Moneycontrol Pro Market Outlook | Can the rate cut rally continue?

The Nifty IT index has experienced an increase in momentum during the week, but its relative strength compared to the benchmark index is deteriorating.

Dear Reader,  

Indian benchmark indices experienced a rebound this week, rising by 1.02 percent and successfully breaking a two-week losing streak. This upswing was largely fuelled by strong measures from the Reserve Bank of India (RBI), which implemented a 50 basis point cut in the repo rate and a significant 100 basis point reduction in the Cash Reserve Ratio (CRR).

The large-cap index saw a gain of 1 percent, while smaller indices, including mid-cap and small-cap, outperformed with increases of 2 percent. Notably, the Realty index surged by an impressive 9.5 percent, the Metal index climbed by 2.3 percent, and the PSU Bank sector closed 2 percent higher.

Despite this week’s positive market performance, foreign institutional investors (FIIs) continued to be net sellers for the third consecutive week, offloading equities worth Rs 3,565.88 crore.

On a global scale, the markets also showed favourable trends. Market sentiment took a turn for the better following a constructive phone call between U.S. President Donald Trump and Chinese President Xi Jinping, which Trump described in a social media post as leading to a "very positive conclusion for both countries."

The Indian markets are on the brink of a potential rally. All signs point to optimism, provided that no significant global events arise to disrupt this positive momentum.

Markets ripe for a rally

After experiencing two consecutive weeks of decline, the Nifty index finally closed on a positive note. A look at the weekly chart reveals a pattern known as the engulfing bull, which is viewed by Japanese traders as a promising indicator for future trends, provided that prices remain above a certain level, which we nearly reached this week.

As the week progressed, the market seemed to shake off the negative sentiment that had been pervasive since May 15, 2025. Notably, the Bank Nifty showed even greater strength, surging to a new all-time high. This development suggests that we may be on the brink of a multi-week rally.

In terms of market dynamics, the percentage of stocks showing buy signals on the Rohit Momentum Indicator (RMI) among the Nifty 50 dropped to just 10 percent during the week. This downturn indicates a significant oversold condition in the short term, reminiscent of April 7, when market reactions followed tariff news. Historically, such oversold conditions have acted as bullish signals in the near term.

Source: web.strike.money

During the week FIIs began to increase their short positions significantly. This added pressure brought the readings close to the dotted red line illustrated in the chart below, a crucial threshold that has garnered attention over time. Historically, similar readings have coincided with market bottoms that have shown resilience, often holding firm for several weeks thereafter. This pattern suggests that the current situation might be no different, hinting at an impending shift that could shape the market's direction in the weeks to come.

Source: web.strike.money

The Open Interest-based Put/Call ratio reflects the number of put options in play compared to call options. When option writers adopt a bearish stance on the markets, they tend to sell more calls, leading to a decline in this indicator. However, when pessimism reaches excessive levels, the ratio falls below the red line, indicating an oversold condition. This threshold was reached in the latter part of the week, prompting a sharp recovery. Conversely, an overbought condition would occur when the indicator rises to the dotted line at the top, signalling that the majority of calls have been covered.

Source: web.strike.money

Sector Rotation

Nifty 50 – The Benchmark Index, rose higher by 1.02% and closed at 25003.05

Indices position on the daily timeframe

Weakening Quadrant: The Nifty Metal index and Nifty Oil & Gas index are both losing momentum and relative strength, which is not a positive sign. If this trend continues, the Nifty Oil & Gas index could soon move into the lagging quadrant, as it is already very close to it.

The Nifty IT index has experienced an increase in momentum during the week, but its relative strength compared to the benchmark index is deteriorating. Nifty Auto is also seeing some improvement in momentum. This sector should be closely monitored, because if its relative strength also begins to improve, it could move towards the leading quadrant in the coming days.

Lagging Quadrant: The Nifty Consumer Durable index remains in the lagging quadrant, but it is showing early signs of a potential turnaround. This sector is worth watching.

Improving Quadrant: The Nifty FMCG index is currently in the lagging quadrant, with both its momentum and relative strength deteriorating, which suggests possible underperformance in the near future. However, the Nifty Pharma index and the Nifty Private Bank index are showing improvements in relative strength.

Leading Quadrant: The Nifty Financial Services index has entered the leading quadrant and is expected to outperform in the near term. The Nifty Bank index, Nifty PSU Bank index, and Nifty Realty index are all experiencing a steady rise in both momentum and relative strength. Meanwhile, the Nifty Media index, Nifty Energy index, Nifty MNC index, Nifty PSE index, and Nifty Infra index remain in the leading quadrant, but their momentum is declining.

Indices positioning on Weekly Timeframe

Weakening Quadrant: On the weekly timeframe, the Nifty Financial Services index has shifted to the weakening quadrant. However, on the daily timeframe, it has moved into the leading quadrant. If it continues to outperform on the daily chart, we may see the Nifty Financial Services index returning to the leading quadrant on the weekly timeframe as well. This sector is worth monitoring, as its positioning on the RRG (Relative Rotation Graph) appears interesting.

Lagging Quadrant: The Nifty Pharma index and the Nifty index remain in the lagging quadrant, with no signs of a turnaround yet. The Nifty IT index, however, is showing improving momentum. If this trend persists, it could move into the improving quadrant.

Improving Quadrant: Several indices, such as the Nifty Media index, Nifty Realty index, Nifty Consumer Durable index, Nifty MNC index, and Nifty Auto index, appear promising, as both their momentum and relative strength are steadily rising. On the other hand, the momentum of the Nifty Energy index and the Nifty FMCG index is declining, which could be an early indication that these indices may underperform in the coming weeks.

Leading Quadrant: Apart from the Nifty PSU Bank index, which continues to show steadily rising momentum and relative strength, all other indices in this quadrant—including Nifty Infra, Nifty PSE, Nifty Oil & Gas, Nifty Bank, and Nifty Private Banks—are experiencing a loss of momentum. This is not a positive sign for these indices.

Stocks to watch

Among the stocks expected to perform better during the week are Canara Bank, Macrotech Developers, Aditya Birla Capital, L&T Finance, Adani Ports, Maruti Suzuki, Bank of India, Dr Reddy’s Lab and Ashok Leyland.

Cheers,

Shishir Asthana