5 reasons why Sensex rallied over 600 points today

Snapping six-days losing streak, Indian benchmark indices Sensex and Nifty ended 1.7% higher each on Wednesday, led by strong rally in financial and banking stocks, especially SBI, IndusInd Bank, HDFC Bank and ICICI Bank

The S&P BSE Sensex ended 645 points or 1.72% higher at 38,177, while NSE's Nifty50 index closed 187 points or 1.68% higher at 11,313 mark.

Overall 22 out of 30 stocks on Sensex and 38 out of 50 scrips in Nifty closed in the bullish territory. The market breadth stood at 1.03 on BSE and 1.13 at NSE, indicating positive market sentiments.

1. China opens to partial U.S. trade deal

Globally, shares turned bullish after a bearish start, after Bloomberg reported that China was still open to agreeing on a partial trade deal with the United States, that created optimism over US-China trade meeting scheduled to be held on October 10-11. Global equities started the day on a subdued note ahead of US-China trade talks, coupled with the International Monetary Fund (IMF) forecasting the weakest growth in a decade owing to long-running tariff disputes.

Following the developement, China's Shanghai index was trading 0.73% higher, followed by Japan's Nikkei index, that traded 0.2% higher, while Hong Kong's Hang Seng index rose 0.06%.

As per the media report, China would accept a limited deal as long as no more tariffs are imposed. In return, Beijing would offer non-core concessions like purchases of agricultural products, the report said. The tit-for-tat tariff year-long dispute between the United States and China have been playing the key role in damaging financial markets, slowing capital investment, trade flows within an already fragile global economy.

2. Increase in Dearness Allowance

Sentiment got a further boost after the Cabinet hiked the dearness allowance (DA) on Wednesday hiked the dearness allowance-cost of living adjustment allowance-by 5% to 17% from the current 12%.

"The 5% hike in DA by govt will add impetus to the festival demand," quoted Vinod Nair, Head of Research at Geojit Financial Services.

According to S Ranganathan, Head of Research at LKP Securities, "The 5 % hike in Dearness Allowance puts more money in the hands of over one crore Government Employees and pushed several heavyweight stocks higher in trade today".

3. Banking stocks rally

As per market experts, investors piled into recently beaten down banking and financial stocks ahead of the earnings season.

Sectorally, all the other indices ended on a bullish note, but the biggest gains were registered in banking and PSU banking indices, partly due to short covering.

Mustafa Nadeem, CEO, Epic Research said, "Nifty rebounded from lower levels as buying on dips was seen in the broader market with banks, financials, PSUs and metals leading."

While Nifty Bank rallied 3.67%, the private bank gained 3.4%. This was followed by PSU bank ending 3.10% higher and financial services at 3.03%.

The Nifty Bank index had fallen 10.5% in the past six straight sessions, while PSU Bank and Private Bank had fallen 10.3 % and 7.6 %, respectively.

"Market recovered after many days of fall and rose comfortably above 11,300 level. Banks outperformed as sharp fall in bond yield is indicating further room for rate cuts which will improve liquidity and consumption story," said Vinod Nair.

Rohit Singre, Senior Technical Analyst, LKP Securities commented on Nifty Bank's rally today and quoted," Nifty bank has closed a day at 28786 superb gains of nearly 4 %, immediate support for the index is coming near 28530-28300 zone and resistance is coming near 29000-29200 zone".

Additionally, over 2% advance was recorded in realty and metal indices and over 1% gain was recorded in pharma and auto stocks today.

4. Nifty's Technical Traits

With Nifty ending above the strong resistance level of 11,300 in today's rally, Rohit Singre, Senior Technical Analyst, LKP Securities commented, "Index opened the day with marginally gains and after retesting its demand zone index has seen the splendid move and managed to close above 11,300 mark with gains of 187 points on Wednesday session.

"After showing a consistent weakness in the last six sessions, the Nifty witnessed a sharp upside bounce today and closed the day on hefty gains," said Nagaraj Shetti, Technical Research Analyst, HDFC securities on today's rally. He added that Nifty showing sharp up move today could be a relief factor for bulls to make a comeback as per short term basis.

Mustafa Nadeem, CEO, Epic Research said," Derivatives data also pointed to short covering at strikes of 11300 - 11400 while long build-up is seen at 11200 - 11300. This indicates that we may sustain the 11200 - 11300 in the coming days. On the upside, resistance is now seen at 11480 - 11520."

5. Results Season

Tech majors TCS and Infosys will be announcing their second quarterly (July-September 2019) results for FY20 this week. This marks the beginning of the September quarterly earnings season.

To promote growth amid the ongoing economic slump, the Centre had slashed corporate taxes regular rate of 30 % to 22% for all domestic companies. This move Low tax rate cut will help boost earnings and kick start consumption and investment cycle. Thus companies are expected to receive EPS (earnings per share) benefit post the development, which will give a boost to their respective earnings for the Q2FY20.

Additionally, the festive demand and record monsoon shall further help the June- September quarter, which turns out to be the biggest sales season for companies.

"Going forward, the result season will dictate the market direction and investors are expecting some green shoots on account of festival demand and good monsoon," stated Vinod Nair, Head of Research at Geojit Financial Services.

By Rupa Burman Roy

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