Moneycontrol Pro Market Outlook | Can election success drive a rally in Indian stock markets?

market

Dear Reader, 

Indian markets finally recorded a positive weekly close following a significant rally on Friday. This ended a two-week losing streak, as the market overlooked the bribery allegations against Gautam Adani despite continued selling by foreign institutional investors (FIIs).

FIIs sold equities worth Rs 11,414.18 crore during the week, bringing the total for the month to Rs 40,947.35 crore and extending the current selling streak to Rs 1,66,394 crore over 38 days.

The BSE Sensex rose by 1.98 percent throughout the week, while the Nifty50 increased by 1.7 percent. Analysts attributed part of Friday's rally to exit poll results showing strong support for Maharashtra's incumbent government.

With results announced over the weekend showing better-than-expected numbers for the BJP government, markets are anticipated to experience a strong rally in the coming week.

The BJP-led coalition promised to make Maharashtra a $1 trillion economy by 2028 and focus on planned urban development in Mumbai.

In the global market, major US indices rebounded from previous losses despite escalating tensions between Russia and Ukraine. More notably, the cryptocurrency market saw Bitcoin continue its post-election rally, gaining over 10 percent for three consecutive weeks and approaching the $100,000 mark.

In Europe, the STOXX 600 closed 1.06 percent higher amid hopes that the European Central Bank (ECB) would cut rates in its December meeting, following PMI data that suggested a worsening economic outlook. The UK's FTSE 100 led gains with a rise of 2.46 percent, while Germany's DAX increased by 0.58 percent. Conversely, Italy's FTSE MIB fell by 2.04 percent, and France's CAC 40 Index remained flat for the week.

The Eurozone Composite PMI Output Index dropped to a ten-month low of 48.1 from 50 in October, marking the first contraction in business activity in the UK in twelve months.

In Asia, Japan's Nikkei 225 closed lower with a loss of 0.93 percent, as the yield on ten-year Japanese government bonds approached 1.1 percent, nearing a thirteen-year high. Consumer inflation remained above the Bank of Japan's target of 2 percent in October.

Meanwhile, Chinese markets faced pressure due to fears surrounding tariffs imposed by Trump, with indices declining by 1.91 percent and Hong Kong's Hang Seng Index losing 1.01 percent during the week.

Positive divergences

Nifty finally closed the week on a positive note, breaking its losing streak. This recovery allowed the Nifty to rise above the 40-week average, which has held for most other major indices, including the Nifty 500 and the midcap and smallcap indexes. A series of positive divergences in market sentiment and extreme data points support the notion of a significant rebound in the markets, which we will discuss today.

The ability to hold 23,200 as a support level—representing 61.8 percent of the entire post-election rally—is encouraging. A move toward 25,000 could be on the horizon.

The 20-day advance/decline (A/D) ratio shows a positive divergence at recent lows, indicating that more stocks have been rising than falling in the past few days despite the market decline. This trend reversal is noteworthy, especially since a negative divergence preceded the previous sell-off.

Source: web.strike.money

We have been discussing this over the past few weeks: the number of Nifty 500 stocks trading above their 100-day moving average (DMA). Recently, this number dropped to the lower red lines, indicating an oversold condition. However, the count began to rise over the last week even as the Nifty index was declining. This represents another form of divergence in market internals, approaching the oversold territory.

Source: web.strike.money

Client positioning has indicated that large traders were accumulating long positions in the market as it declined. This trend is now prompting short sellers to cover their positions. The data pertains to index futures, which represent bets on the major indices in the market. This reading will likely provide a temporary boost to the markets until the long positions are closed out, so it's important to keep an eye on this development.

Source: web.strike.money

Sector Rotation

The Weekly Relative Rotation Graph (RRG) from India Charts shows no major changes.

Source: web.strike.money

Weekly RRG

On the daily chart, Nifty Bank, Financial Services, and PSU Banks saw a dip in relative momentum, ending up in the weakening quadrant. Nifty IT continued in the leading quadrant, while other indices shuttled between the improving and lagging quadrants, though trying to gain relative strength.

Source: web.strike.money

Stocks to watch

Among the stocks expected to perform better during the week are Tech Mahindra, Laurus Labs, Wipro, Eicher Motors, HDFC Bank, Dixon, Divis Lab and Infy.

Among the stocks that can witness further weakness are IGL, India Mart, Bata India, IndusInd Bank, SRF, Nestle, Astral RBL Bank and Bandhan Bank.

Cheers,Shishir Asthana