Moneycontrol Pro Market Outlook | Caution prevails as traders prepare for results season uncertainty

As the results season begins, traders are expected to proceed cautiously. If the September quarter numbers are any indication, the sentiment is likely to lean towards selling.

On the global stage, US markets experienced profit-taking throughout the week; however, a strong rally on Friday propelled indices to close higher. Notably, 2024 marked a remarkable achievement for the S&P 500, recording its second consecutive year of over 20% gains—the best two-year performance in a quarter-century. Despite this, economic indicators from the US showed weakness, with December's activity index falling to 36.9, marking the thirteenth month of contraction.

In Europe, the pan-European STOXX 600 edged up by 0.20%, although major markets ended slightly lower: Germany's DAX fell by 0.39%, France's CAC 40 dropped nearly 1%, and Italy's FTSE MIB remained flat. The UK's FTSE 100 was an exception, rising by 0.91%, buoyed primarily by a weaker British pound.

In Asia, Japan's Nikkei 225 dipped nearly 1% but closed the year at its highest level ever, achieving an impressive gain of nearly 20% in 2024. Meanwhile, Chinese stocks struggled, closing down approximately 5.55%, with Hong Kong's Hang Seng Index declining by 1.64%. The real estate sector in China continued to face headwinds, with sales from the top 100 developers plummeting by 28.1%.

An interim top

The Nifty index closed higher for the second consecutive week, once again surpassing the 40-week average, while the Bank Nifty experienced a decline. This week saw some short covering from short-term traders, particularly those engaged in weekly options. Despite this uptick, the weekly Rohit Momentum Index (RMI) remains bearish, suggesting that the overall market trend is still downward.

Notably, we ended the October-December quarter in the red after six quarters of a robust 18-month rally, indicating a need for both price and time corrections. As a result, we will view any upward movement as a counter-trend bounce before the market heads lower.

Analysing daily swings during these counter-trend movements, we observe that readings approaching 80 can reverse downward, leading to additional selling pressure. Essentially, readings near 80 indicate a near-term overbought condition. Following Thursday's significant bounce, the daily swing reached 84, signalling that the counter-trend bounce may have come to an end.

Source: web.strike.money

The options market indicates that call writers have largely covered their short positions. In this context, being short means selling a call option in anticipation that the market will remain flat or decline, allowing the seller to pocket the premium. During market downturns, we often witness an increase in call selling, which is reflected in the green histogram.

From December 6 to December 18, this histogram rose to a new record level. However, after that peak, the positions began to decline. On Thursday, the histogram shifted to red when the Nifty surged by over 400 points. This change signifies that there are now more outstanding put options than call options.

Historically, when the histogram turned red, it indicated that most call sellers were compelled to cover their positions. Following such occurrences, the market typically reached a peak before declining. The same scenario is likely to unfold again.

Source: web.strike.money

Lastly, foreign institutional investors (FIIs) have been actively increasing their short positions. On December 13, they held short positions of only 60,000 contracts, but by the end of this week, that number had risen to 229,000 contracts. This trend indicates that FIIs adopt a bearish outlook on India through their short positions in index futures.

So far, we have not witnessed any short covering in this segment, making it a relatively medium-term indicator compared to the previously mentioned metrics. Historically, readings above 330,000 contracts signal that an extreme level has been reached. At this point, the market appears poised for further selling as it continues to decline.

Source: web.strike.money

Sector Rotation

Source: web.strike.money

At the beginning of the week, the Nifty index appeared bearish but sharply recovered during the first two days of the new year, ultimately closing up by 0.80%.

The Nifty Infrastructure sector moved from the Lagging quadrant to the Improving quadrant, signalling positive momentum. Similarly, both Nifty India Consumption and Nifty Auto gained traction and are on their way to entering the Improving quadrant.

Notably, Nifty Realty began to outperform the benchmark, transitioning from the Improving quadrant to the Leading quadrant. Meanwhile, Nifty Consumer Durables made a significant leap directly into the Leading quadrant from Weakening, indicating a continuation of its upward trend following a minor correction.

Source: web.strike.money

On the daily chart, the Nifty Consumer Durables sector shows an upward trend and is poised to enter the Leading Quadrant. In contrast, the Nifty Pharma and Healthcare sectors experienced a loss of momentum as the overall market rebounded. Throughout the week, Nifty India Consumption and Nifty FMCG maintained steady momentum while remaining in the Leading Quadrant.

Nifty Auto gained traction and successfully transitioned into the Leading Quadrant from Improving on the week's last trading day. Meanwhile, Nifty Energy and Nifty Oil & Gas moved up from the Lagging Quadrant to Improving, positioning them as potential outperformers for the upcoming week. However, Nifty IT and Nifty Realty are trending towards the Lagging Quadrant.

Stocks to watch

Among the stocks expected to perform better during the week are Laurus Labs, Lupin, Kalyani Jewellers, Indian Hotels, Ultracemco, Max Healthcare, Apollo Hospital, Infosys, Abbot India, JK Cement and UBL.

Among the stocks that can witness further weakness are Bandhan Bank, IndiaMart, BSoft, Asian Paint, Concor, Nestle India, IRCTC, Reliance and Britannia.

Cheers, Shishir Asthana