A relief rally is a respite from broader selling in the markets. It is a temporary rise in the markets, when the larger trend is downward.
Relief rallies often occur when anticipated negative news ends up being positive or less severe than expected.
Relief rallies can also be a result of liquidity. After a massive downfall, several investors await buying opportunities, or taking positions at prices they deem attractive. This buying gives some support to markets, and results in a relief rally.
In May 2022, the markets first went down 8%, and then last week were up 3%. A couple of days of respite, resulting in a week that ended positive after 4 consecutive of falling.
So, what’s up?
Why did the markets suddenly rise?
China cuts key lending rates: With every other country facing inflationary pressures, and rising rates to cool the economy down, China is going the other way. Its zero tolerance policy towards COVID-19 saw massive lockdowns in activity. Demand, production and logistics were heavily hampered. The People’s Bank of China announced a 15-basis-point cut in its five-year Loan Prime Rate (LPR).
Economic data in the US contributed to some encouragement: Retail spending jumped in April for the fourth straight month.
Optimism from the Ministry: India’s economic growth will be robust at 8.9% this fiscal year, the highest among all large economies according to Nirmala Sitharaman. The minister also expressed optimism about next financial year's growth prospects in her statement. This highlights the country's strong resiliency and quick recovery since COVID.
And of course, relief rallies!
There’s usually no point digging into relief rallies much on larger downward trends. They don’t indicate any change in direction, except they may strongly be deceiving if looked at in isolation.
Take some bluechip stocks for example; the ones trading near their 52-week-lows. Five Nifty 50 stocks are within 5% of their 52-week lows, while 12 are within 10% of their 52-week lows.
Some examples? Shree Cement, Wipro, BPCL, HDFC Bank, Nestle India and Bajaj Finance are <5% away from their 52-week-lows.
If your POV is that these stellar companies are available at such steep discounts, you’ve probably already bought these stocks, and contributed to the relief rally.
In the US, last week saw some respite in the markets with stocks rising for a couple of days, excited by positive economic data. However, the bears were quick to come back, and the rest of the week saw heavy downfalls again.
Even with India, while small positives are easy to be excited about, the RBI Governor has indicated that rate hikes in June are a ‘no-brainer’. We don’t really need to point out overall market direction in that case, no?