Moneycontrol Pro Market Outlook | Rupee weakness keeps market on edge

The direction of Indian markets will likely hinge increasingly on two critical factors

Dear Reader,

Indian markets endured a turbulent week, closing 0.53 per cent lower as foreign institutional investors continued their selling spree and the rupee slipped to a fresh low. Weighing heavily on investor sentiment was lingering uncertainty over US-India trade negotiations, which cast a shadow over market confidence.

The defence sector bore the brunt of the downturn, plummeting three percent, while media, PSU banking, IT, and FMCG stocks also faced significant selling pressure. Bucking the broader trend, metal and consumer durables emerged as the week's bright spots, closing in positive territory.

Foreign institutional investors showed no signs of relenting, pulling out Rs 9,201.89 crore worth of equities during the week. This brought December's total outflows to a substantial Rs 19,605.61 crore.

Meanwhile, across the Pacific, US benchmark indices were painting an entirely different picture. American markets surged to fresh all-time highs, buoyed by the Federal Reserve's third consecutive interest rate cut. Market participants drew encouragement from central bank officials' commentary, which many interpreted as more dovish than anticipated.

Yet even in the US, technology stocks—particularly those operating in the artificial intelligence space—encountered headwinds as concerns resurfaced about the sector's elevated infrastructure spending requirements.

Looking ahead, as the calendar year draws to a close, market observers expect trading volumes to thin considerably. The direction of Indian markets will likely hinge increasingly on two critical factors, namely, the trajectory of foreign institutional investor flows and the rupee's performance against the dollar.

Indices reveal bullish pattern

Nifty ended the second week lower, but the weekly chart revealed a hammer candle pattern across major indices, including midcap and smallcap stocks—an indication that the bulls made their presence felt last week. The challenge in the coming week is for the index to surpass last week's high of 26,179. Sustained momentum at new highs will require broader participation from a wider range of stocks. Notably, Nifty also formed a higher bottom compared to the previous three weeks.

Both the daily swing and average swing indicators are now in oversold territory, a relatively rare occurrence. Typically, readings of 20 or below signal an oversold condition on these indicators. The recovery seen over the last two days emerged from this deeply oversold state.

Source: web.strike.money

A significant percentage of Nifty 50 stocks are flashing buy signals according to the RSI. This includes not only new buy signals but also those stocks that are already in a bullish phase, where the average RMI remains below the RMI itself. When readings reach 20 or lower, the market is considered oversold. Given these conditions, the setup suggests that markets could move higher in the short term.

Source: web.strike.money

Finally, attention turns to the FII net index position, calculated as the difference between long and short positions—this time using both futures and options contracts held by FIIs. The latest chart reveals that this net figure has touched the lower boundary of its trendline for the week. This suggests that FIIs aggressively sold calls during the recent decline, resulting in an all-time low reading in the data. Historically, after similar events since August, the market has rebounded in three distinct waves. As such, there could be an upside surprise waiting ahead.

Source: web.strike.money

Sector Rotation

Nifty 50 – The Benchmark Index ended lower by -0.53% this week and closed at 26046.95.

Weekly RRG:

Leading Quadrant: Nifty Private Bank and Nifty Financial Services, which entered the leading quadrant last week, have seen a dip in momentum this week, but the relative strength of both indices has improved. A similar trend is seen in Nifty Oil and Gas and Nifty Bank, where relative strength has improved this week but momentum has dipped. However, if momentum continues to deteriorate in the coming weeks, the relative strength will eventually follow suit. Nifty PSU Bank has seen a dip in both momentum and relative strength. Nifty Infrastructure has seen some improvement in relative strength this week.

Weakening Quadrant: Nifty Metal, Nifty Auto, and Nifty MNC continue to show deterioration in momentum and relative strength.

Improving Quadrant: Nifty IT has seen a sharp improvement in momentum and relative strength for the second consecutive week, which is a good sign

Lagging Quadrant: Nifty Realty, Nifty FMCG, Nifty Energy, Nifty PSE, Nifty Media, and Nifty Realty continue to show deteriorating momentum and relative strength. Nifty Consumer Durable has seen a deterioration in relative strength, but momentum has flattened. However, Nifty Pharma has seen some momentum uptick, but relative strength dipped this week.

Stocks to watch

Among the stocks expected to perform better during the week are Eicher Motors, Federal Bank, Motherson, Cummins, HDFC Bank, Laurus Labs, Torrent Pharma, TVS Motors, Reliance, Axis Bank, Maruti, and IDFC First Bank.

Cheers, 

Shishir Asthana