Moneycontrol Pro Market Outlook | Market on shaky ground, indicators flash warning

The Indian markets surged to all-time high.

Dear Reader,

Indian markets continued their upward trajectory, with benchmark indices reaching new all-time highs. However, the rally was primarily concentrated in large-cap stocks, as smaller stocks remained relatively unchanged throughout the week.

The key catalyst for the market's movement was the US Federal Reserve's decision to cut interest rates by 50 basis points. Although global markets initially reacted negatively to the announcement, a wave of buying on Friday fuelled a sharp recovery.

The BSE Sensex rose by 1.99 percent, while the Nifty50 gained 1.71 percent. This was led by a strong performance in the Real Estate sector, which surged by 4.5 percent. Banks, Auto, and FMCG stocks also contributed to the rally. In contrast, IT, Media, and Pharmaceutical stocks experienced negative returns over the week.

The rally was further supported by strong Foreign Institutional Investor (FII) buying, with net inflows totalling Rs 14,064.05 crores, helping the market achieve significant gains by the end of the week.

In contrast to the Indian market, the US market experienced a broad-based rally, with small and mid-cap stocks rising alongside the benchmark indices. The first rate cut since March 2020 spurred a wave of optimism, with markets celebrating the day following the announcement.

However, the rate cut didn't sit well with European markets, which remained relatively flat over the week. The STOXX 600 closed 0.33 percent lower, mainly due to a 0.52 percent decline in the UK's FTSE.

Meanwhile, the Bank of England maintained its key policy rate at 5.0 percent, as services inflation increased from 5.2 percent to 5.6 percent.

The Nikkei 225 climbed 3.1 percent as the yen weakened following the Fed's rate cut announcement. Additionally, the Bank of Japan's decision to keep interest rates unchanged further contributed to the yen's depreciation, which supported gains in the equity market.

Meanwhile, China's market rose during the shortened trading week, posting a gain of 1.21 percent. The standout performer among major global markets was the Hong Kong market, which surged 5.12 percent over the week, making it the top-performing market in that period.

Time to be cautious 

What started as a lacklustre week ended with a bang, as the markets surged to all-time highs, accompanied by substantial volume and buying pressure that would leave the bears unsettled. But the question remains: Are we out of the woods, or was this just a fleeting moment of optimism?

The picture isn't entirely clear due to divergent readings across different indices, making it challenging to call the market's next move with certainty. One thing, however, is evident—this recent rally isn't broad-based. The underlying market strength appears to be weakening, suggesting that the coming week will be crucial in confirming the sustainability of this uptrend.

Notably, the number of stocks trading above their 50-day Moving Average (DMA) within the Nifty 500 has declined or shown a negative divergence from the main indices' price movement (see chart Stocks above 50 DMA). In simpler terms, fewer stocks are participating in the rally, which isn't a positive sign. Historically, such divergences often precede market corrections, indicating that the current momentum might be fragile and vulnerable to a potential pullback.

Stocks above 50 DMA

Source: web.strike.money

Foreign Institutional Investors (FIIs) significantly increased their index futures positions on Friday (see chart FII Index futures position), bringing the net long positions back to levels near the previous record set just a month ago. With 359,062 contracts long, this marks the second-highest reading since 2017, surpassed only by the peak of 392,157 contracts on July 4 this year.

These elevated figures indicate a strong bullish sentiment among foreign investors, which historically tends to precede corrective phases in the market. While an immediate reversal might not be on the horizon, such extreme optimism has often been a precursor to shifts in market trends. Maybe not immediately, but we cannot ignore the next trend reversal in the market.

FII Index futures position

Source: web.strike.money

The short-term swing indicator dropped to 24 during the week, mainly due to weakness in mid-cap and small-cap stocks (see chart Daily Swing). It recovered to 47 on Friday but remains in a neutral zone, neither overbought nor oversold. This suggests a state of indecision in the market, and it's a metric that warrants close monitoring in the coming days to gauge potential shifts in market momentum.

Daily Swing

Source: web.strike.money

Sector Rotation

The Weekly Relative Rotation Graph (RRG) from India Charts has not changed much. However, it is interesting to note that Realty, Banks, and Autos show a positive pickup in relative momentum while IT and FMCG have decreased momentum.

RRG Weekly

Source: web.strike.money

On the daily RRG, it was a mixed week, with more sectors ending the week in positive territory. Nifty IT and Pharma are now in the weakening quadrant due to a loss of momentum, while Nifty Consumer Durables and FMCG are in the leading quadrant, but there was a loss of momentum.

Nifty Banks, Financial Services, and Realty gained relative strength, while Nifty CPSE and Nifty Energy showed a rise in momentum but are still in the lagging quadrant.

Daily RRG

Source: web.strike.money

Stocks to watch

Among the stocks expected to perform better during the week are Sun Pharma, Naukri, Trent, Cholamandalam Finance, ICICI Prudential, Dabur, Bajaj Auto, Apollo Hospital and Kotak Bank.

Among the stocks that can witness further weakness are IDFC, RBL and IDFC First Bank.

Cheers, 

Shishir Asthana