How far can this rally sustain? Analysts believe record high could be in the offing

NEW DELHI: Fundamental analysts may be complaining about a disconnect between the real economy and the stock market rally, but technical analysts on Dalal Street believe the ongoing rally has legs and the benchmark indices may go on to form new record highs.

Analysts at ICICI Securities said their bottom-up prognosis indicated bullish undertone for Nifty constituents that carry 85 per cent weightage, and it looked like the index is on its way to hit a high at 12,604 level. That would mean an upside of about 7 per cent from current level.

“We expect Nifty to retest its all-time high of 12,400 by March 2021. Sectorally, IT, pharma, insurance, auto and chemicals are expected to extend the outperformance, while consumption and banking are expected to catch up from here on,” the brokerage said in a report.

Data compiled by Accord Fintech showed Nifty Pharma has been the top sectoral gainer since March lows, jumping 84 per cent. Nifty Auto, Nifty Metal, Nifty IT and Nifty Media indices have gained 60-82 per cent.

Nifty has surged 54 per cent in the same period, retracing about 80 per cent of its fall from the highs of January-February. This has been in line with the gains in S&P500 and DAX, which have also retraced more than 80 per cent of their falls. Analysts expect the positive correlation between Indian and major world indices to continue.

Major technical signals also indicate bullish movement to continue. Both — Nifty and Sensex — have formed ‘Golden Crosses’ on the daily charts, which happens when the 50-DMA crosses over the 200-DMA, forming a string of support levels.

“We expect further upside towards the 11,800-12,000 zone going ahead, while trend support is seen at 10,900. Banking stocks look attractive while metals and auto stocks can be accumulated on dips. We also continue to remain positive on the broader markets,” said Sahaj Agrawal, Head of Research for Derivatives at Kotak Securities.

In the ongoing rally, the broader market has outperformed the headline peers. Nifty Smallcap Index has surged over 82 per cent from its March low while Nifty Midcap has advanced more than 60 per cent. Analysts have advised investors should utilise every dip to accumulate quality midcap companies.

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“In the Nifty500 index, the percentage of stocks above 200-DMA, which is a gauge of durability of uptrend, has crossed the important threshold of 60 per cent. In all the previous three occasions, such a reading has led to an extended rally towards all-time highs,” said ICICI Securities.

Among the Nifty stocks that the brokerage believes Cipla, TCS, Asian Paints, Bharti Airtel, Hero MotoCorp, M&M, HDFC Life, Dr Reddy’s are likely to outperform from here on.

However, not everyone is equally bullish about the market. Some technical analysts think the market would consolidate once the bulls get tired and the liquidity-fuelled short covering gets over.

“Sooner than later, this market shall slip into a prolonged multi-month consolidation phase with a sharp correction of 10-15 per cent on the downside. Once the current large pullback rally ends, then the current market phase may mimic that of the consolidation phase witnessed in 2010 to 2013,” said Mazhar Mohammad, Chief Strategist – Trading Advisory at Chartviewindia.in.

“Hence, based on our long-term trend studies, our preferred view is Nifty will not have a sustainable new high for another 12 months,” he said.