Expensive Valuations Slow Investor Enthusiasm Ahead of Q3 Earnings Season Kickoff
In a stark shift of sentiment, exuberant investors are cautiously adjusting their portfolios as expensive valuations take the center stage ahead of the upcoming Q3 earnings season set to commence next week, led by industry giants TCS and Infosys on January 11.
Market Performance: The new year’s second trading day witnessed a bearish undertone, with benchmark indices diving deep into the red as investors rushed to book profits. At 2:31 pm, the Sensex was down 408.22 points, or 0.56 percent, at 71,864, and the Nifty slid 83.80 points or 0.4 percent to 21,658. Market breadth indicated 1,679 advancing shares, 1,625 declining, and 77 remaining unchanged.
Profit-Booking at Higher Levels: Investors engaged in profit-booking at elevated levels, expressing concerns over disruptions in the Red Sea that pose short-term risks to global supply chains and freight costs. Vinod Nair, research head at Geojit Financial Services, highlighted these concerns, emphasizing a cautious approach amid potential euphoria in specific market segments, particularly smaller stocks.
Sectoral Trends: In the broader markets, the BSE Smallcap index exhibited marginal gains, while the BSE Midcap index trended downwards. Nifty Auto emerged as the top loser, witnessing a nearly 1.5 percent decline post-December sales data, impacting stocks like Eicher Motors and Ashok Leyland, which experienced losses of around 3 percent each. Other sectoral losers included Nifty Bank, Nifty IT, Nifty Infra, and Nifty FMCG.
On the flip side, marginal gains were observed in Nifty Energy, Nifty Metal, Nifty Pharma, and Nifty PSU Bank indices.
Caution Against Overvalued Stocks: Financial experts caution investors against chasing stocks with inflated valuations. The recent 1,000-point rally in the Nifty over the last month has fueled market momentum. Retail investors, enthused by stellar returns in 2023, are showing exuberance and pursuing stocks, often ignoring high valuations in midcap and smallcap segments.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, warns against the ‘recency bias’ trap and advises investors not to chase low-grade stocks in the broader market.
Global Context and 2024 Outlook: A declining dollar and US bond yields create a favorable global context for equities. FII inflows in 2024 are expected to be substantial, potentially uplifting high-quality large caps, especially in segments like banking with fair valuations.
Cautionary Signs: The volatility index (VIX) spike to 14.5 is noted as an important trend, indicating potential heightened volatility ahead. The sell-off in the last 30 minutes on January 1 serves as a warning, suggesting significant selling pressure at higher levels.
Expert Perspectives: Vinod Nair, Head of Research at Geojit Financial Services, highlights the importance of this week’s focus on FOMC minutes, providing insights into potential 2024 rate cuts. Despite a strong momentum in mid and small caps, there is a reversal trend observed in private banks.
Advice for Traders: Rajesh Bhosale, Technical Analyst at Angel One, suggests securing profits at higher levels, given the overbought status of indicators for an extended period. A reality check is deemed necessary, and caution is advised as traders navigate the current market dynamics.
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