We are headed for an exciting week with central banks of three important economies expected to decide on interest rates. Traders will closely follow the outcomes of meetings by the US Federal Reserve, Bank of England and Bank of Japan. Last week, the European Commercial Bank (ECB) raised interest rates by 25 basis points to 4 percent.
For most global markets, what the US Fed does matters. Though US inflation increased by 3.7 percent in August 2023 compared to a year ago, the market expects the Fed to maintain a status quo.
According to CME’s FedWatch Tool, financial markets have priced in a 97 percent likelihood of the central bank holding the target rate at 5.00- 5.25 percent in its meeting on Wednesday.
US markets, nonetheless, are jittery ahead of the meeting and fell sharply on Friday, resulting in a negative close for the week. All three indices closed the week in the red.
Another market that saw action in the previous week was oil, after Saudi Arabia and Russia decided to extend their oil production cut until the end of the year. Oil prices touched an 11-month high and traded above the $90 a barrel mark.
Indian markets seemed to be immune to the development in the international markets. The BSE Sensex ended the week up 1.86 percent, and Nifty50 gained 1.87 percent. Strong domestic data, like a fall in inflation and robust industrial and manufacturing production data, absorbed the negative global news.
However, the rally is losing steam as the BSE SmallCap and MidCap indices fell during the week, declining 1 percent and 0.5 percent, respectively.
Losing Steam
After three consecutive positive weeks, the RSI for Nifty stands at 76. A reading above 70 is overbought. However, the new high in Nifty was not accompanied by a new high in Midcap indices, where the Nifty Midcap 100 retraced only 66 percent of the mid-week fall.
Source: web.strike.money
Unless the midcap index goes higher, we can consider this a negative short-term divergence that may mean more selling in the coming week. Furthermore, the coming week is also the pre-expiry week, which has often seen markets pull back due to profit booking by options traders who prefer closing their position than paying extra margin in the monthly expiry week.
Also, the swing reading we discussed last week as trading between 74 and 80 dipped to 26 intra-week, which is not an extremely oversold reading. A reading below 20 would be oversold, and below 10 would be extremely oversold. Interestingly, though the Nifty touched a new high, the swing could not retrace its steps. We have to be on the lookout for a sign of weakness, which would be if Nifty falls below 20050.
Source: web.strike.money
Another sign of fatigue is that 96 percent of stocks are above the 20 Daily Moving Average (DMA), a very high reading that can result in a consolidation or trend reversal depending on the setup. At times, the top comes only after a negative divergence (see arrow in the chart below). The present reading is comparable to previous occasions, as the chart shows.
Source: web.strike.money
Indices and Market breadth
Among sectors that performed well during the week, the Nifty PSU Bank index was up 7.2 percent, Nifty IT was up by three percent, the Nifty Bank index rose by 2.3 percent, and Nifty Pharma and Auto indices increased by 2 percent each. The underperformers were the Nifty Media index, which fell by 3.6 percent, and Nifty Oil & Gas index, by one percent.
The top performers were ITI which rose by 58 percent, Rane (Madras) by around 25 percent and GTL Infra by around 24 percent. Despite the negative close by the small-cap index, 40 small-cap stocks gave double-digit returns during the week.
Foreign investors continued to sell for the eighth consecutive week, offloading Rs 746.62 crore equity.
Global Markets
While the US market closed the week in the red, thanks to a sharp fall on Friday, European markets were strong during the week. The European Bank signalling an end to its rate-hiking cycle saw equity markets closing the week higher. Stoxx 600 posted a gain of 1.8 percent, CAC40 rose by 1.9 percent, and the DAX was up by nearly one percent.
MSCI's index of Asia-Pacific shares minus Japan was up 0.58 percent, while Japan's Nikkei rose 1.10 percent.
Chinese markets continue to be shaky after news of a nearly $200 billion withdrawal from its equity market since the peak of December 2021. Various steps taken by the government, like slashing stamp duty, restricting divestment by major shareholders and tighter IPO norms, have failed to improve market sentiment.
Ahead of the US Fed meet, US treasury yields rose, with the two-year yield edging above the 5 percent threshold while the 10-year yield closed at 4.3304%.
Stocks to Watch
There are visible signs of fatigue in the market, with stocks touching a one-month high having flattened.
Nonetheless, there are frontline stocks that are still showing strength. Axis Bank, Bajaj Auto, HCL Tech, M&M, Tata Motors, TCS, and SBI Life are some momentum stocks that can continue to rise even if the market consolidates.
Stocks that can break out of a trading range are Tata Steel, LTIM, and ICICI Bank.
Cheers, Shishir Asthana
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