Moneycontrol Pro Market Outlook | A bullish undertone to the earnings season

A four-day week ended with markets closing near its high on Friday as global markets posted a strong recovery.

Dear Reader,

An eventful week ended with the market closing flat for the week, the second in a row. A four-day week ended with markets closing near its high on Friday as global markets posted a strong recovery.

The week started negatively thanks to elevated US Treasury bond yields but soon recovered as oil prices cooled. Data coming out of the US continued to reflect the bullishness of the economy. The surprisingly strong labour data resulted in the 10-year and 30-year Treasury yields trading at their highest level since 2007.

RBI maintaining a status quo on repo rates on Friday helped the market recover the losses for the week. However, bond markets were spooked by the RBI’s action, with the bond yield spiking the most in a year.

Based on technical and data points, we expected the markets to recover in the previous week. However, a poor start for the week, thanks to a sharp fall in the US market, saw Indian markets falling sharply on Tuesday, making a new bottom on Wednesday, only to recover sharply in the remaining two days.

The September quarter earnings season will start next week, but markets will be looking for cues from the results of US banks, many of whom are expected to show losses in their treasury portfolio. In India, IT results will set the tone, especially after TCS declared that it will be announcing another buyback.

However, all bets are off if the Israel-Palestine war blows up and spreads to other Middle Eastern countries.

Closing Strong 

Between 19600 and 19333, the Nifty made lower lows, and the swing made higher lows, resulting in a positive divergence that signalled the next move higher for the Nifty.

Source: web.strike.money

On Thursday this week, the weekly expiry, the percentage of RMI buy signals dipped to 4 percent, an extremely low reading. It has coincided with the markets confirming a trend reversal from down to up.

Source: web.strike.money

Client Position 

Lastly, when FIIs go short, clients go long. It is based on the history of NSE data available for participant-wise open interest. Typically, when FIIs are max short, we reach a market bottom in the medium term. On the opposite side, we are also at the bottom when clients are long. Based on this, the chart below shows that clients are now long up to 84k contracts, comparable with previous bottoms. Client positions have peaked near one of the two red lines on the chart before. We are now at the first red line, which can be considered a possible bottom.

Source: web.strike.money

Indices and Market Breadth 

The benchmark indices closed the week flat after two weeks of negative closing. For the week, BSE Sensex closed 0.25 percent higher while Nifty50 was up 15.2 points at 19,653.50. Smaller stocks gave a mixed performance, with the BSE Small-cap Index gaining 0.8 percent, BSE Mid-cap Index losing 0.8 percent, and the BSE Large-cap Index ending flat.

RBI’s status quo helped the real estate sector close the week on a strong note, gaining over two percent. A late rally also helped the IT index close 1.8 percent higher, but the Power Index lost 2.5 percent, the Metal index fell 2.3 percent and BSE Telecom dropped about two percent.

Among the top performers for the week were Vascon Engineers, which rose 23.71 percent, Sasken Technologies which gained 23.67 percent and Bhagiradh Chemicals which closed 22.21 percent higher. Among the losers were MTNL --down 9.41 percent, DCM Shriram-- dropped 9.14 percent, and Aarti Pharmlabs, which lost 7.98 percent.

Global Markets 

After a four-week losing streak, the S&P 500 closed the week marginally positive, all because of a strong rally on Friday led by technology shares. Rising jobs but at a slower wage growth helped improve market sentiment, leading to a strong rally on Friday. For the week, the S&P 500 was up 0.5 percent, the Dow fell 0.3 percent, and the Nasdaq rose 1.6 percent.

The European markets ended lower as bond yields continued to rise. The pan-European Stoxx 600 index and all major European indices declined more than one percent. The eurozone retail sales declined 1.2 percent sequentially in August due to a sharp drop in gasoline, mail orders, and internet shopping. House prices fell for the sixth consecutive month in September in the UK, while cancelled construction projects in Germany have touched a new high.

Asian markets mostly closed lower on worries of higher bond yields.

While the Chinese markets were closed due to the Golden Week Holiday, economic data from the country was encouraging. For the first time since March, China’s manufacturing PMI exceeded expectations at 50.2 in September from 49.7 in August. The non-manufacturing PMI also expanded to a better-than-expected 51.7 from 51.0 in August.

Stocks To Watch 

As the earnings season starts, volatility will increase in companies lining up to post their results.

Among the stocks that can continue to witness momentum buying are Bajaj Finance, Bajaj Finserv, DLF, McDowell, TCS, Titan and L&T.

The stocks which offer a good risk-reward ratio are HDFC Life, IOC, ITC, Reliance, SBI Life, and Tata Steel.

Cheers, Shishir Asthana