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A shallow rally, but market at record high. What's next?

A shallow rally, but market at record high. What's next?

A shallow rally, but market at record high. What's next?
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By Anuj Singhal  Aug 5, 2021 8:17:05 AM IST (Published)

Wednesday’s rally was not as broad based as Tuesday’s. In fact, four financial stocks contributed more than the rally itself on the Nifty.

The Indian market played as per the script on Wednesday. It was the second straight day of rally in large-caps, a massive catch-up play in Bank Nifty and a big decline was seen in the mid-caps and small-caps. Now, why do so many patterns play out over and over again in stock markets? That’s because ultimately the market is about two human emotions – greed and fear, and despite the invasion of artificial intelligence and machine trading, these two human emotions still overrule everything else.

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What does anecdotal evidence tell us about today’s trade and the market action going forward? For starters, today is weekly expiry and the market is sitting on two days of back-to-back rally. However, yesterday’s rally was not as broad based as Tuesday’s. In fact, four financial stocks contributed more than the rally itself on the Nifty. The market breadth was very poor, with five stocks declining for every two stocks rallying. Anecdotally, that has been a signal of some consolidation after two strong days of index rally. The options data indicates some resistance at 16,300 and 16,350 on Nifty and 36,250-36,300 on Bank Nifty. However, given the momentum, if the indices take these levels out, a further up-move cannot be ruled out though that’s not the base case for today.
The Bank Nifty has played a big catch-up to Nifty after the recent underperformance and the question everyone seems to be asking now is whether Vodafone Idea is emerging as a risk to the Bank Nifty rally. On that, my view is very simple – Was the market unaware of a potential default by Vi as a risk? Absolutely not. Can any potential Vi default derail the banking system completely? Absolutely not. There are two-three banks with a large exposure and the market has discounted a worst-case scenario already.
What about the large-cap vs mid-cap action after yesterday’s move? Well, it’s entirely possible that mid-caps see some more profit-taking, especially given the stupendous rally of this year but once again, if you go by the anecdotal evidence of bull markets, these moves last for a limited time and eventually the mid-cap and small-cap outperformance resumes once the expansion phase of the index is done.
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