Can the market see a deep correction from peak levels? What should be your strategy?

Investors have been waiting for the Sensex and the Nifty to hit their fresh all-time highs for the last few weeks. However, it appears that the market is not able to hold altitude as it witnessed profit booking on high levels because concerns over inflation, rate hikes and economic slowdown are not gone completely.

Analysts pointed out that the market has discounted most positives already and it needs a fresh trigger to move higher. Nifty has been in the green since March on a monthly basis on signs of easing inflation and sustained foreign capital inflow amid hopes of the end of the aggressive rate hike cycle. Healthy March quarter earnings and strong macroeconomic data gave a further boost to the market sentiment.

While the long-term prospects of the domestic market are healthy, the near-term trend of the market will depend on the RBI MPC decision this week and the Fed policy meet outcome next week. The development of monsoon is also a

Can the market see a deep correction?

Most analysts do not expect a deep correction in the market. However, a decent correction is likely since the market is near its all-time high level.

"The scale and time of correction will depend on the triggers for the correction. Two key events are the RBI and US Fed meet and the monsoon. Corrections can happen anytime from now, but small corrections are being utilised by fence sitters to add to equity exposure," said Deepak Jasani, Head of Retail Research, HDFC Securities.

Aamar Deo Singh, Head Advisory at Angel One has similar views.

"Overall, the trend remains positive but at the same time, we are likely to witness profit booking as well, till we see Nifty trade above its all-time high of 18,887 witnessed on December 1, 2023," said Singh.

What should be your strategy?

Most analysts see opportunity in times of correction as the market's long-term outlook remains healthy. A majority of them believe investors should increase their exposure to large and mid-caps. Moreover, it must depend on one's risk appetite as mid and small-caps are more volatile than large-caps.

"Short-term support zone for Nifty is around the 18,200-18,300 mark. At the current levels, depending on one’s risk appetite, one should look at investing in large-caps or mid-to-small-caps, because volatility tends to be higher in the mid-to-small-caps as compared to the large caps at record levels," said Singh.

Shrey Jain, Founder and CEO of SAS Online believes there is potential for a fresh upward momentum, with attention towards large-cap stocks after the mid-cap and small-cap rally. However, Jain said mid-cap and small-cap stocks will continue to show promise. Midcap stocks with good quality fundamentals are in a sweet spot to perform better than large and small-cap companies, he said.

"It is important to monitor the market closely, and a review may be necessary if the Nifty index closes below 18,275 and the Bank Nifty index falls below 43,650. Despite these considerations, the rally in mid-cap and small-cap stocks remains intact," said Jain.

Jasani of HDFC Securities pointed out that large caps have been underperforming so far in the up-move. He believes in the final up-move, even large caps could participate.

"A small exposure to large-caps may also be taken in addition to a large portion in mid and small-caps, where periodic profit-taking and shift to other stocks is advised," said Jasani.

Diwakar Rana, Senior Research Analyst at Prudent Equity underscored that many small and mid-cap stocks still trade at fair prices, despite the market being near all-time highs. Rana said whether investing in small-cap or large-cap stocks, investors should concentrate on the company's unique qualities and growth story.

"The market's direction and the index's ups and downs shouldn't have any bearing on a long-term value investor's choice of investments. Investors in this market should search for companies with growth at fair prices. A correction could occur in the future for an expensive stock with volatile earnings," said Rana.

“A proverb in the market states, 'Never shop at the supermarket when you're hungry; you will overbuy.' With the markets reaching record highs, the saying is particularly true today, and investors should avoid buying anything at any cost,” said Rana.

Raj Vyas, Portfolio Manager at TejiMandi believes it’s a buy-on-dips kind of market. He said the markets are also now fairly valued. It may consolidate a while around these levels and selected sectors like financials, manufacturing, infra, and cement are likely to do well and some of the sectors which have not done well in the last 1-1.5 years are likely to outperform as well on the back of earnings growth.

"Instead of timing the market, staying invested is the only key as we see higher growth potential for India Inc.," said Vyas.

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Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.