Moneycontrol Pro Market Outlook | Markets at crossroads

Throughout the week, Indian markets saw a rally, primarily driven by foreign investments.

Dear Reader,

Indian markets have responded positively to the Reserve Bank of India's (RBI) decision to maintain interest rates at the same level and increase liquidity. Despite various ministers attributing the economic slowdown to elevated interest rates, the RBI has stood firm, keeping the repo rate at 6.5 percent for the 11th consecutive time. Instead, it opted to reduce the Cash Reserve Ratio (CRR) by 50 basis points, injecting ₹1.16 lakh crore into the banking sector.

Throughout the week, Indian markets saw a rally, primarily driven by foreign investments, which amounted to ₹11,933.59 crores in the first week of December after two months of significant selling.

The Sensex rose by 2.38 percent, while the Nifty50 increased by 2.26 percent. Notably, broader indices performed well, with mid-cap and small-cap stocks climbing over 3 percent for the third consecutive week.

Sector-wise performance showed that both Realty and PSU Bank sectors gained 5 percent each, while Metals and Media stocks increased by 4 percent, and IT stocks rose nearly 4 percent.

With the RBI policy behind us, the immediate future market direction will be dictated by foreign flows.

Globally, markets were also bullish, with the MSCI World Index gaining 1.18 percent and the MSCI Emerging Market Index closing 2.5 percent higher for the week. In the United States, major stock indexes ended mixed; however, the S&P 500, Dow Jones Industrial Average, and Nasdaq reached record highs. The Nasdaq posted a robust gain of 3.34 percent for the week, while the S&P 500 closed up by 0.96 percent and the Dow Jones fell by 0.60 percent.

Expectations for a rate cut in the U.S. increased after Federal Reserve Chair Jerome Powell remarked that "the U.S. economy is in very good shape," suggesting a cautious approach as they seek a neutral stance. Additionally, recent economic data bolstered expectations for a potential 25 basis points rate cut in December.

In Europe, the STOXX Europe 600 Index rose by 2.00 percent despite political instability in France. The market stabilized following President Emmanuel Macron's announcement that he would appoint a new prime minister and engage with political leaders from both sides to form a new government.

Philip Lane, the chief economist of the European Central Bank (ECB), indicated a shift away from a strictly data-dependent approach in future policy decisions, focusing instead on upcoming risks once inflation is on track to meet its 2 percent target.

During an interview, Bank of England (BoE) Governor Andrew Bailey expressed optimism for equity markets, suggesting that four interest rate cuts could be possible next year if economic conditions align with the central bank's outlook.

In Asia, while South Korea faced political challenges that impacted its market negatively, other regional markets remained stable. Japan's Nikkei 225 index gained 2.3 percent, bolstered by a weaker yen trading around 150 against the USD, down from the high 149 range at the previous week's end. Chinese markets also rose by 2.33 percent amid expectations of new stimulus measures from China's leadership during their annual meeting to outline next year's economic agenda.

There are high expectations that China will pre-emptively address any tariff barriers proposed by the Trump administration with a series of supportive measures for its economy.

Mixed signals

After three weeks of recovery, the Nifty has retraced over 50% of its previous losses, approaching the potential end of a counter-trend bounce. Counter-trend bounces can extend up to 61.8%, so the future remains uncertain. However, both price and time are finite, and they will eventually start to run out. At this point, it becomes a game of patience as we observe whether the market will roll over or confirm a downtrend. Until the week closes, we will be monitoring daily charts for insights.

Sentiment data presents mixed signals, making it premature to draw definitive conclusions. It's also important to pay attention to the strength of the broader market; for instance, the Nifty small-cap index has been rising for the 11th consecutive day. A trend reversal is likely to be more widespread when it occurs, and the small-cap index could even reach an all-time high before any reversal takes place.

While clients have reduced their long positions to 106,779 contracts, they still maintain a substantial long exposure. Typically, we would expect to see more long liquidations before concluding that the market has peaked, so it would be unusual for such a peak to occur at this time.

Source: web.strike.money

The daily swing has a negative divergence with price, which can mean one of two things: a trend reversal is on the cards, or we are going to consolidate for a few days before another attempt higher.

Source: web.strike.money

The number of Nifty 500 stocks above the 20dma is at 84%, and we have seen readings peak near or above 88% before, so we can wait for that to happen before the broad market rolls over.

Source: web.strike.money

Sector Rotation

The Weekly Relative Rotation Graph (RRG) from India Charts shows an increase in Relative Strength in Nifty IT, while Nifty Bank entered the leading quadrant to join Financial Services and IT.

Weekly RRG

Source: web.strike.money

On the daily RRG there was an uptick in the relative momentum for Nifty Bank, Financial Services with Nifty PSU Bank, Nifty PSE and Nifty Media entering the leading quadrant. Nifty IT has slipped into the weakening quadrant though Nifty Realty and Consumer Durables continue to be in leading quadrant.

The rest of the indices are oscillating between the improving/lagging quadrant and trying to gain relative strength.

Daily RRG

Source: web.strike.money

Stocks to watch

Among the stocks expected to perform better during the week are Zomato, Dixon, Wipro, HDFC Bank, L&T, Federal Bank, Max Healthcare, Naukri, Divi’s Lab, Ultra Cemco and Oberoi Realty.

Among the stocks that can witness further weakness are Asian Paints, IndusInd Bank, Nestle and Britannia.

Cheers, Shishir Asthana