5 reasons why markets fell sharply Monday

Kumar Shankar Roy   /   December 21, 2020
Stock markets

The Indian market on Monday suffered their worst day in seven months. The NSE Nifty 50 index ended 3.14% lower at 13,328.40, wiping out six straight sessions of gains. The other benchmark, S&P BSE Sensex fell 3% to 45,553.96. Here are the 5 factors why markets tanked in this manner.

1) Mutated Covid strain

British health secretary Matt Hancock said Sunday that the government has imposed a strict Christmas lockdown in London and southeast England because a new strain of the coronavirus was “out of control”. Countries around the world have begun banning flights and travellers from Britain.

Says Naveen Kulkarni, Chief Investment Officer, Axis Securities “The market fall today can be attributed to the surge in cases in the UK and the new strain of coronavirus which transmits even faster.”

2) Valuations not cheap

Markets are ripe for a fall due to valuations.

Before the fall, the Nifty trades at a 12-month forward P/E of over 21 times, a premium to its long-period average. The Nifty P/B of nearly 2.9 times, a premium to its historical average.

The index’s 12-month trailing P/E of nearly 27 times, over 30% premium to its long-period average. At 3.2 times, its 12-month trailing P/B is also above its historical average. These valuations are before market fall.

Many in market feel that the valuations appear to be in dangerous territory, unlike what is widely perceived. Optically, values appear high. The valuations will make sense only when earnings play catch-up, in two out of the next four years.

“…. concerns around the fiscal deficit can’t be overlooked. Sustenance of small businesses, jobs and the like are indeed in question. Having said that, no market rally ever expects to have all ticks marked in its favour. The market gains strength from a host of factors lending credible support: a benign crude and commodity environment that would benefit equities, a government-backed mega manufacturing push in India, lowered taxation, and global players aggressively eyeing an alternative to China,” says Amar Ambani, Senior President and Head of Research – Institutional Equities, YES SECURITIES.

3) Profit-booking after highs

Markets have been enjoying a strong Bull Run over the past two months now. Last week, the benchmark index hit a fresh record high above 13700. “… today too despite having some sluggish start, Nifty managed to post a new high of 13777.50 in the initial hours. The initial profit booking then turned into a massive sell off in the latter half to shed more than 600 points at one point,” says Sameet Chavan (Chief Analyst-Technical and Derivatives, Angel Broking).

Today’s correction is a classic example of how the market generally traps market participants. Despite the market hitting new record highs in the last couple of weeks, the brakes have been applied to the recent euphoria.

4) Put writers cover

Another factor behind market plummeting was in the derivatives market activity.

Nifty has formed a large bearish candle which has engulfed the high low range of the previous 9 sessions. In the process two upgaps formed in this period have been filled nullifying the bullishness.

Many put writers today covered their positions by shorting in the futures market. This lead to the fast decline in the market.

Selling pressure accelerated after a high of 13778 was touched. Broad market indices like the BSE Mid Cap and Small Cap indices lost more, thereby under performing the Sensex/Nifty. Market breadth was negative on the BSE/NSE.

All the sectoral indices ended in the red. The top losers were the BSE Metal, Oil and Gas, Realty and Auto indices.

“Technically, with the Nifty correcting sharply and closing below the crucial supports of 13447, the index is now in a short term downtrend. Immediate supports are now at 13131. Any pullback rallies could find resistance at 13447-13500,” says Subash Gangadharan, Technical and Derivative Analyst, HDFC Securities.

5) Global bear hug

Resurgent fears have emerged over the new strain of Covid-19 virus and this has spread like panic across the globe.

Global markets behave when participants lightened positions across nations. Basket selling by FPIs likely triggered the sharp fall in Indian markets. Indian markets performed the worst among the Asia pack. Marketcap of BSE listed companies fell Rs 6.64 lakh crores or 3.6% between Dec 18 and Dec 21.

Plus, rising US-China tension is not helping. Asian stocks ended mostly lower on Monday after a new strain of Sars-CoV-2 virus has been found in the U.K. that is 70 percent more infectious. Wavering trade negotiations between Britain and the European Union and rising U.S.-China tensions overshadowed positive news of U.S. lawmakers reaching a deal for a nearly $900 billion Covid-19 financial package.

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