Sensex rebounds from its early losses: Know the primary drivers

Sensex fell from Monday’s high

The Indian equity indices were trading in the red on Tuesday morning, giving up early gains and losing almost 200 points on the BSE Sensex. In banking, finance, and oil and gas stocks, there was a lot of selling pressure.

The Sensex hit a record high of 58,515.85 points on Monday, and the Nifty50 on the National Stock Exchange hit a new high of 17,429.55 points, indicating a strong week ahead, but profit-booking on Tuesday weighed on investors.

What is causing the Sensex and Nifty to rise?

In intra-day trading on Friday, the benchmark Sensex broke the 55,000 mark and set a new high, thanks to continued purchasing support from ordinary investors and mutual funds. The Sensex surged 593.31 points to a new all-time high of 55,437. Even as experts warned retail investors to be extra cautious and advised against investing in stocks when valuations are high, the NSE Nifty Index rose 164.70 points to a new high.

According to economists, the ongoing bull trend is being driven by retail investors and mutual funds. In the quarter ended June 2021, retail holdings of NSE-listed companies reached a new high of 7.18 percent, reflecting a strong increase in new investor accounts over the previous 18 months and an increase in retail involvement in both secondary and primary markets. In December of this year, it was 6.42 percent.

Equity mutual funds, on the other hand, had record inflows of Rs 22,583.52 crore in July, compared to Rs 5,988.17 crore in June, thanks to new fund offers and buoyant stock markets. This cash is also making its way into the stock market.

Is the rally justified by the fundamentals?

The Dow and S&P have achieved yet another new high, indicating that global support for the surge is still strong. While the IIP data for June shows double-digit growth, it remains low in comparison to pre-pandemic levels, indicating that the economy still needed policy assistance.

Notably, the July CPI of 5.6 percent provides reassurance because it fell below the RBI’s target range of 2-6 percent, allowing the RBI to maintain its accommodative monetary policy stance in the coming quarters. This is surely good news for corporate profits. Furthermore, the recent rebound in the domestic market was not a broad-based bounce, as midcap and smallcap stocks saw strong profit booking, but selling pressure looks to have lessened now.

The PMI index rose above the important 50.0 mark in July after dipping into contraction for the first time in 11 months in June. According to IHS Markit, the headline figure increased from 48.1 to 55.3, indicating the fastest rate of growth in three months. Following rumours of improved demand and the relaxation of some local pandemic limitations, factory orders increased. The recovery was rapid, especially when compared to a significant drop in June.

Is the rise likely to continue?

According to economists, the market boom is being fueled by plentiful liquidity in the system and expectations of a long-term economic recovery. If the inflow of funds into the stock market continues, the surge will gain traction.

While concerns about global growth exist due to the recent spike in cases of the delta variation in many regions of the world, many analysts believe the domestic market’s core strength remains intact. Monsoon progress, festive demand, and pandmeic positive rates will be under focus in the next few days. Higher government investment and a resurgence in industrial capex will help the economy recover. Investors should concentrate on high-quality stocks with strong earnings visibility and safety margins.

In July, important economic indicators such as GST collection, auto sales volume despite supply disruptions, and other high frequency indicators such as e-way bills all showed significant improvement, indicating a sustained comeback in corporate earnings in the coming quarters. The market should be able to maintain premium valuations as a result of this.

Notably, June quarter earnings have been good thus far, with most firms above consensus projections, providing some relief.

Dollar at a low point

The dollar remained near recent lows as traders anticipated a flurry of central bank meetings this week, from Australia to Europe and Canada, in search of any signs of progress toward policy normalisation.

US employment

The US economy added 235,000 jobs in August, the fewest in seven months, as hiring in the leisure and hospitality sector slowed, lowering prospects of an early Federal reduction.

 

Frequently Asked Questions

Q1. How are the stock prices determined?

After a firm goes public and its shares begin trading on a stock exchange, the price of its shares in the market is determined by supply and demand. The price will rise if there is a significant demand for its shares due to favourable reasons.

Q2. What is the meaning of the term “blue chip”?

A blue chip company is one that is well-known, well-established, and financially sound. Blue-chip firms are noted for weathering economic downturns and operating financially in the face of adversity, which contributes to their lengthy track record of consistent and sustainable growth.