Moneycontrol Pro Market Outlook | Holiday season expected to keep markets subdued

Weekly momentum indicators remain in sell mode.

Dear Reader,

Indian markets experienced a narrow trading range for most of the truncated week, with a gap opening on Friday. The BSE Sensex concluded the week with a gain of 0.84%, while the Nifty50 rose by 0.95%.

The rally on Friday was primarily driven by gains in the Nifty Auto and Pharma sectors, supported by contributions from FMCG, Banking, and Realty stocks. Despite the lackluster week, Foreign Institutional Investors (FIIs) continued to sell off shares in the Indian market, with total sales amounting to ₹6,322.88 crore for the week, bringing their monthly sales to ₹10,444.10 crore.

FIIs have been withdrawing funds as the yield on 10-year US Treasury bonds increased, reaching a high of 4.641% during the week. In the US markets, the Dow Jones closed slightly higher by 0.35%, while the Nasdaq performed better with a 0.76% increase.

European markets showed stronger performance, with the STOXX 600 gaining 0.99%. Among leading indices, CAC 40 rose by 1.11%, and DAX increased by 0.50%. The week began with US President-elect Donald Trump suggesting on social media "make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!"

Japan's Nikkei 225 experienced a robust rally, gaining 4.08%, fuelled by a weakening yen that hovered near five-month lows at 157 against the dollar. The Bank of Japan's governor indicated that interest rates may need to rise if economic conditions improve as anticipated, contributing to market optimism. With the consumer price index (CPI) rising to 3%, surpassing expectations of 2.6%, traders are bracing for a potential rate hike sooner than expected.

Chinese stocks also saw positive movement, rising by 0.95%, while the Hang Seng index gained 1.87%. Chinese officials plan to stimulate their economy by issuing a record RMB 3 trillion in special Treasury bonds next year, significantly higher than the RMB 1 trillion issued in 2024.

As the holiday season continues, Indian markets are expected to remain subdued with a slight negative bias in outlook.

Stocks can fall further 

The Nifty experienced a modest bounce this week, recovering slightly above the 40-week moving average. However, this small rebound indicates a lack of sufficient buying power to propel the index to higher levels. Weekly momentum indicators remain in sell mode, suggesting that we may see further declines in the market, especially as the volatility bands on weekly charts are expanding.

This period has been characterised by a slow decline, with low trading volumes contributing to continuous selling in individual stocks. Additionally, several seasonal patterns appear to be shifting earlier than expected. The pharma sector stood out as the only area of resilience this week. The daily swing indicator has bounced back from an oversold reading of 5 to 41, providing some relief and creating the potential for the Nifty to move lower. Although the average swing has only increased to 11, it is notable that it remains above 10. Typically, this would suggest that an important market bottom is near; however, in a bear market, the opposite can occur. Markets can continue to decline even when they are in oversold conditions.

Source: web.strike.money

The net position in index futures held by Foreign Institutional Investors (FIIs) has seen a significant increase in their short positions, rising from -37,000 contracts to -174,000 contracts. This substantial shift is moving the position closer to the extreme levels observed three times in the past two years. The dotted line at the bottom indicates -340,000 contracts, and readings below this level reflect an extreme bearish sentiment among traders and investors.

Typically, when pessimism reaches its peak, it signals that a downtrend may be nearing its end; however, we are not yet at that point. There remains considerable room for FIIs to increase their short positions further.

Source: web.strike.money

The volume of Puts to Calls has started to rise, but when the ratio is above 0.8, we can say that everyone is bearish and the trend is about to change. The reading is rising from 0.66 and is near 0.7. We need patience to see this play out.

Source: web.strike.money

Sector Rotation

This week, the Nifty remained largely flat, failing to achieve even a full 1% gain from the previous week's close. Most indices stayed within the same quadrants as last week, except the Nifty Private Bank, which moved into the "Leading" quadrant from the "Improving" quadrant.

RRG Weekly
Source: web.strike.money

On the daily time frame, the Nifty Pharma, Healthcare Index, and Nifty India Consumption indices outperformed the Nifty, gaining momentum to enter the Leading Quadrant. The Nifty FMCG index is also moving towards the Leading Quadrant, attempting to catch up with these sectors.

In contrast, the Nifty IT, Nifty Consumer Durables, and Nifty Realty indices experienced a loss of momentum and have transitioned from the Leading Quadrant to the Weakening Quadrant. The Nifty Metal index underperformed compared to the benchmark Nifty 50 and quickly fell into the Lagging Quadrant, along with the Nifty PSU Bank, exhibiting a short-term bearish trend.

Defensive sectors have outperformed in this uncertain market environment, where the Nifty formed Doji candlesticks on all four trading days. This is evident from the movement of the FMCG, Pharma, and Healthcare indices into the Leading Quadrant.

Source: web.strike.money

Stocks to watch 

Among the stocks expected to perform better during the week are Laurus Labs, Dr Reddy, Coromandel, OFSS, Indian Hotel, Wipro, Naukri, Coforge, Lupin and Muthoot.

Among the stocks that can witness further weakness are IRCTC, Asian Paint, Nestle, Berger Paint, Reliance, Aarti Industries, Bandhan Bank, India Mart and Britannia.

Cheers, Shishir Asthana