Sensex ends 549 pts lower: Top factors that dragged the markets lower

Rich market valuations with the economy still in the recovery phase prompted investors to exercise caution
The Indian benchmark indices ended Friday's session lower, down over 1 per cent, triggered by an across-the-board sell-off that saw all the Nifty sectoral indices ending the session in the red. Among headline indices, the S&P BSE Sensex tumbled as much as 788 points from the previous day's close to 48,796 in the intra-day deals, before partially erasing the losses and ending at 49,035, down 549 points. The broader Nifty50 index ended the day 1.1 per cent lower at 14,434.

The fall comes amid worries over the Indian markets' soaring valuations and profit booking by investors after the major information information technology (IT) companies posted better-than-expected results in the December quarter.

According to S Ranganathan, head of research at LKP Securities, "Markets began circumspectly amidst weak job data in the US even as Joe Biden unveiled details of the $1.9 trillion rescue package. Friday's afternoon trade saw profit taking in IT stocks despite the biggies putting out positive commentary with large deal wins as market-capitalisation to GDP crossed 100 per cent leading to volatility," he said.

Head of research at IDBI Capital, AK Prabhakar said a correction was long overdue in the Indian markets which has been logging fresh record highs almost on a daily basis. 

"We have been rallying for a very long time without any correction so, this correction was needed. It is a healthy correction, and another 300-400 points down would have been ideal. The important thing is that IT as a sector, which has been doing very well till now, has corrected," he said. 

Here are the key factors behind today's fall in the markets:

Profit booking: Investors booked profits, especially in the major tech companies which came out with better-than-expected December quarter results. The Nifty IT index plunged 2.24 per cent and was the top sectoral loser in Friday's session. Among individual stocks, Tech Mahindra, Coforge, HCL Tech and Wipro fell over 3 per cent each while Naukri, Mindtree, LTI, and Infosys fell over 2 per cent each. 

Since November, the Nifty50 index has rallied 25.3 per cent, till Thursday, amid massive liquidity, strong foreign fund inflows and development on the vaccine front. As for the Nifty IT index, it has surged 29 per cent in the same period.

Valuation concerns: The combined market capitalisation of all listed companies in India crossed the country’s GDP for the first time in more than 10 years. On Thursday, the market-capitalisation on the BSE reached Rs 197.7 trillion, against India’s nominal GDP at current prices of around Rs 190 trillion during the year ended December 2020. READ MORE

Such rich valuations with the economy still in the recovery phase also prompted investors to exercise caution. 

Global cues: The Indian markets started Friday's session on a feeble note, and extended their losses, mirroring the subdued trends in major Asian and European indices. Asian shares stumbled lower in afternoon trade as rising Covid-19 cases in China reinforced investor concerns over the prospects for a global economic recovery. More than 28 million people are under lockdown in China. On Friday, it reported the highest number of new Covid-19 cases in more than 10 months. Consequently, Chinese blue-chips shed 0.97 per cent. Besides Hong Kong’s Hang Seng fell 0.29 per cent and Australia’s ASX 200 was flat, while Japan’s Nikkei lost 0.65 per cent.

European stocks were also set to end a four-week winning streak on Friday with losses. The pan-European STOXX 600 index fell 0.4 per cent. The German DAX was down 0.4 per cent and France’s CAC 40 fell 0.6 per cent. UK’s FTSE 100 declined 0.4 per cent.

Technical setup

According to Jay Purohit, Technical & Derivatives analyst at Motilal Oswal Financial Services, "at current juncture, crucial support for Nifty is placed at 14,430 levels and from last few sessions we are witnessing buying interest from lower levels. Thus, we continue to maintain our bullish stance on index and expect Nifty to move towards 14,750 – 14,800 zones in coming days. On the flipside, support is placed at 14,430 and then 14,220 zones. Considering overall structure, traders should use ongoing corrective move in index as a buying opportunity."

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