Moneycontrol Pro Market Outlook | Higher volatility threatens the market

While most analysts expect no change in the repo rate, any unexpected action could have a significant short-term impact on the markets.

Dear Reader, 

Indian markets started the week on a positive note, buoyed by reports of advancing negotiations between the United States and China. However, this optimism was short-lived as Israel launched an attack on Iran’s nuclear facility, which sent shockwaves through both Indian and global markets.

By the end of the week, the benchmark indices had recorded a loss of 1.3 percent, while the mid-cap index saw a decline of one percent. In contrast, the small-cap index managed to remain flat.

Foreign Institutional Investors (FIIs) continued their selling spree, offloading shares worth Rs 12,456.51 crore over the week. Cumulatively, these investors have withdrawn Rs 4,812.39 crore from the stock market for the month.

The realty sector took a significant hit within the sectors, with stocks plummeting by three percent. The PSU banks followed closely behind, suffering a decline of 2.3 percent, while the Fast-Moving Consumer Goods (FMCG) sector also fell by two percent.

The Israel attack also resulted in a selloff in global markets, as seen in the chart below.

Equity markets have fallen, responding negatively to various global tensions. In contrast, gold and oil prices have surged, accompanied by rising bond yields.

Over the weekend, the conflict between Israel and Iran intensified, raising concerns over increased volatility in the market moving forward.

Adding to this uncertainty is the upcoming meeting of the US Federal Reserve. While most analysts expect no change in the repo rate, any unexpected action could have a significant short-term impact on the markets.

A likely recovery

The Nifty index has been trading within a defined range of 24450 – 25200 over the past few weeks. A breakdown below this range could indicate a temporary setback for bullish sentiment. However, any correction is likely to be short-lived.

This outlook is supported by several short to medium-term sentiment indicators, many of which are currently in oversold territory or are showing signs of recovery, suggesting a positive trend for the Nifty in the coming weeks and months. Below are some notable sentiment indicators to consider.

The 40-Day Advance/Decline (A/D) ratio recently reached its second upside line before pulling back from its highs. While some may view this as a concern, historical data indicate that divergences generally appear before the market establishes a medium-term peak in a rising market.

As demonstrated in the chart below, the Nifty index typically exhibits breadth divergences before entering a period of substantial correction or consolidation. Currently, we have not observed any such divergences, suggesting that there may be further upside potential in the short to medium term. However, as the market rises, market breadth may narrow. In this situation, it may be prudent to focus on outperforming stocks rather than trying to "bottom fish."

Source: web.strike.money

The Open Interest Put-Call Ratio (OI PCR) recently dipped into an oversold zone, even while the Nifty index was range-bound. Generally, a rising OI PCR signals bullish sentiment, while a falling OI PCR suggests scepticism or bearishness. Currently, the OI PCR is attempting to rebound, but the Nifty remains confined within its range, hovering near the lower end (24450).

With the OI PCR also around oversold levels, if the Nifty manages to hold above its support at 24450, it could bounce back towards the upper end of its range (25200). A confirmed price breakout above 25200 would likely coincide with a rising OI PCR.

Given this setup, the downside for the Nifty appears limited since the OI PCR is already in oversold territory. There's a high probability of the OI PCR rising from here, which should foster positive sentiment and lead to a durable bottom in the near term. Keep an eye on how this data unfolds over the next few days.

Source: web.strike.money

FIIs briefly adopted a positive stance in index futures in early May. However, as the Nifty index entered a trading range, they aggressively built up short positions once again. Currently, their net short position in index futures stands at -104,209 contracts, which is approaching an extremely oversold zone. However, it hasn't reached the outlier levels of around -200,000 contracts seen from February to April.

This extreme pessimism is further reflected in the low percentage of FIIs' long positions in index futures, which is currently at the second-lowest level. Historically, such oversold conditions have often led to medium-term market rallies. A decisive breakout to the upside from the Nifty's current trading range could trigger a significant short-covering rally, a pattern observed in the past. Closely monitoring FIIs' net index futures positions in the coming weeks should provide valuable insights into the potential direction of the market.

Source: web.strike.money

Sector Rotation

Nifty 50 – The Benchmark Index, fell -1.14% this week and closed at 24718.60

Weakening Quadrant: Nifty Financial Services continues to see deteriorating momentum and relative strength. The Nifty Private Bank Nifty moved from the leading to the weakening quadrant due to weak momentum and relative strength.

Lagging Quadrant: The Nifty Pharma index and Nifty Metal have shown initial signs of a turnaround, with momentum picking up this week. Nifty IT has seen a strong increase in momentum and relative strength. It can soon enter the Improving quadrant if this trend continues next week.

Improving Quadrant: Many indices like the Nifty Media index, Nifty Realty index, Nifty Consumer Durable index, Nifty MNC index, Nifty Auto, and Nifty Consumer Durable index are showing a trend increase in momentum and relative strength. The momentum of the Nifty Energy index and the Nifty FMCG index continues to fall. Nifty FMCG’s relative strength is deteriorating, and this can push the Nifty FMCG back to the lagging quadrant in the forthcoming weeks.

Leading Quadrant: All the indices like Nifty PSU Bank, Nifty Infra, Nifty PSE, Nifty Oil & Gas, Nifty Bank, and Nifty Private Banks are seeing a loss of momentum this week. Nifty Bank and Nifty PSU have also seen a deterioration in their relative strength this week.

Weakening Quadrant:  Many of the sectors, like Nifty Media, Nifty Metal, Nifty Energy, Nifty MNC, and Nifty PSE, are showing weakening momentum and relative strength. Only the Nifty IT index has turned around from the weakening quadrant and is inching higher towards the leading quadrant with increasing momentum and relative strength.

Lagging Quadrant: Nifty Consumer Durable index is still in the lagging quadrant with deteriorating momentum and relative strength. Nifty Auto transitioned to a lagging position this week, but it is seeing some momentum pick-up. However, relative outperformance is missing in the case of Nifty Auto. The Nifty Oil & Gas is seeing a pick-up in momentum and some relative strength as well. If this trend continues, then it can directly enter the leading quadrant.

Improving Quadrant: Nifty FMCG index is in the improving quadrant and has seen some relative strength in the past couple of trading sessions. However, it has a lot of ground to cover to get into the leading quadrant.

Leading Quadrant: The Nifty Pharma index has moved to the leading quadrant this week on the daily RRG and is seeing strong momentum and relative strength. Nifty Healthcare is seeing increasing relative strength against the benchmark, but the momentum is weakening, which is not a good sign. Other Notable indices, such as Nifty Bank, Nifty Private Bank, Nifty Financial Services, Nifty PSU Bank, and Nifty Infra, are showing signs of weakening momentum and relative weakness. The Nifty Realty has gained some relative strength this week, but the momentum continues to deteriorate. If this trend prevails, then it can drift lower to the weakening quadrant.

Stocks to watch

Among the stocks expected to perform better during the week are Muthoot Finance, Manappuram Finance, Max Healthcare, Solar Industries, MFSL, BEL, SBI Card and AU Bank.

Cheers,

Shishir Asthana