Moneycontrol Pro Market Outlook | All eyes on Fed meet

Federal Reserve

Dear Reader, 

It was a positive week for global equity markets with Indian markets being no exception. Buying interest was broad-based, and Indian markets extended their gains for the second straight week following the announcement of GST cuts.

Sentiment received a further boost when news emerged of a US delegation visiting India to negotiate an aircraft deal, raising hopes of improved ties after Trump’s move to impose a steep 50 percent tariff on Indian goods.

For the week, the Nifty50 advanced 1.5 percent, with the broader market delivering similar returns. However, this optimism was tempered by persistent foreign outflows, as Foreign Institutional Investors (FIIs) continued their selling streak for the 11th consecutive week, offloading equities worth Rs 3,577.37 crore.

On the sectoral front, defence stocks surged seven percent, leading the rally, while information technology stocks also posted a solid four percent gain.

Globally, markets mirrored this positive momentum. US benchmark indices closed higher, buoyed by expectations of a potential rate cut ahead of the Federal Reserve’s September 16–17 monetary policy meeting. European markets too gained on the back of these hopes. Japan, however, stole the spotlight as the top-performing market of the week, with stocks rallying sharply after a major political upheaval in the country.

Looking ahead, the Fed’s upcoming announcement will be the key event guiding market direction, with expectations of a rate cut running high. Yet, uncertainty lingers in the form of President Trump’s unpredictable tariff pronouncements, which have the potential to quickly sour the upbeat mood.

Source: investing.com

Market at a critical point

The Nifty index has achieved a second consecutive week of gains, settling above the 20-week moving average. This development has rekindled optimism for a sustainable recovery in the markets. The real test of this upward momentum will come when the Nifty surpasses the level of 25,162, which aligns with the 61.8% retracement level. Until that point, it is crucial to assess market sentiment and the positioning of various data points to determine if we are stretching ourselves too thin.

While the daily swing has been on the rise, it has yet to breach the 80 to 90 range that would indicate a near-term overbought condition. Furthermore, the average swing remains below this threshold. As things stand, the markets may enter a consolidation phase, but the prevailing indicators suggest a continued upward trajectory in the near term.

Source: web.strike.money

The open interest-based put/call ratio (PCR) has a direct correlation with the underlying market price of the Nifty. As the Nifty experiences an upward trend, the PCR is also on the rise. However, it's important to note that the current PCR levels have not yet reached the highs seen during previous market peaks from a medium-term perspective. This suggests there may still be potential for further advances.

That said, the PCR is approaching a critical threshold marked by a red horizontal line. Crossing this line indicates that the market could become overextended. Therefore, it's crucial to closely monitor the trend of rising PCR, as changes in this trend could signal a shift in market dynamics.

Source: web.strike.money

As we approach the resistance level of 25,162, the histogram depicted in the chart below has shifted to red. This shift indicates that there are more Puts open in the market than Calls. The underlying reason for this trend is the panic among option sellers, who tend to offload their Calls and increase their Puts. The presence of the red bar suggests that we may be witnessing a phase of short covering, which often occurs towards the conclusion of a near-term trend. Therefore, unless we manage to surpass the 25,162 level, it would be wise to anticipate a potential pullback or consolidation phase before the market can resume its upward trajectory.

Source: web.strike.money

Sector Rotation

Nifty 50 – The Benchmark Index ended higher by 1.51% this week and closed at 25114.

Weekly RRG:

Weakening Quadrant: Nifty Media has entered the weakening quadrant this week due to deterioration in momentum and relative strength. Other Nifty indices, like Nifty Infrastructure, Nifty PSU Bank, and Nifty Bank, continue to lose momentum and relative strength. Nifty Financial Services has seen some uptick in the momentum this week. This index should be watched closely in the near term. If its momentum continues to improve, then we can expect improvement in relative strength as well, leading to outperformance.

Lagging Quadrant: Nifty Energy and Nifty Oil and Gas have entered the lagging quadrant this week. For both these indices, the momentum and relative strength are deteriorating. Nifty PSE and Nifty Realty were in the lagging quadrant last week, and their momentum and relative strength continue to deteriorate. There are no signs of a turnaround seen in both these indices yet. Nifty Private Bank has seen some uptick in the momentum and is showing initial signs of a turnaround.

Improving Quadrant: Nifty FMCG index continues to gain momentum and relative strength this week. In the case of Nifty IT, there has been some improvement in relative strength, but the momentum continues to weaken. If this trend continues, then the Nifty IT index can enter the lagging quadrant next week.

Leading Quadrant: Nifty Auto continues to gain momentum as well as relative strength, and there are no signs of a turnaround yet. The momentum has flattened out in Nifty MNC, but the relative strength continues to improve. For the second straight week, the Nifty Metal index has seen improvement in momentum as well as relative strength, which is a good sign. However, momentum has deteriorated in the Nifty Consumer Durable and Nifty Pharma indices. If the momentum continues to deteriorate, then these indices can underperform in the coming weeks. So, watch out for these indices.

Daily RRG: 

Weakening Quadrant:  Nifty IT is in the weakening quadrant and is losing momentum as well as relative strength. Nifty FMCG and Nifty MNC have entered the weakening quadrant today. Losing momentum as well as a relative strength.

Lagging Quadrant: Nifty Infra has seen some pickup in momentum, and this will be an interesting sector to watch out for in the near term.

Improving Quadrant: Nifty PSE, Nifty Energy, Nifty Pharma, Nifty PSU Bank, Nifty Oil and Gas, Nifty Private Bank, Nifty Financial Service and Nifty Bank are in the improving quadrant. These indices are gaining momentum as well as relative strength, which is a good sign.

Leading Quadrant: Nifty Metal is the only Nifty index in the leading quadrant that is gaining momentum as well as relative strength. Loss of momentum is visible in Nifty Consumer Durable. Nifty Auto has seen some improvement in relative strength in Friday's trading session; however, it is losing momentum, which is not a good sign.

Stocks to watch

Among the stocks expected to perform better during the week are Bajaj Finance, Maruti, Allied Blenders, Indian, Bank, LTF, Fortis, HBL, Motherson Sumi, Eicher Motors, Anand Rathi, Acme Solar and Muthoot Finance.

Cheers, 

Shishir Asthana