Markets Experience Short Covering but Remain at Crucial Juncture

The Indian market managed to see some short covering rally today after a series of sell-offs over the past few days. However, this rally faded during the latter part of the day. As mentioned in our previous report, the Indian headline index witnessed selling near the day's high of around 24,600 and declined to the 24,420-415 range during the closing hour, settling at 24,435, down a marginal 0.15% from the previous day's close.

The Bank index remained weak after a pullback towards the mentioned resistance of 51,600, declining to the 51,150-107 area and settling almost flat. Gains in HDFC Bank, which rose 1.26%, helped the index avoid further declines and prevented it from breaching the 51,000 mark. Selling in Axis, SBI, and ICICI negated any potential recovery.

The Midcap Select index, however, managed a smart recovery, with gains in Persistent Systems and Coforge as the index recovered from a day's low of 124,400 to around 12,651. However, some selling from the top pushed the index to 12,544, though it remained up 0.82% from the previous day's close.

The broader market sentiment is still not fully out of the grip of bears, with an advance-decline ratio of 1,461-1,039 on the NSE. FIIs have sold over ₹5,000 crore worth of Indian equities today, despite net buying of over ₹6,000 crore from DIIs. FIIs have now been net sellers to the tune of ₹92,142 crore so far in October, which may continue to keep the local market under pressure. Yesterday's selling was also attributed to panic selling from retailers, with around 90% of stocks on the NSE declining.

In global markets today, the NIKKEI Index of Japan slid 0.8%, the UK FTSE Index fell 0.51%, while the German DAX was up 0.15% at the time of writing.

The selling in markets can be attributed to outflows from Indian equities by FIIs, possibly toward China, as they have cut down lending rates. The Chinese market, based on market cap/GDP ratio, is significantly undervalued compared to India. China’s market cap to GDP was around 65% at the start of FY25, while India was quoting above 135%, indicating high local valuations. With such high valuations and a lower chance of an RBI rate cut, along with below-par corporate results and geopolitical tensions, there has been selling in Indian equities from foreign institutional investors.

What Investors Should Do Now?

The long-term story of India remains intact, and after this corrective phase, Indian equities should regain strength. However, it is difficult to predict when the market will bottom out. A corrective phase is part and parcel of a bull market and is a healthy sign for long-term investors. The larger index has corrected only 6-7%, and any correction between 10-12% from the high can be considered healthy. For mutual fund investors, it is advisable to stay invested and continue SIPs every month for a long-term investment outlook.

Market Outlook Index for Traders:

• NIFTY: The index has strong support at 24,360-400, which is a 38.2% retracement of the rally from election day lows to the latest ATH. If the index breaches these levels, further declines toward the 24,250-280 range may occur. Conversely, for recovery, the index needs to breach and hold above the newly formed resistance at 24,600.

• BANK NIFTY: The bank index is likely to remain weak intraday below the 51,000 mark, bringing fresh selling to the market. The resistance for the day is in the 51,600-650 range, and any breakout and sustained trading above this level may lead to recovery.

• NIFTY MIDCAP Select Index: The index formed a tweezer bottom kind of candlestick pattern; however, it needs a breakout above 12,650 to confirm this pattern. Conversely, if the index breaks the 12400 levels, a slide toward the 12,250-280 range is imminent.

The report is prepared by Bitupan Majumdar, an independent SEBI registered research analyst with registration code INH30006962. Please consult your financial advisor before making any investment decisions.

Also Read: Sell-off Continues in Indian Market; BSE Loses Rs 8.47 Lakh Crore in Market Cap Today