Moneycontrol Pro Market Outlook | Structural weakness persists as the market climbs higher

Market volatility is expected to rise.

Dear Reader,

The Indian markets followed the global trend, ending the week with nearly a one percent rise. In a turbulent week, the markets hovered near all-time highs, with global events influencing market movements.

The standout moment of the week was the unprecedented surge in market capitalisation of US powerhouse Nvidia, reaching a staggering $277 billion increase and pushing its total value close to $2 trillion. This remarkable feat underscored the growing significance of artificial intelligence in the market, revitalising market sentiment towards the week's end.

While the Indian markets concluded the week on a positive note, concerns persist about its underlying stability. As the anticipation builds for the announcement of the general election date in the coming weeks, market volatility is expected to rise.

A shaky foundation

The Nifty index marginally inched up during the week, but internals like breadth and momentum are weakening. Though the index has made a new high this week, other broad indices like the Midcap and the Smallcap have not made a new high, leading to inter-market divergence.

For the Nifty, a decisive close below the 40DEMA, currently at 21675, will be a sign of reversal.

Even as the market makes new peaks, foreign investors are net sellers in the cash and derivative markets. In the cash market, FIIs sold equities worth Rs 1,939.40 crore, taking the total sale figure to Rs 15,857.29 crore for the month and Rs 51,835 crore FOR THE YEAR???????. In the index futures, FIIs are short by 37,058 contracts.

We have seen such patterns occurring in the past, where Nifty rises marginally above the previous high and the FIIs cover short positions, but when the trend picks up on the downside, they again start building positions on the short side. Presently, Nifty is hovering around the upper end of the channel. A break below the 21800–21675, its important support zone, should lead to a trend on the downside. The upside could be capped at around 22400 – 22500 levels.

Source: web.strike.money

A look at the Net New One Quarterly Highs shows the structural weakness of the market. Net New One Quarterly Highs for the Nifty Smallcap index have turned red, indicating that New One Quarterly Lows are slightly more than Highs for the same duration. It's happening when the Nifty Smallcap index is trading near its all-time high, indicating that breadth is getting narrower and the stocks are losing momentum.

Such patterns have occurred in the past, where occasionally it resulted in a prolonged correction or a minor blip. The probability of a prolonged correction against a minor blip is high because of the elevated weekly RSI, which is currently around 85.

Source: web.strike.money

This is not just a Smallcap phenomenon, but in the chart below, the breadth is captured across all the listed stocks and is smoothened by the 40-day average. The green line at the bottom is drifting lower even as the market rises, indicating that the breadth is getting narrower.

Generally, we tend to get a short-term or prolonged correction when such patterns occur. It is difficult to predict whether the correction will be short-lived or prolonged, but it certainly warns you of an impending correction.

Source: web.strike.money

Indices and Market Breadth

During the week, Nifty touched a new high but closed marginally lower; BSE Sensex, on the other hand, moved one percent higher and is close to its all-time high level of 73,427.5. The Midcap index ended the week with a minor change, while Large and Smallcap indices gained around 1 percent each.

Among the sectors, BSE Realty index was the top performer, adding 4 percent followed by the Telecom index which gained 3.8 percent and Oil & Gas index closed two percent higher.

Among the top gainers of the week are Jubilant Industries with a sharp jump of 32.57 percent, BF Utilities saw a 30.70 percent rise while Waaree Renewable Technologies closed 27.62 percent above its previous week's close.

On the other hand, IFCI lost 14.18 percent, HPL Electric & Power fell by 11.80 percent, and Coffee Day Enterprises closed 10.72 percent lower.

Global Market 

The main global markets closed the week higher. The S&P 500 reached new intraday highs, while the Nasdaq saw its biggest daily gain in nearly a year on Thursday. Nvidia's strong performance and market reaction to it were the cause behind the move. However, as with India, there is structural weakness as the small-cap Russell 2000 lost ground.

MSCI World index closed the week 1.49 percent higher.

The Euro Stoxx 50 index saw a gain of 2.24 percent during the week. Apart from a flat closing by FTSE 100, other main European markets closed the week with about two percent gain.

Asian markets also saw a strong move led by Shanghai and Hang Seng, which closed 4.04 per cent and 2.36 percent higher on the Chinese government's announcement of more sops. Japanese markets closed 1.59 percent higher, closing at its highest level since 2019.

Stocks to watch

Dixon, Tata Steel, Tata Motors, Apollo Hospital, Granules, Phoenix Ltd, HDFC AMC, Wipro, and Mahindra Life are among the frontline stocks showing strong upside momentum.

Sharda Crop, Hindustan Unilever, Bata India, PVR Inox, and HDFC Bank are under pressure.

Cheers,
Shishir Asthana