After a hesitant start of the week, the market settled during the past week and the momentum continued ahead following strong US markets, with benchmark indices gaining close to 2 per cent on the weekly basis. The coming trading week will be shortened by a session owing to a trading holiday on Thursday August 19 on account of Muharram, the benchmark is expected to scale new high on back of large cap outperformance.

Equity market opened positive and hit yet another record highs making gains for the second consecutive week in a row, after breaking out of its two-month consolidation last week. Sensex crossed the 55,000 mark for the first time on Friday, hitting a new high of 55,487 intraday before closing at 55,437. Nifty too hit a fresh high of 16,543 and closed near life highs at 16,529. As the benchmark index scaled new highs, despite sharp rise in markets leading to overall jump in volatility, India VIX moved up by just 5 per cent from 12.37 to 12.99 levels.

It has been an extremely bullish close for Nifty Friday, and it has managed to breach both previous resistances of 16,000 and 16,300 over the past two weeks.

Gaurav Udani, Founder and CEO, Thincredblu Securities expect this trend to continue to the next week. What is most promising is that this rally is led by stocks across most sectors. Nifty has strong support in 16,330 and 16,280 range and “We can expect Nifty to test the 16,700 levels over the next week,” he said.

However, the beginning of the week was shaky as there was consistent selling witnessed in the broader market, which shook the confidence and raised the question mark over the sustainability of the rally. The reason was a surveillance measure taken by the Bombay Stock Exchange (BSE) with respect to small and mid-cap stocks. Measures taken by BSE to curb excessive price movement in smaller stocks nudged selling pressure in small and mid-cap stocks. However, a late clarification from BSE on limiting its surveillance restrictions to penny stocks gave comfort to the broader markets.

Penny stocks have also been trendy with retail investors now owning almost 70 per cent of the free float, according to Bloomberg Intelligence, while promoters staged a stock sale aggregating to over Rs 20,000 crore. The selective approach of various market participants to different parts of our market has been a bonanza, since majority stocks, large and small, are yielding returns for shareholders across the board.

Nirali Shah, Head of Equity Research, Samco Securities said, “Matter of fact, such a momentum-driven rise is typically a cue to be cautious as valuations surpass the fundamentals. Any negative news flow at this juncture will provoke a selloff, as witnessed by mid and small caps midweek. This, however, was a brief halt and the rally may continue for some time.”

According to July mutual fund data, there has been a positive bias towards small-cap funds, with a 152 per cent jump in inflows on month on month (MoM) basis versus only a marginal rise of 8 per cent MoM in large-cap funds, indicating that there is still a significant amount of money being diverted towards smaller cap stocks. Hence, the confidence seems to be intact from this segment of the market.

While DIIs are focusing on broader bourses, FPIs have begun to invest in large caps indicating revived interest after a four-month selling.

FPIs were sellers in financial services and IT in July. But these sectors are among the best performing in recent days. The outperformance of large-caps over mid and small-caps indicates Institutional activity. “Since markets are at record highs with stretched valuations, some profit booking by FIIs cannot be ruled out going forward,” said VK Vijayakumar, Chief Investment Strategist at Geojit financial services.

FPIs appear to have changed their investment strategy in August. After selling equity worth Rs 11,308 crore in July FPIs have turned buyers in August. Up to August 13, FPIs have bought equity worth Rs 1,795 crore. The small figure indicates a lack of conviction on the part of FIIs in the market rally. The market is now driven by retail investors who account for 45 per cent of cash market transactions. “At least for the present, FPIs are not the leaders but followers,” he said.

The firm trend in the Indian market in the later part of the previous week was due to firm US markets. US stocks edged higher during the week pushing both the Dow Jones Industrial Average and S&P 500 to fresh records. The Dow rose 422 points or 1.22 per cent to 35,499.85, a record close for the blue-chip index during the week, while the S&P 500 climbed 0.7 per cent to 4,460.83, also a record, during the week.

The US Labour Department reported on August 12 that initial jobless claims declined slightly last week as the US labour market continues its recovery from last year’s recession. There were 375,000 claims last week, matching estimates. Global markets were in high spirits as US jobs data reflected continued economic recovery.

The US also announced its inflation numbers for the month of July and it was not as bad as expected. Inflation came in at 5.4 per cent YoY and 0.5 per cent MoM with economists opining that there is a higher likelihood of inflation being transitory as has been expected by the US Federal Reserve. US and European markets continue to rally on strong earnings, re-opening trends of the economy, and commodity push expected due to US Senate approving the Infrastructure Bill.

Shrikant Chouhan, Executive VP, Equity Technical Research, Kotak Securities said, “Going forward, Indian Markets would remain buoyant on the back of US economic recovery, bullish commodity prices, the pace of vaccination process in India, unlock measures by various states, strong GST collections, monsoon development Pan India and the accommodative stance of the RBI.”

As per the technical outlook of Nifty50, the benchmark has consolidated in the narrow range of 16,200–16,350 for six trading sessions and has given a breakout on the higher side.

Rohan Patil, Technical Analyst, Bonanza Portfolio believes that the choppy trend has ended in the large-cap space. “We can expect Nifty to hit an upside target range of 16,650 – 16,700 in a short span of time. Dips should be utilised to create fresh longs in large-cap stocks,” he said.

Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services said, “Equity market is likely to continue with its strong positive momentum as the economic activities are expected to further pick up pace with the lockdown measures getting relaxed.”

The result season is now largely over with corporate earnings being in-line to better than expectations. “Going ahead, we expect corporate earnings to improve further as economy opens up and improving vaccination trends,” he said.