Bear Paws Grip Dalal Street as Rising Risks Clamp Down on Exuberance

The euphoria that painted Indian markets bright in 2023 seems to be facing a harsh winter as the new year begins with a bearish bite. Nifty and Sensex, the bellwethers of Indian equities, slumped on the second day of January, weighed down by a confluence of uncertainties and profit-booking.

Red Sea Tensions Cast a Shadow:

The simmering tension in the Red Sea, a crucial artery for global trade, threw a long shadow on investor sentiment. Disruptions in the critical shipping lane pose a real threat to global supply chains, potentially inflating freight costs and disrupting market equilibrium. This unease, coupled with lingering concerns about the global economic slowdown, dampened the bullish spirit that marked much of last year.

Earnings Season Looms, Raising Eyebrows:

As the upcoming Q3 earnings season casts its shadow, anxieties about inflated valuations have also begun to play a role. Investors, once giddy with the heady returns of 2023, are turning cautious, wary of chasing stocks with price tags that may not hold up under closer scrutiny. The exuberant rally of the past month, particularly in the midcap and smallcap segments, seems to be facing a reality check.

Profit-Booking Frenzy Takes Its Toll:


With the indices hovering near record highs, the temptation to lock in profits proved too strong for many. A rush to offload stocks, particularly at higher levels, contributed significantly to the bearish pull. Sectorally, the auto sector bore the brunt of the selling pressure, reeling from disappointing December sales figures. Nifty Bank, IT, and Infrastructure also found themselves in the red, while Energy, Metal, and Pharma indices offered a glimmer of hope with marginal gains.

Experts Sound Caution:

Market experts urge caution against chasing inflated valuations, particularly in the smaller end of the market. VK Vijayakumar, chief investment strategist at Geojit Financial Services, warns against succumbing to “recency bias” and the allure of quick returns offered by lower-grade stocks. He emphasizes the importance of focusing on high-quality largecaps with fair valuations, especially in sectors like banking, where the potential for growth remains strong.

The recent spike in the VIX (volatility index) to 14.5 also serves as a stark reminder of the potential for turbulence in the near future. Rajesh Bhosale, technical analyst at Angel One, advises traders to secure profits at higher levels, given the significant rally of the past two months. The overbought indicators further underscore the need for caution, as a correction could be swift and brutal.

Global Context Offers Some Silver Linings:

Despite the immediate headwinds, there are some reasons for optimism. The declining dollar and US bond yields create a favorable global environment for equities. Additionally, FII inflows are expected to remain strong in 2024, potentially fueling further growth in high-quality largecaps. The upcoming FOMC minutes, offering insights into the Fed’s rate hike schedule for the year, will also be closely watched, as it could significantly impact market sentiment.

Technical Outlook Points South, But Hope Flickers:

Technically, the daily Nifty chart paints a bearish picture. Rupak De, Senior Technical Analyst at LKP Securities, suggests that sentiment is likely to remain bearish as long as Nifty stays below 21,750. However, he acknowledges that a breakout above this level could swing the pendulum back in favor of the bulls. Support at 21,500 offers a potential floor, but the overall trend for the near future appears to be southward.

Navigating the Stormy Seas:

As Indian markets navigate the choppy waters of 2024, investors need to adopt a measured approach. While the recent correction presents an opportunity to reassess portfolio allocations and secure profits, it’s crucial not to abandon the long-term investment thesis. By focusing on fundamentals, maintaining discipline, and avoiding emotional decisions, investors can weather the current storm and emerge stronger on the other side.

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