Towards the beginning of 2024, Indian stock market appeared indomitable and appeared poised to continue scale new peaks effortlessly. The mood is the reverse now with investors and traders wondering how much lower stock prices will fall in the correction which began last September.
The long-term outlook, which covers a period of more than 20 years, does not undergo frequent changes and therefore reviewing the trend in the Nifty50 and Sensex every year is not necessary. In our long-term view published on January 15, 2024, titled ‘Long-term outlook for Nifty50, Sensex: Ride the rally but watch out for long-term correction’, we had written: “There is no question that the Indian equity market is in a bullish long-term super-cycle. But the need for caution arises from the fact that the recent leg of this upcycle, which began from the pandemic low in March 2020 is almost four years old. The Nifty50 and Sensex are also nearing some long-term targets. While the ongoing rally can take the benchmarks higher from these levels, a long-term corrective phase is around the corner.”
Our long-term view remains the same. The bullish long-term super-cycle (based on Elliott wave theory) in the Nifty 50 and the Sensex, which began from the October 2008 low, is still in progress. One leg of this super cycle ended at the September 2024 peaks of 26,277 and 85,978 in the Nifty50 and Sensex respectively. The decline from this peak has resulted in 13 per cent pull back.
The way the correction is progressing so far indicates a shallow but long-drawn correction which can make the bellwether indices moving sideways with a bearish bias for a year or more. But completion of this consolidation will get the stock market ready for the next wave higher which can take Nifty50 to the 38,000 to 41,000 level. We will need a strong close below 19,100 to make us revise our long-term outlook.
The correction may appear excruciatingly prolonged for investors who have entered the stock market over the last four years, but these corrections are essential to adjust over-valuations and bring prices towards their fundamental worth. Also, while the correction in large-cap stocks which form part of the index can be shallow, mid and small-cap stocks which have run far beyond their fundamental worth, can see a much deeper correction. It could be akin to the move between 2018 and 2020, when the large-caps edged higher, but broader market suffered.
Video Credit: Businessline
Long-term outlook
As mentioned above, the long-term wave counts for the Nifty50 and Sensex have not altered much. If we look at the wave counts from the 2001 low or the 2008 low, we have a cluster of targets between 24,000 and 28,000 in the Nifty50. That’s where the index is halting now. Next upper targets fall between 38,000 and 41,000 and beyond that, at 51,000 to 54,000.
We will have to review our long-term outlook only on a strong close below 19,100. This level will need to be breached strongly to signal that a serious correction is in the offing, which can drag the Nifty to 17,099 or 13,063.
Corresponding long-term targets for the Sensex, where it is halting now, are between 73,000 and 81,016. Strong move beyond 81,000 will open the way for the 93,000 to 98,000 band and beyond that, 114,450 to 134,688. A strong weekly close below 62,000 is needed to revise the long-term view to cautious.
The year ahead
As explained, the decline from the September 2024 peak in the Nifty50 appears to be a part of the up-move from the pandemic low, from 7,511 in the Nifty. The third leg of this up-move that began from March 2023, appears to be still unfolding.
The most likely movement for the index over the coming year will be a sideways move in a band between 22,000 and 28,000. Decline below 22,000 will take the index to 20,600 or 19,100. Breach of 28,000 is needed to start another steep bull-run to 35,000 level. But that appears quite unlikely in the months ahead.
The Sensex is also halting tantalisingly at the 38.2 per cent (Fibonacci retracement level) from the March 2023 low. This leads to the possibility of the move continuing, resulting in a sideways move between 70,000 and 93,000 over the next year. Next supports are at 68,000 and 62,000.
Global cues
If we consider the index return since the pandemic lows, Indian stock market has outperformed other Asian emerging markets by a strong measure. The Nifty 50 (176 per cent) and Sensex (166 per cent) are at the top among Asia pacific indices, after Karachi, Sri Lanka and Mongolian stock exchange indices. The returns in Indian markets are on par with those in advanced economies such as the S&P 500, DAX and Nikkei, which are clocking good returns.
It is therefore not surprising that foreign portfolio investors have turned net sellers since September, as they cash out some profits. Valuation premium in Indian markets over their emerging market counterparts also makes Indian stocks more vulnerable at this juncture.
The S&P 500 index is poised at its life-time peak currently and the uptrend appears very strong. The third part of the move from the March 2020 low has the immediate target of 6,118, which it has already achieved. Further up-move will give it the targets of 7,121 and 7,741. The long-term outlook will be threatened only on a strong weekly close below 4,800.
As Donald Trump’s shenanigans bolster companies in the US and the US dollar, global institutional money is likely to move towards US stocks, giving strength to the S&P 500.
