Investors look for santa rally after grim year in US stocks

Mumbai: Investors hurt by the recent battering of the stock market are pinning their hopes on a Santa Claus rally to ease some of the pain. While indicators are signalling that the market is precariously perched, history has shown the Nifty tends to strengthen in the run-up to the New Year and immediately after that.

The Santa Claus rally is a tendency of stocks to rise in the last five trading sessions of a calendar year and the first two of the New Year. Since 2011-12, the Nifty has gained on nine out of 11 occasions during this seven-day period, according to data compiled by ET.

Return of Risk-off Sentiment

This year, the start of the period for the Santa Claus rally is December 26. Confidence among investors and analysts that history will repeat itself is relatively muted.

A short-term bounce might be in the offing if the market becomes oversold but traders might cut their holdings on every rebound. The Nifty dropped below the psychologically crucial 18,000 mark in a brutal sell-off on Friday and is now hovering above a critical support zone of 17,650-17,800. If these levels are breached, analysts see the Nifty falling to 17,000.

"Nifty's short-term moving averages are falling, indicating the bearish momentum could continue in the upcoming week," said Sudeep Shah, head, technical and derivatives, SBI Securities.

Last week, the risk-off sentiment intensified worldwide on renewed concerns over the spread of Covid with the government asking citizens to be vigilant in the wake of the fresh infections in countries such as China, Japan, South Korea and Thailand. Sentiment was already on edge after the US Federal Reserve reiterated its hawkish interest rate commentary and Bank of Japan made a surprise move seen as a signal toward the gradual normalisation of its ultra-accommodative monetary policy. India's Volatility Index or VIX - a measure of traders' expectations of near-term risks to the market - shot up over 6% to close at 16.16 on Friday, the highest in nearly two months.

While the Nifty fell close to 2.6% last week, mid- and small-cap stocks bore the biggest brunt of the bearish shift in sentiment as forced liquidation by stockbrokers in some of the recent hot favourites set off a chain reaction across the market. The small-cap index slumped 5.9 % and the mid-cap index slid 4.1% over two trading sessions. Many stocks fell as much as 15-30% in this period.

"Markets fell largely due to offloading of over-leveraged positions," said Deven Choksey, managing director, KR Choksey Shares and Securities. "Friday's fall was also due to the reactions by institutional investors due to a surge in Covid cases. Unwinding of long and leveraged positions is a natural outcome of FeMo (fear mongering global institutional investors)."

Foreign portfolio investors (FPIs) net sold shares worth ₹706.84 crore on Friday, as per the provisional data. Since the start of December, FPIs have now turned net sellers to the tune of ₹3,526 crore, factoring in Friday's selling.

The reasons that caused the recent panic selling are getting priced in, which should bring stability back to the markets, said Choksey.

Across the world, investors last week offloaded shares at their highest weekly rate ever, selling a net $41.9 billion of equities, according to BofA Global Research. Investors also reduced their cash holdings by a net $59.5 billion, the biggest drop since February 2022 besides selling the largest quantity of investment grade and high-yield bonds in nine weeks, BofA said.