Moneycontrol Pro Market Outlook | Poor corporate earnings can add pressure on markets

The Indian markets are feeling the strain of disappointing corporate earnings.

Dear Reader, 

Indian markets are experiencing a downturn even as many global markets are showing strong performances. The recent trade deal between the United States and Japan provided a boost, helping both the US and Japanese markets to close higher. In contrast, the Indian markets are feeling the strain of disappointing corporate earnings.

Adding to this pressure, foreign institutional investors (FIIs) continued their trend of net selling for the fourth consecutive week, offloading shares worth Rs 13,552.91 crore. This brings the total sales for the month to a staggering Rs 30,508.66 crore. As a result, the Nifty50 index slipped by 0.53% over the week, but the broader markets experienced a more significant decline. The Midcap index fell by 1.7%, and the Smallcap index dropped by 2.5%.

Sector-wise, the Media index saw the steepest decline, losing 5.7%. Following closely were the Realty sector, which dropped nearly 5%, and IT stocks, which fell by 4%. The Oil & Gas and FMCG sectors each recorded a loss of 3.5%. However, not all sectors were in the red; banking and pharmaceutical stocks emerged as winners amidst the broader market losses.

On the international front, the announcement of new trade agreements between the US and countries such as Japan, Indonesia, and the Philippines provided optimism for US and Asian markets. Meanwhile, European markets remain on edge as the August 1 deadline set by US President Donald Trump looms closer. If a deal isn’t reached by then, a 30% tariff on European goods may be imposed on imports into the US, adding to the uncertainty.

Indian markets are likely to respond to corporate earnings and may react negatively to changes in global market sentiment.

Slow and painful decline

Nifty has declined for the fourth consecutive week, losing a total of 800 points. This decline is noteworthy, especially when we consider that a similar amount was lost in just two days during the Israel-Iran attacks. By analysing both price and time, we can gain a perspective on this situation. Although the decline may not seem significant in terms of points, the duration of the downturn has been quite frustrating.

Much of this decline has been driven by stocks and sectors that performed poorly due to disappointing earnings. Once these factors are fully accounted for, we expect the market to begin recovering. Interestingly, the usual July seasonality has turned upside down this year.

FIIs maintain a short position, with their current short position in index futures being the second-highest on record at -158,520 contracts. It's only a matter of time before this changes. When we see a price reversal and the RMI momentum indicator starts to turn positive, we should also witness some short covering. So far, more short positions have been added with every dip in the market.

Source: web.strike.money

The daily swing indicator has dipped back into oversold territory following a brief bounce. As of Friday, it stands at a low reading of 20. This suggests that during the next price movement, we should once again attempt to reverse the current downward trend into an upward trajectory. Historically, past readings that fell below 20 have demonstrated a strong potential for reversal, offering optimistic prospects for the future.

Source: web.strike.money

When the RMI issues a buy signal, the likelihood of a stock experiencing a decline in the near term diminishes significantly. To gauge overall market sentiment, we examine the number of stocks within our basket that are generating RMI buy signals. The percentage of these buy signals among the Nifty Smallcap 100 is illustrated below, revealing that oversold readings below 20 have often coincided with many near-term market bottoms. As of Friday, we ended the day with a reading of 13.

Source: web.strike.money

Sector Rotation

Weekly RRG:

Nifty 50 – The Benchmark Index ended lower by -0.53% this week and closed at 25837.

Indices positioning on Weekly Timeframe

Weakening Quadrant: Nifty Bank has seen a good improvement in momentum and relative strength this week. Additionally, Nifty Financial Services and Nifty Private Bank have experienced some improvement in momentum this week. If the momentum in these indices continues to improve, they can potentially see relative outperformance in the coming weeks.

Lagging Quadrant: Nifty FMCG is the only index in this quadrant. In the past few weeks, there has been an uptick in the momentum. If this trend continues, the relative strength can also start improving, leading to outperformance against the benchmark index in the coming weeks.

Improving Quadrant: The momentum and relative strength of the Nifty Pharma and Nifty Consumer Durable indices continue to improve. However, the Nifty IT index's momentum has fallen significantly this week.  This can lead to underperformance in the coming weeks if the momentum continues to fall.

Leading Quadrant: Nifty PSU Bank is experiencing improvement in both momentum and relative strength. Nifty MNC has moved into the leading quadrant this week, but falling momentum is not a good sign. Other indices in the leading quadrant, such as Nifty Realty, Media, Metal, Energy, Auto, PSE, Infrastructure, and Oil & Gas, have seen a falling momentum, which is not a good sign.

Indices positioning on Daily Timeframe

Weakening Quadrant:  Nifty Infrastructure and Nifty Oil & Gas indices' relative strength is deteriorating, and if this trend continues, they might enter the lagging quadrant.

Lagging Quadrant:  Nifty IT index's relative strength continues to deteriorate, but there is a slight pickup in the momentum. If the momentum continues to improve, then it can be an early signal of a turnaround in the Nifty IT.

Improving Quadrant: Nifty Realty is close to entering the leading quadrant and is seeing continuous improvement in relative strength, but falling momentum is not a good sign. It might break into the leading quadrant next week, but falling momentum hints that the outperformance may not be sustainable.

Leading Quadrant: Only a few indices like Nifty Metal, Nifty Auto, Nifty Consumer Durable, and Nifty Pharma are showing improvement in relative strength and momentum. All the other indices in the leading quadrant, such as Nifty Private, Energy, PSE, Media, Bank Nifty, Financial Services, PSU Bank, MNC, FMCG, are experiencing a decline in momentum. In most cases, their relative strength is also declining, indicating potential underperformance in the near term.

Stocks to watch

Among the stocks expected to perform better during the week are Fortis, Eternal, UPL, Indian Bank, ICICI Bank, Laurus Labs, ICICI Bank, HDFC Bank and M&M.

Cheers,

Shishir Asthana