher levels with investors booking profit at regular intervals. 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.
But is the recent rise a suckers rally or a bull trap?
A suckers rally is a temporary rise in a specific stock or the market as a whole. Such a rally occurs with little fundamental information to back the movement in price and may continue just long enough for the "suckers" to get on board, after which the market or specific stock falls.
Says Sahaj Agrawal, deputy vice president – derivatives (PCG) at Kotak Securities: “There could be some consolidation in the markets but the overall trend remains positive. I am of the opinion that this is not a bull trap or a suckers rally and this up move is here to stay. Once the Nifty is able to take out 6,350, there can be a further upside. I recommend buying high beta frontline stocks, especially from the banking and capital goods sectors.”
Dipesh Mehta, derivative research analyst, Nirmal Bang is of the opinion that the Nifty can go up to 6,280 (F&O level) and then profit booking can kick-in. “I expect metal and banking stocks could see some profit booking at that level. I don’t think the current up move can be termed as a suckers rally. Even if you see the OI (open interest), it has been rising continuously. It is not the case where in the shorts are getting covered and there is a panic in the market. There are fresh longs coming in to the system,” he says.
Adding: “Significant addition in Put OI (open interest) build up at 6200, 6100 as well as at 6000 indicates dominance of bulls in the markets. On the contrary, additions in 6400 and above strike calls may provide resistance in the market in the days to come. Highest OI build-up is seen at 6300 Call and 6000 strike Put, to the tune of 6.38 million and 8.32 million respectively.”
Says Shardul Kulkarni, senior technical analyst at Angel Broking: “Going forward, considering current optimism and the positive crossover in daily momentum oscillators we expect the Nifty to test 6,250 – 6,305 if it can sustain above the 6,202 mark. Failure to sustain above 6202 over the next few sessions should be considered as the first sign of caution. On the flip side, 6,141 – 6,110 may provide decent support for the Nifty in the coming trading sessions. 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. He likes Mahindra & Mahindra (M&M), Tata Motors and Maruti Suzuki, Ranbaxy, Kotak Mahindra Bank and YES Bank. He expects profit booking in Bajaj Auto, CESC and Coal India.