Why Retail Investors Should be Cautious of the Market Rally

The Nifty has gained over 28 per cent since September 13, when BJP announced the name of Narendra Modi as its prime ministerial candidate. The record rally in the markets was led by bluechip stocks, but over the last month, action seems to have shifted to midcap and smallcap stocks.

The CNX 500 index, which includes stocks of top 500 companies by market capitalisation, has gained nearly 36 per cent since September. 52 per cent stocks in the CNX 500 benchmark have gained over 100 per cent from their one-year lows, whereas 20 stocks are up over 300 per cent from their 52-week lows and 9 stocks are up over 500 per cent or five times from their one-year lows.

Stocks like Bharat Earth Movers (BEML), Simplex Infrastructure and Sintex have surged over 5 times, while stocks like Hindustan Construction Company, Patel engineering and Suzlon Energy are up over 300 per cent during the same period.

130 out of the 500 stocks in the CNX 500 index are within 10 per cent of their lifetime highs whereas another 25 per cent of the stocks in the index are within 10-30 per cent of their life highs.

The exuberant performance of the stocks in the CNX 500 index indicates that retail investors are back in the market.

However, market analyst Rajat K Bose told NDTV that retail investors should be cautious as most of the stocks are moving without underlying fundamentals. (Watch)

Mr Bose believes that the rally in the midcap stocks is mainly liquidity driven so when liquidity dries up these stock will fall the most. The fact that many stocks are still far below their all-time highs suggests the fundamental in these stocks have come down drastically, he added.

Mr Bose expects some consolidation while the Nifty is in the 7,250 to 7,500 range, but expects the benchmark to touch 7,850 levels before the budget.