The unbroken bullish trend on Dalal Street experienced a pause on Wednesday, witnessing the most significant single-session losses in over nine months. This downturn occurred after both benchmark indices reached record highs earlier in the day.
Starting from an all-time high of 21,593 points, the Nifty 50 saw a significant decline of over 400 points, settling at 21,150. Simultaneously, the Sensex plummeted over 1,400 points from its lifetime peak of 71,913 to conclude at 70,506, reflecting a 1.3% drop.
Reasons Behind the Nifty and Sensex Decline
The primary cause behind the market’s fall was profit-booking following the record-setting rally. Investors became increasingly concerned about high valuations and overbought signals on technical charts. In December alone, both the Nifty 50 and Sensex had risen over 5%.
Of the 50 constituents of Nifty, 46 ended in the red, with losses reaching nearly 6%. Notably, Adani Enterprises and Adani Ports and SEZ were the top two laggards.
Traders also kept a close eye on the rising cases of the Covid sub-variant JN.1 in India, with 614 reported cases on Wednesday, the highest since May 21. Geopolitical tensions affecting shipping routes in the Red Sea region also impacted investor sentiment.
Vinod Nair, Head of Research at Geojit Financial Services, commented on the abrupt sell-off in the domestic market, attributing it to profit-booking from the recent sharp rally, stretching valuations of mid- and small-cap stocks. He noted that the recent uptick in crude prices prompted investors to book profits.
The sell-off was broad-based and more pronounced in the small-cap segment, which experienced a healthy correction after several months. The BSE Smallcap index ended 3.4% down, snapping a 5-day winning streak, while the Nifty Midcap100 registered its most significant single-session fall in almost a year.
Market Outlook and Analysis
Siddhartha Khemka, Head of Retail Research at Motilal Oswal Financial Services, stated that the market is witnessing a sell-off after a sharp run-up of more than 12% in the last seven weeks. He expects the market to consolidate in the near term as investors resort to profit-booking and assess the potential risk of rising Covid cases, especially in Kerala and Karnataka.
Despite the short-term negative trend resulting from the sharp fall, analysts suggest that this correction was warranted after the relentless rally since November. Ajit Mishra of Religare Broking noted that this is the first significant slide in the Nifty index after seven weeks of an upward move, and further dips may occur. However, he emphasized that it is too early to conclude that the uptrend has faded unless the Nifty breaks 20,700 levels.
Mishra recommended accumulating quality names during this correction phase but cautioned that selling pressure could be higher in the midcap and smallcap space.
Sectoral Impact
There was selling across sectors, with power, telecom, metal, automobiles, capital goods, and real estate bearing the brunt of it. The Nifty Energy index snapped a five-session gaining streak and ended nearly 3% down, while the BSE Power index slumped more than 4%.
The Nifty Metal index ended in the red for the second straight session, with Vedanta, Tata Steel, NMDC, and SAIL finishing over 4-6% down. Information technology stocks were under selling pressure following weak guidance by Accenture Plc, with the Nifty IT index dropping for the second session.
Public sector stocks also faced selling pressure, with the Nifty PSE index finishing 4% lower. The banking sector witnessed a bear attack, with public sector banks experiencing the most significant single-session decline in over a year, as seen in the Nifty PSU Bank index.
What Lies Ahead?
While the sharp fall has turned the short-term trend negative, analysts believe this correction in the market was necessary after the uninterrupted rally since November. Investors will closely monitor market movements and trends to assess the potential impact on various sectors. As always, market dynamics are influenced by a combination of domestic and global factors, making it essential for investors to stay informed and agile in response to changing conditions.