Dear Reader,
Global markets extended their relief rally this week following a significant diplomatic breakthrough between the United States and China. Presidents Donald Trump and Xi Jinping reached an agreement on a one-year trade truce that promises to ease tensions between the world's two largest economies. Under the terms of the deal, the United States will reduce tariffs on Chinese imports while China has agreed to suspend its export controls on rare earth materials and resume purchasing American soybeans and other agricultural products.
The week's positive momentum was further bolstered by the Federal Reserve's monetary policy decision. At its October meeting, the central bank delivered an expected quarter-point rate cut, lowering the federal funds rate by 25 basis points to a range of 3.75 percent to 4 percent. The move aligned perfectly with market expectations and added to investor confidence.
However, Indian markets painted a more mixed picture. The country's benchmark indices closed the week marginally lower, shedding 0.28 percent despite strong performance in the first half of the week. Selling pressure mounted as the week progressed, weighing on the broader market, especially after SEBI’s proposal on mutual funds.
Yet the decline masked underlying strength in mid-cap and small-cap stocks, which defied the trend. The mid-cap index climbed one percent while small-caps advanced 0.7 percent, demonstrating continued investor appetite for broader market opportunities.
Foreign institutional investors remained net sellers for the week, offloading shares worth ₹2,102 crore. This brought their total selling for October to ₹2,346.89 crore, reflecting ongoing caution among overseas investors.
Sector performance varied widely across the Indian market. PSU banking stocks emerged as the week's standout performers, surging 4.7 percent on news of increased foreign investment limits. The oil and gas sector also performed strongly, rising 3 percent, while metal stocks gained 2.5 percent, riding the wave of global optimism stemming from the US-China trade agreement.
Looking ahead, market direction will likely be shaped by global developments and corporate earnings, which have so far delivered mixed results. This uneven performance suggests investors will need to remain selective as more results emerge while international developments continue to influence sentiment in the sessions ahead.
Structurally strong market
After an impressive four-week winning streak, the Nifty finally paused for breath, closing the week in negative territory. However, beneath this surface-level decline lies a more encouraging story. The Nifty Midcap index achieved a significant milestone, pushing its weekly technical indicators into bullish territory—a development that could signal broader market strength ahead.
This shift in mid-cap momentum is particularly noteworthy, given that mid and small-cap stocks have been underperforming the benchmark indices for some time. Their recent resurgence represents a crucial turning point as robust performance across market capitalisations is typically essential for sustaining a strong bull market. The fact that these segments are finally catching up suggests the market's foundation is becoming more solid.
Despite the weekly pullback, it's important to recognise that this appears to be a minor correction rather than a trend reversal. Market sentiment hasn't swung dramatically from one extreme to the other—the pendulum remains relatively steady. In fact, when viewed through a longer lens, the month that just concluded saw the Nifty register its highest closing level since September 2024, underscoring the underlying upward trajectory.
The daily swing indicator has retreated to a reading of 27, which represents a low level, but hasn't yet entered oversold territory. Historical patterns during bullish market phases reveal that the swing indicator can remain elevated for extended periods, sometimes refusing to drop below 20 or even 10. Typically, meaningful market bottoms tend to form when this reading falls somewhere below 30, suggesting that the current pullback may be relatively shallow in the broader scheme of things.
Source: web.strike.money
An analysis of futures positioning reveals an intriguing dynamic between FIIs and domestic clients that offers clues about where the market might be headed. The data show that FIIs have been steadily unwinding their short positions while domestic clients have been trimming their long positions—a divergence that warrants closer examination.
The critical question facing investors is whether the market has already travelled too far on the upside. Based on historical positioning patterns, the answer appears to be no. Past market cycles have demonstrated a clear tendency that domestic clients typically abandon their long positions entirely and even shift to short positions as the market approaches major tops. This capitulation at market peaks is a reliable contrarian indicator, signalling excessive optimism and an impending reversal.
However, the current picture looks markedly different. Client long positions have declined only modestly to 84,195 contracts, hovering near the upper boundary marked by the red lines on the chart. This represents a relatively minor reduction rather than abandonment of bullish bets that characterises market tops.
What makes this positioning particularly noteworthy is the timing. The market has already surpassed its July peak, yet positioning hasn't shifted dramatically. In previous cycles, such a breakout to new highs would typically trigger significant changes in market positioning as sentiment swings from one extreme to another. The fact that this hasn't occurred suggests that investor psychology hasn't reached the euphoric levels typically associated with market tops.
This measured positioning indicates that sentiment remains balanced rather than excessively bullish—a healthy sign that the uptrend may have further to run before exhaustion sets in.
Source: web.strike.money
For long-term investors, the Volume Put-Call Ratio (PCR)—which measures put options traded relative to calls—offers crucial insight into market positioning. Historically, this ratio drops to 0.4 or lower before significant market tops, typically once every two to three years.
What makes the current environment noteworthy is that the PCR remained elevated between 0.66 and 0.79 for an unusually long period—the longest stretch in history—reflecting persistent investor caution. However, the ratio has recently broken below this range, marking the first clear sign that bulls are regaining control.
If this trend continues, we could see the ratio decline toward levels last seen in October 2021, though reaching those extremes would require the market to climb substantially higher from current levels. Such positioning shifts typically develop only after prolonged rallies that draw in even cautious investors.
Source: web.strike.money
Sector Rotation
Nifty 50 – The Benchmark Index ended lower by 0.28% this week and closed at 25722.10
Weekly RRG:
Leading Quadrant: Nifty Auto and Nifty MNC have seen a sharp deterioration in momentum and relative strength. Nifty MNC could enter the weakening quadrant next week if there is no turnaround in momentum. Nifty PSU Bank and Nifty Metal continue to gain both momentum and relative strength.
Weakening Quadrant: After entering the weakening quadrant last week, Nifty Consumer Durables has seen a sharp deterioration in both momentum and relative strength this week. On the positive side, Nifty Infrastructure has seen a pick-up in both momentum and relative strength this week, which is an encouraging sign.
Improving Quadrant: The Nifty IT index's momentum and relative strength have both deteriorated sharply this week, which is a negative development.
Lagging Quadrant: The Nifty Pharma index entered the weakening quadrant last week, and this week it has seen a sharp deterioration in both momentum and relative strength. Nifty FMCG has also experienced a decline in momentum this week. The Nifty Media index continues to see deterioration in both momentum and relative strength, with no signs of a turnaround yet. There was no meaningful improvement in relative strength for Nifty Realty this week though momentum continues to improve. Other Nifty indices, including Nifty PSE, Nifty Oil and Gas, Nifty Energy, Nifty Bank, and Nifty Financial Services, have shown good improvement in both momentum and relative strength, which is a positive sign.
Stocks to watch
Among the stocks expected to perform better during the week are BEL, Canara Bank, Samman Capital, BHEL, Divi’s Lab, Ashok Leyland, RBL Bank, Titan and Persistent Systems.
Cheers,
Shishir Asthana
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
