Sensex, Nifty surge 9% in a month. Will the up move sustain in August?

After frontline indices rallied 9 per cent each in the last one month, analysts believe that the strong foreign inflows after nine months of relentless selling brought upswing to the markets.

It has been a good run for the markets since the past few days with the S&P BSE Sensex and the Nifty50 rising over 9 per cent each in the last one month. Gains in the mid-and small-caps have been sharper with both these indexes surging around 12 per cent and 10 per cent during this period.

But, will the rally seen in the past one month sustain, or is this a short-term bounce that will eventually get sold into?

The 9 per cent rally in the frontline indexes in the last one month, analysts said, is in sync with the 9 per cent rally in the S&P 500 index. The pullback in US and other developed markets, they believe, was led by the strong employment numbers and resilience of the US economy, triggering hopes that the US might succeed in avoiding a recession; or if the recession happens, it would be a mild one.

The big positive for the Indian market amid the current move, according to Dr. V K Vijayakumar, chief investment strategist at Geojit Financial Services, is that the foreign portfolio investors (FPIs) turned net buyers in July after nine months of relentless selling.

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“The sharp decline in the dollar index from above 109 to below 106 indicates that the flight to the safety of the dollar is over for now. Nifty valuations are again moving to the higher side. Investors have to exercise caution. After the expected run up in financials, now, capital goods, autos - particularly passenger vehicles and the commercial vehicle segments - and select pharmaceuticals look interesting. High quality financials will continue to be resilient,” Vijayakumar said.

Also aiding the sentiment back home is the 7 per cent fall in crude oil prices in the past one week – from around $110 a barrel for Brent to around $102 a barrel now. This, analysts said, will help tame inflation that has been trending above the Reserve Bank of India’s (RBI’s) comfort zone.

Any possible steep fall in oil prices below $100 a barrel, according to G Chokkalingam, founder and chief investment officer at Equinomics Research, can take care of global inflation problems to a large extent, which can see global equities recover further. India, he said, would be a major gainer of any possible mild recession across the world as oil prices can fall steep in such a possible scenario.

“US Fed balance-sheet reduction plan and oil price would remain as the key risk factors in the short-term. We believe that the domestic markets may rise further for a couple of weeks amid volatility and intermittent corrections,” Chokkalingam adds.

Technical chartists, too, see some more upside for the markets from the current levels with the Nifty50 index crossing the 17,000 mark with conviction last week. However, there could be some nervousness ahead of the RBI’s monetary policy meet outcome on Friday, August 5.

“This level coincides with the 200-simple moving average (SMA) and hence should be considered a key development from a technical point of view. We may see some consolidation going ahead, but the market's undertone would continue to remain strong. For the current week, 17380 followed by 17450 are the immediate levels to watch out for as regards Nifty50 index,” said Sameet Chavan, Chief Analyst-Technical and Derivatives, Angel One.