Moneycontrol Pro Market Outlook | Quality of earnings to decide the market trend

The market's reaction to the recent tariff announcements has been surprisingly subdued when compared to previous instances.

Dear Reader,

Earnings season in India kicked off on a disappointing note, further complicated by the uncertainty surrounding trade negotiations with the United States, which intensified pressure on the markets. The Nifty 50 index faced a decline of 1.22 per cent over the week. In contrast, small and mid-cap indices fared somewhat better but still ended the week in negative territory.

Foreign Institutional Investors (FIIs) were active sellers for the second consecutive week, divesting a substantial Rs 4,511.12 crore worth of equities. The telecom sector experienced a notable downturn, losing 4.4 per cent, while IT stocks dropped by 3 per cent, largely impacted by disappointing earnings reports from major companies.

On a broader scale, global markets also exhibited volatility, especially following the release of new tariff rates by the US affecting various countries. This turbulence in the global landscape is illustrated in the accompanying chart, which details market performance over the week.

The market's reaction to the recent tariff announcements has been surprisingly subdued when compared to previous instances, indicating that investors might have already priced this news in. However, the announcement of a staggering 50 percent tariff on copper has certainly stirred concerns among market participants, as it has the potential to keep global commodity prices elevated.

As the earnings season gains momentum, the Indian markets are poised to respond to the results from individual companies, along with any unexpected news emerging from the United States.

Bounce back likely

The Nifty index has experienced negative performance for a second consecutive week. Typically, most corrections in a bull market tend to resolve themselves within one to two weeks. We may be nearing the end of this downturn. However, this assumption relies on the notion that we are indeed in a bull market and that the upward trend will persist.

Looking at the weekly charts, we are witnessing a pattern of higher lows, provided we do not breach a certain critical level. This situation offers some leeway to absorb any negative news that may arise.

Interestingly, the setups we've analysed suggest that we might not need to test those lower levels just yet. Historically, July tends to be a positive month, but this year is marked by uncertainty due to anticipated poor earnings in the upcoming quarter. The question remains whether this negative outlook is already factored into the market.

After three days of consecutive selling, the hourly charts have fallen back into oversold territory, as indicated by the RSI (Relative Strength Index). Generally, a reading below 30 signifies oversold conditions, and when it nears 20, it indicates an even stronger potential for a bounce back. This pattern has been observed twice recently, on May 9 and June 13, after which we saw a rebound leading to new higher highs. Currently, these lower levels coincide with a trendline touched last Friday, placing us at a support point, accompanied by the RSI approaching 20 once more.

Source: web.strike.money

On the day of the June expiration, FIIs significantly reduced their short positions, resulting in a net short position of -34967 contracts. However, since that day, they've been steadily adding back to their shorts each day. By the end of the week, their position had risen to -103760 index futures short.

Analysing historical data over the past two years, it's clear that whenever readings exceed one lakh contracts, the Nifty tends to approach a significant bottom, often within a one-to-two-week timeframe, if not longer. Currently, we find ourselves with a considerable short position in the market, suggesting that a rising trend in the Nifty could trigger a short squeeze.

Source: web.strike.money

The daily swing has recently dropped to a level of 18, marking a significant decline from its previous high of 88. This adjustment took 11 sessions, a duration that feels unusually prolonged given the rarity of such behaviour. Now, with the daily swing at 18, we can confidently say it has entered oversold territory.

Except February 11th, every other instance of such a dip has typically led to a market bounce-back, particularly when supported by a favourable Relative Strength Index (RSI). Furthermore, when considering additional data points, such as participant positioning, the evidence increasingly suggests a trend toward higher prices in the near term, rather than a further decline.

Source: web.strike.money

Sector Rotation

Nifty 50 – The Benchmark Index ended lower by -1.22% this week and closed at 25149.85

Indices positioning on Weekly Timeframe

Weakening Quadrant: Nifty Bank, Nifty Financial Services, and Nifty Private Bank continue to see deteriorating momentum and relative strength.

Lagging Quadrant: Nifty Pharma has seen some pickup in momentum and relative strength. Also, Nifty FMCG has seen a pickup in momentum and relative strength this week. These two sectors will be interesting to watch in the coming weeks.

Improving Quadrant: Nifty IT, Nifty Media, Nifty MNC, and Nifty Consumer Durable are seeing improvement in relative strength.  Nifty Auto has gained relative strength, but its momentum is falling, which is not a good sign. Even if it gets into the leading quadrant in the coming weeks, it might not necessarily be a sign of strength unless the momentum sees an uptick.

Leading Quadrant: Nifty Realty has entered the leading quadrant, but the daily RRG is showing significant underperformance. A turnaround is needed on the daily RRG to bet on Nifty Realty. Nifty Energy has also entered the leading quadrant, but the momentum is falling. Nifty Metal also entered the weekly quadrant, and it looks interesting because it has seen a strong uptick in momentum as well as relative strength. Nifty PSE and Nifty PSU Bank’s relative strength has improved this week. However, Nifty Oil & Gas and Nifty Infra have seen a downtick in momentum.

Indices positioning on Daily Timeframe

Weakening Quadrant:  None of the indices are in the weakening quadrant.

Lagging Quadrant: Last week, the Nifty IT was at a make-or-break zone. This week, the Nifty IT went into the lagging quadrant, and it has seen significant underperformance. It has seen some improvement in momentum, but the relative strength continues to deteriorate this week. Nifty Realty is also seeing some improvement in momentum, but the relative strength continues to deteriorate. Other notable indices, such as Nifty Media, Nifty Private Bank, Nifty Bank, and Nifty Financial Services, are in the lagging quadrant but are also gaining momentum and relative strength.

Improving Quadrant: Nifty FMCG, Nifty PSE and Nifty Energy are gaining momentum and relative strength. Nifty Auto was attempting to inch towards the leading quadrant, but on Friday, its momentum deteriorated. If this trend continues, it may return to the lagging quadrant.

Leading Quadrant: Nifty Consumer Durable and Nifty Infrastructure are in the leading quadrant, and they continue to see improving relative strength and momentum. Nifty Metal and Nifty Oil & Gas have seen a strong outperformance to the benchmark, and that is the reason they have entered the leading quadrant with a strong increase in momentum and relative strength.

Stocks to watch 

Among the stocks expected to perform better during the week are RBL Bank, Laurus Labs, Ultratech Cement, Indigo, Muthoot Finance, HDFC Bank, AU Bank, Marico and Dalmia Bharat.

Cheers, Shishir Asthana