Moneycontrol Pro Market Outlook | All eyes on Union Budget and Fed as markets brace for volatility

FIIs continued their exodus from Indian markets

Dear Reader,

Indian equity markets experienced their sharpest decline in four months in the past week, with broader indices bearing the brunt of the selloff. The Nifty50 fell 2.51 percent, while mid-cap and small-cap stocks suffered even steeper losses, dropping between 4 and 6 percent over the week.

January 2026 has proven particularly challenging for investors. The benchmark Nifty50 has declined nearly 4 percent month-to-date, while mid-cap stocks have shed 5.7 percent and small-caps have tumbled 9 percent, reflecting widespread weakness across market segments.

The selloff was broad-based, with every sectoral index closing in negative territory. The downturn was driven by a confluence of factors, including persistent foreign investor selling, disappointing corporate earnings, the rupee sliding to fresh lows, and escalating geopolitical tensions. Real estate stocks were hit hardest, plummeting 11 percent, while consumer durables fell 6.5 percent and media stocks declined 4 percent. The oil and gas, energy, infrastructure, defence, and healthcare sectors each lost approximately 3 percent.

FIIs continued their exodus from Indian markets, offloading shares worth Rs 14,651.99 crore during the week. This brings their total monthly sales to a substantial Rs 40,704.39 crore, adding significant pressure to domestic equities.

Across the Atlantic, American markets experienced volatility on Tuesday following President Donald Trump's announcement of new tariffs on European nations opposing US efforts to purchase or take control of Greenland. However, stocks rebounded after Trump softened his stance, suggesting an agreement had been reached between NATO and the United States.

Looking ahead, the coming week is expected to be shaped by global macroeconomic developments as traders position themselves ahead of India's Union Budget. While the Federal Reserve is scheduled to meet, no major policy changes are anticipated. Market participants will be closely watching Fed Chairman Jerome Powell's responses to any questions regarding an ongoing investigation against him, as his remarks could influence global market sentiment.

Record FII short position

The Nifty has declined for three consecutive weeks, and the weekly RMI momentum indicator has been in sell mode since January 9th. Prices have fallen to the lower band, representing two standard deviations below the 20-day moving average. Does this signal a bottom? In a bull market, yes; in a bear market, no. The 24,741 level marks the lower band and will be crucial support to monitor next week.

Sentiment indicators have reached oversold levels, helping the market bounce for a day or two, but fresh selling has emerged repeatedly. In bear markets, oversold readings don't work. The data pattern has shifted and warrants attention.

The daily swing indicator ended the week at 17.84. Over the past two weeks, it dropped below 10 twice, signalling extreme oversold conditions. This week saw an intraday reading below 7. However, on both occasions, the Nifty rebounded for only one or two days before selling off to lower closing lows. As the saying goes, "Do not catch a falling knife." This is one of those moments.

Source: web.strike.money

FIIs have relentlessly built up their short positions, reaching levels that historically have presented attractive buying opportunities. However, this time the situation requires a different interpretation. I'm characterising this as a directional short position because it was established near the market peak, not after a significant decline. Consequently, we cannot immediately read it as a bullish contrarian signal.

The net short position of 227,573 contracts in index futures held by FIIs represents an all-time high. This marks only the second instance in the data's history—and the first since the COVID period—that we've witnessed such a pattern. These figures have been adjusted for changes in contract size, making the reading all the more significant.

Source: web.strike.money

Finally, let's examine how many stocks are trading above their 200-day moving average. Using the Nifty Total Market Index, which comprises over 700 stocks and represents the broadest possible market gauge, this indicator ended the week at 22.53.

Readings below 20 typically signal oversold territory, raising the question: should investors start buying at that level? Eventually, yes—but timing matters. In March 2023, the market bottomed at a higher reading of 37, yet the same pattern doesn't appear to be playing out this time. It may be prudent to wait for the data to reach more extreme levels, perhaps even below 10, before taking action.

Source: web.strike.money

Nifty 50 – The Benchmark Index ended lower, by -2.51% this week and closed at 25048.65.

Sector Rotation

Leading Quadrant:

The Nifty Financial Services index entered the leading quadrant this week and has gained momentum and relative strength. The Nifty IT index continued to gain momentum and relative strength this week. Nifty Bank and Nifty Private Bank also continued to gain momentum and relative strength after seeing a turnaround in the previous week, hinting at continued outperformance in the coming weeks. Nifty Metal saw a significant improvement in momentum and relative strength after entering the leading quadrant last week.

Weakening Quadrant:

Nifty PSU Bank has shown an initial sign of a turnaround this week, with momentum and relative strength. Nifty Oil and Gas continues to lose momentum and relative strength. Nifty Auto has seen a sharp decline in relative strength over the past two weeks, which is not a good sign. This index can start to underperform meaningfully if this trend persists.

Improving Quadrant: Nifty Media and Nifty PSE have seen a strong uptick in momentum, pushing these indices to the improving quadrant from the lagging quadrant. The Nifty Pharma index has once again seen a positive turnaround in momentum and relative strength, pushing it back into the improving quadrant.

Lagging Quadrant:

Nifty Infrastructure has entered the lagging quadrant as it continues to lose momentum and relative strength. Nifty Realty is seeing a sharp decline in momentum and relative strength, and there are no signs of a turnaround yet. Nifty MNC has seen improvement in momentum, as reflected in its relative strength. Nifty Energy and Nifty FMCG have seen some momentum, but their relative strength continues to weaken. Nifty Consumer Durable shows some improvement in momentum, but its relative strength continues to deteriorate.

Stocks to watch

Among the stocks expected to perform better during the week are Hindustan Zinc, Hindalco, Tech Mahindra, Vedanta, Shriram Finance, SBI, Tata Steel, Nestle, Federal Bank, Ashok Leyland, National Aluminium, and JK Tyre.

Cheers,

Shishir Asthana