Stock markets outlook: Will Santa bring in new highs or profit booking?

Nirali Shah, Senior Research Analyst, Samco Securities says that markets witnessed yet another cheerful week as the benchmark indices touched life-time highs making investors skeptical if the recent run-up is justified. Burger King’s IPO listing stole the show with two days of upper circuit. However, such a euphoric rise in equities is making participants wonder what is leading to this bold move and whether markets will correct soon. Broadly, there seems to be three major factors keeping domestic bourses on a roll. Firstly, the US Dollar Index collapsed below $90 for the first time in two years causing other emerging currencies to gain strength. Secondly, with India’s CPI retail inflation moderating marginally to 6.93% in November from 7.61% mom, the purchasing power of the common man is bound to improve. Lastly, better than expected revival in earnings growth is driving D-Street’s rally.
 
Moreover, sentiments across the globe too aided the rally with hopes of a post- Brexit trade deal and the US Government closing in on a $900 bn Covid aid bill including long-awaited stimulus checks for the US citizens. Cumulatively, all these factors suggest that the bull rally is here to stay albeit there will be sessions of mild profit booking and tiny bumps before the start of the New Year. 
 
Not only in equities but other asset classes too are witnessing quite an upmove especially metals and oil. The volatile Bitcoin has also managed to hit an all-time high after crossing the $20000 levels. When market is surrounded by good news from all possible directions, participants tend to forget Mr. Market’s moody behavior. Any sudden negative news be it the efficacy of vaccine or trade concerns between countries could lead to a correction. Investors are advised to continue buying on dips in a staggered manner as 2021 is expected to bring in a lot of optimism in the markets. 
 
Event of the Week:
 
Much to everyone’s surprise, the Fed Chairman categorically mentioned that stock prices are not necessarily high in comparison to how low the interest rates are. The FOMC meet vowed to continue their stance on interest rates at zero levels for years to come in hopes of accomplishing a secure economic recovery. The assurance to keep pouring cash into financial markets along with the promise to continue the current bond-buying program until there is ‘substantial further progress’ in restoring full employment and hit 2% inflation target, clearly suggests that there is bound to be an abundance of money supply in the months to come paving way for higher inflation. Japan too announced another stimulus package of $ 708 bn, eventually with major economies pumping in billions of dollars into the economy, it can be reasonably concluded that the optimism in the stock markets is here to stay and only a significant catastrophe can make a dent in the rally. 
 
Technical Outlook:
 
Nifty 50 closed another week with positive gains and the market breadth remained positive broadly throughout the week. Despite this, major largecap market movers such Reliance and the banking sector broadly remained muted. We continue to keep a cautiously bullish outlook and suggest traders to be light on the longs as the market is stretched in the short term. Any aggressive fresh buying should definitely be avoided at current levels. Immediate support for Nifty is now placed at 13450. Below 13450, we might get confirmation for a brief profit-booking move on the downside which can then retest 13000 to 12800 zone. 
 
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Expectations for the Week:
 
In the coming week, markets are expecting positive news on the vaccine front in India which will further add fuel to the already rising markets. Currently, indices seem to be in the hands of all-charged bulls and the mighty bear seem to have given up. However, one cannot rule out mild profit booking on the way up. In the upcoming week sectors such as defence and metals could remain in focus. Any supportive policies by the Government in these sectors could lead to strong moves in these stocks. As regards PSU lenders, any signs of tepid response in capital raising could lead to fractures in the newly-begun PSU rally. With benchmark indices hitting all-time highs, traders and investors are advised to ride the momentum till possible but with caution. Nifty50 closed the week at 13,760.5, up by 1.8%.