Sensex, Nifty 50 at record high; is market overheated? What should investors do?

Market benchmarks the Sensex and the Nifty 50 are on a record-setting spree. Nifty 50 hit its fresh record high of 22,525.65 while Sensex set its new all-time high of 74,245.17 in intraday trade on Thursday, March 7.

Market sentiment is buoyant due to strong domestic macroeconomic indicators and increasing optimism regarding potential interest rate cuts by the Federal Reserve in the near future.

Nevertheless, experts warn that the market has discounted most positives and a correction could be imminent due to the lack of fresh triggers.

“The outlook for 2024 appears mixed. Many companies are booming due to the economy's growth of 6.5-7 per cent. Record highs of the Sensex and Nifty showcase the market's bullishness, but investors should be prepared for potential 3-5 per cent corrections," said Trivesh D, Chief Operating Officer at Tradejini.

"The dominant forces in the market are presently steering it towards a bullish trajectory until the general election. In my view, this bullish trend may witness some near-term correction," said Trivesh.

Also Read: Stock market today: Nifty 50, Sensex hit record highs; mid, smallcaps outperform

Overheated market?

The sharp rally since October indicates the domestic market could be slightly overheated. Nifty 50 is up 15 per cent since October last year. The current PE (price-to-earnings ratio) of Nifty 50 is 23.20 which is above its two-year average PE of 21.58.

According to brokerage firm Motilal Oswal Financial Services, Nifty is trading at a 12-month forward PE ratio of 19.5 times, which is in line with its long-period average (LPA) even as broader markets trade at expensive valuations. The NSE Midcap 100 index is trading at nearly 33 per cent premium to Nifty.

Trivesh pointed out that the fear gauge, represented by India VIX, has been rising since October 2023, indicating a potentially overheated market.

"A policy change or negative commentary could trigger a sharp reaction. Whether recent gaps are filled will be interesting to see," said Trivesh.

V K, Vijayakumar, Chief Investment Strategist at Geojit Financial Services also pointed out that there is fundamental support to the market from India’s impressive GDP growth and decent corporate earnings. However, the concern is the elevated valuations.

"Nifty is now trading at above 22 times FY24 earnings. Sustained flows into the market and retail investor enthusiasm are keeping the valuations high. The danger signal is the frothy valuations in the broader market, particularly in the small-cap space. This is unsustainable," said Vijayakumar.

Highlighting technical indicators, Shrikant Chouhan, Head Equity Research, Kotak Securities said for the positional traders now, 22,200/73,300 or the 20-day SMA (Simple Moving Average) would act as a trend decider level.

Above 22,200/73,300, the market could move up to 22,650-22,800/74,500-74,800. On the flip side, below 22,200/73,300, the market could slip to 22,100/73,000. Further downside may also continue which could drag the index to 21,950/72,650, said Chouhan.

Also Read: HDFC Bank, ICICI Bank, SBI among top banking picks as analysts say most negatives already priced in

What should investors do?

Vijayakumar advises investors sitting on big profits in the broader market can certainly book partial profits and move the money into large caps and fixed income.

Deepak Jasani, Head of Retail Research, HDFC Securities observed the broader market seems tired due to the lack of fresh triggers. Investors may choose to take some profits out of the broader universe - especially in stocks that have run up too fast - beyond the value justified by their medium-term triggers.

Also Read: Market lacks fresh triggers; see value in banking, financial stocks: Taher Badshah of Invesco Mutual Fund

Trivesh says investors should not be in a hurry and should wait in the volatile market if they are thinking for the long term.

"The market currently appears bullish, but its longevity is uncertain. Investors should be patient in this volatile market, especially for long-term goals. Having said that, partial booking of profits is definitely on the cards given the uncertainties surrounding the recent rally in the market, but remember, timing the market is a gamble,” said Trivesh.

Ajit Mishra, SVP - Technical Research at Religare Broking believes participants should focus more on the index majors and large-quality midcaps now and reduce exposure to the smallcap pack on the rise.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.