Moneycontrol Pro Market Outlook | More pain before gain

The Nifty 50 is trading 13 percent lower than its peak reached in late September 2024.

Dear Reader, 

Indian markets experienced a downturn for the third consecutive week, with losses recorded on nine out of the last ten trading days. The benchmark indices slipped nearly one percent; however, there was notable buying interest in the broader indices, which propelled the midcap index to a gain of 1.62 percent. In contrast, the small-cap index fell by 0.98 percent. Currently, the Nifty 50 is trading 13 percent lower than its peak reached in late September 2024.

Throughout the week, foreign institutional investors (FIIs) continued their selling spree, with net outflows reaching Rs 7,793.27 crore. This brings the total FII outflows for the month to Rs 36976.70 crore and a staggering Rs 1,24,262 crore in less than two months of the current year.

Additionally, market sentiment was influenced by concerns surrounding potential tariffs under Trump’s administration. Discussions regarding higher tariffs on Indian automobiles, reduced import duties on electric vehicles, and the anticipated entry of Tesla into the Indian market all contributed to heightened volatility in Indian automobile stocks.

Selling pressure was noted in the US markets after the major indices reached new highs during the week. The markets experienced volatility amidst discussions of a potential Trump-Putin meeting and the President's intention to impose additional tariffs on automobiles, pharmaceuticals, and lumber products.

Throughout the week, several economic data points raised concerns about the state of the economy. The consumer sentiment index fell to 64.7 in February, marking a decline of nearly 10 percent. Additionally, the five-year inflation outlook is projected to reach 3.5 percent, the highest level since 1995. Compounding these issues, a PMI reading of 50.4— the lowest in 17 months—contributed to the Dow Jones and Nasdaq losing more than 2.5 percent during the week.
The week across the Pacific was relatively calm, with the STOXX Europe 600 Index ending 0.26 percent higher, fueled by optimism regarding a potential resolution to the Russia-Ukraine conflict. However, country-specific markets showed a mixed performance. The DAX fell nearly 1 percent as investors awaited the upcoming federal election on Sunday, while the CAC 40 Index eased by 0.29 percent. In contrast, Italy’s FTSE MIB rose by 1.17 percent, and the UK’s FTSE 100 Index experienced a decline of 0.84 percent.

In Japan, markets faced a downturn with the Nikkei 225 Index losing 0.95 percent. This drop coincided with a strengthening yen and rising Japanese bond yields, which added to market volatility. The country reported strong GDP figures, with a growth of 0.7 percent, exceeding the consensus estimate of 0.3 percent and surpassing the previous quarter's growth of 0.4 percent. Notably, the yield on the 10-year Japanese bond hit its highest level since 2009, rising to 1.43 percent from 1.35 percent at the end of the previous week.

Conversely, Chinese markets continued their upward trajectory, largely driven by strong earnings in the technology sector. Shanghai closed the week with a gain of 1 percent, while the Hang Seng Index surged by 3.79 percent.

A rare market divergence
Nifty closed the week down with a Doji. A Doji is an indecisive week where the open and close are almost the same. On the other hand, the Nifty 500, a broader market index, closed the week positive showing that stocks have started to recover so the oversold conditions that we have been witnessing in sentiment have started to play out in stocks recovering but it is yet to show up in Nifty. Seasonally Jan-March is a weak period for markets but somewhere between Feb and Mar the worst also gets discounted so pay attention to the signs of a trend reversal from down to up as this happens.

The swing is well out of oversold territory in the short term as the Nifty is falling---a rare market divergence that should end sooner with the Nifty catching up with the market's overall direction. The only doubt is whether Nifty will make an attempt to touch the trendline of the lows shown below near 22600 before that happens.

Source: https://web.strike.money

FIIs are showing unwavering commitment, as evidenced by their increasing short positions in India. Currently, their short positions have reached a new record, with 192891 net contracts short. This figure represents the total number of long contracts minus the short contracts held by FIIs as a collective, providing insight into their overall sentiment. Given this excessively bearish outlook, it seems unlikely to persist for long. A minor market trigger could prompt these investors to begin covering their shorts.

Source: https://web.strike.money

Last week we looked at the number of stocks above the 200dma from the Nifty 500 index. The chart below shows that the reading at 13 percent was lower than the reading at 15200 Nifty which was 15 percent. Now the level has improved to 16 percent. This again goes to show the divergence between the Nifty and the broad market. Nifty is falling while stocks have started to recover.

Source: https://web.strike.money

Sector Rotation

The benchmark Index - Nifty 50 closed 0.58 percent lower this week forming a Doji Candlestick pattern.

On the weekly RRG, Nifty Infrastructure last week had given up momentum and underperformed the Nifty to enter in Lagging quadrant from the Improving. This week it gained back the momentum to enter the Improving quadrant once again.

Other sectors remained in the same quadrant as last week. Nifty Media & Nifty Realty extended further in the Lagging quadrant indicating their Underperformance. Similarly, In the Weakening quadrant, Nifty IT, Nifty Pharma & Healthcare and Nifty Consumer Durables continued southwards indicating a loss in momentum.

Nifty FMCG and Nifty Auto are turning down in the Improving quadrant. If this trend continues, we can expect weakness or underperformance in the weeks to come. Notable change in Momentum was observed in Nifty Private Bank which made a “U” turn in the Leading quadrant indicating its Outperformance and gain in Momentum.

Source: https://web.strike.money

On the Daily RRG, Nifty Bank, Nifty Financial Services & Nifty Private Bank lost momentum but outperformed the Benchmark Nifty 50 and remained in the Leading quadrant. Nifty Auto entered the Lagging quadrant from the Weakening indicating its loss of momentum and underperformance to Nifty. In the Lagging quadrant, Nifty FMCG, Nifty CPSE, Nifty PSE, Nifty Oil & Gas and Nifty Energy were seen gaining momentum.

Nifty Media & Nifty Healthcare entered the Lagging quadrant from the Improving suggesting a big loss in their momentum and underperformance to the benchmark Index. Nifty Pharma as well lost momentum but remained in the Improving quadrant. Finally Nifty Metal seemed to be a star for the Bulls, which entered the Leading quadrant from the Improving and seems to be an interesting Sector to watch out for in the upcoming week.

Source: https://web.strike.money

Stocks to watch

Among the stocks expected to perform better during the week are Chambal Fertiliser, SBI Cards, Bajaj Finance, Kotak Bank and Shree Cements.

Among the stocks that can witness further weakness are Tata Elxsi, Tata Motors, Adani Green, ITC and Apollo Tyres.

Cheers,Shishir Asthana