Nifty to aim 17500 amid wall of worries

What's Buzzing:

The equity benchmark staged a strong rally of 10% from June lows of 15200 despite growing concern over possibility of U.S. recession, as softening of crude oil and industrial commodities helped to cool off rising inflation concerns. Are the markets headed further higher?

Context:

Over past one month we have observed that rallies are now getting bigger along with shallow correction, indicating structural improvement that makes us confident to upgrade target to 17500. Meanwhile, psychological mark of 16000 remains strong support which we do not expect to breach. Hence, dips should be utilised as incremental buying opportunity. Our constructive bias is further validated by following observations:

A) Since October 2021 peak of 18600, on two occasions post falling channel breakout Nifty has retraced 80% of preceding corrective phase. At current juncture, similar breakout has panned out and we expect Nifty to maintain the same rhythm and head towards 17500 being 80% retracement of two month decline (18100-15200)

B) Since 2008, on six occasions index has formed durable bottom after percentage of stocks above 200 DMA (Nifty 500 universe) has touched the extreme low reading below 15. Subsequent rallies in each of these instances measured minimum 20% from lows

C) India continues to relatively outperform EM basket even in recent volatile scenario. Over past one year while MSCI EM index has corrected over 50% from highs, India has relatively outperformed as Nifty corrected only 18%

D) The sharp decline in crude oil prices coupled with industrial commodities and cool off in India VIX highlights improvement in market sentiment that augurs well for extension of ongoing rally

Our Perspective:

We expect the index to accelerate upward momentum and gradually extend ongoing rally towards the 17500 region in coming months. Since October 2021 peak of 18600, on two occasions post falling channel breakout Nifty has retraced 80% of preceding corrective phase. At current juncture, we expect index to maintain the same rhythm as 80% retracement of two month decline (18100-15200) is placed at 17500. We expect BFSI, Auto, capital goods sector to outperform while IT, metal and consumption are expected to witness bargain buy opportunities