Sell-on-rally sentiment grips D-Street as high valuations and dollar strength weigh on markets: Experts

As evidenced in the recent trading sessions, it appears that investors are taking advantage of the market's rise to sell stocks at higher levels. Every time the bulls tried to take control of the market, the bears swiftly took the upper hand, pushing prices back down. This sell-on-rally sentiment suggests caution among investors, who seem to be capitalising on short-term gains while remaining wary of potential market corrections.

The front-line indices, which kicked off 2025 on a strong footing, have failed to sustain the same momentum in the following trading sessions. After ending Friday’s trading session in the red, the indices are maintaining the same downward trajectory in today’s trade, with the Nifty 50 losing another 1.10%, falling below the 24,000 mark and the 200 DMA.

The Sensex also fell by 0.86% in today’s session, reaching 78,534. The broader market is facing more selling pressure, as the Nifty Smallcap 100 index tumbled by 2.20% in trade, while the Nifty Midcap 100 index fell by 1.9%.

According to market experts, concerns surrounding President-Elect Donald Trump’s policies impact on global trade, import tariff proposals on China and other emerging markets, and expectations of fewer Fed rate cuts in 2025—which is strengthening the US dollar—are putting adverse pressure on emerging market currencies like the Indian rupee.

Moreover, the strong rally in crude oil prices is also impacting sentiment, as the country meets 80% of its oil requirements through imports. This has cascading effects on raw material prices and is also likely to influence inflation numbers.

These factors, along with concerns over the expensive valuations of Indian markets (even after a sharp decline from the September peak), are weighing on investor sentiment.

Amid these concerns, FPIs have withdrawn ₹4,285 crore in the first three trading sessions of January, which was a turn from ₹15,446 crore that they invested in December, data with the depositories showed.

Overall, FPIs injected just ₹427 crore into Indian equities in 2024, which contrasts sharply with the extraordinary ₹1.71 lakh crore net inflows in 2023, driven by optimism over India's strong economic fundamentals.

Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, "The market is likely to be influenced by the negative factors impacting FII flows and some positive domestic factors that can support the market. The external macro construct continues to be unfavourable with the dollar index at 109 and the 10-year US bond yield at 4.62%. The FIIs are likely to continue selling till the yields decline and the dollar stabilises."

"Domestically, the December auto numbers indicate that the much talked about urban demand deceleration is exaggerated. Buying will resume in these resilient domestic segments, supporting the market on declines," he added. 

Volatility likely to continue further

Vinod Nair, Head of Research, Geojit Financial Services said, "The market concluded last week with a pessimistic note as a sell-on-rally sentiment prevails in the market due to a strong US dollar, high valuation, and investors shift towards a multi-asset strategy,"

Nair highlighted those persistent concerns over FII outflows, a depreciating INR, along with signs of improving core sector performance and reduced expectations for rate cuts in 2025, which have contributed to mixed investor sentiment. Conversely, DIIs have maintained an optimistic stance.

He added that uncertainty surrounding Trump's economic policies and high valuations may impact the stock market in the short term, particularly in emerging markets. Looking ahead, significant market attention is expected on the upcoming Q3 results, with an anticipated improvement on a QoQ basis.

"Further, the investors are likely to align their portfolios based on pre-budget expectations. The key data points, such as the FOMC minutes, US non-farm payroll, and unemployment rate, will influence market sentiment," Vinod noted. 

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