Moneycontrol Pro Market Outlook | It is time to be cautious even as markets touch a new high

Except for the short-term oversold condition, other indicators support the view of a market top near 22,000 in Nifty.

Dear Reader,

Results from IT giants Infosys and TCS contributed to a positive shift in market sentiment last week. The week initially began on a negative note and remained mostly subdued. However, a significant upward movement on Friday propelled the benchmark indices to close at new all-time highs. On January 12, the Sensex and Nifty reached fresh record levels of 72,720.96 and 21,928.25, respectively.

Despite the positive market trends, the week was marred by developments in the Middle East, where the conflict with Yemen's Houthis took a new turn. The US and UK intensified efforts to liberate the Red Sea area from the rebels. Notably, last Thursday, Iran's navy seized an oil tanker in the Gulf of Oman, previously confiscated by the United States for violating sanctions related to Tehran's nuclear program. This incident further heightened tensions in the region.

The market has so far absorbed these Middle East developments calmly. Iran's actions, particularly the seizure of the oil tanker, are perceived as a test of the US, and any escalation at this crucial juncture could lead to uncontrollable consequences.

Cautious optimism 

Nifty moved higher towards the end of the week, though most indicators show a negative divergence. Except for the short-term oversold condition, other indicators support the view of a market top near 22,000 in Nifty.

While the near-term momentum appears strong, the volume peaks are typical of market tops. Note that a market top is a process, not an event; according to us, January 2024 continues to be a topping process.

The swing, seen in the chart below, reached the oversold reading of 17, after which the market bounced back. The retracement coincided with support near the 20dma. Over the next few days, watch out for a trend reversal as traders will reduce their position because it is the penultimate week ahead of the expiry.

Source: web.strike.money

Despite the selling by Foreign Institutional Investors (FIIs) in the cash market amounting to Rs 3,901.27 crore, they have maintained their positions in the derivatives market. Regardless of the market's direction, FIIs retain approximately 75,000-85,000 long contracts. This pattern is similar to the behaviour observed during the market's peak in July '23 when a reversal occurred after weeks of divergence. We will have to be patient till the FIIs throw in the towel.

Source: web.strike.money

The chart below shows the net new one-month highs for the Nifty 500. The arrows on the chart highlight moments when the new one-month high data shows a negative or positive divergence relative to the index. A negative divergence, as seen presently, precedes a market top. Whether the market follows the same behaviour this time around, we will know over the next few days, if not weeks.

Source: web.strike.money

Indices and Market Breadth

But the market would have ended in the red, except for the sharp recovery on Friday. The rebound helped the Sensex close 0.75 per cent higher and the Nifty gain 0.84 percent during the week.

Along with the benchmark index, the BSE-Largecap, BSE-Midcap, and BSE-Smallcap touched record highs during the week.

The IT sector led the rise with a 4.5 percent gain during the week, followed by Realty, which gained 4.3 per cent. The energy and Automobile sectors moved up 2 per cent each. The sectors under pressure were FMCG, down 1.7 percent, and the Bank index, which fell 0.9 per cent.

Among the stocks that gained the most was Wardwizard Innovations at 38.90 percent, Kamdhenu was up 34.16 per cent, and Suven Life Sciences closed 34.15 per cent higher. The top losers during the week were Sanmit Infra, which fell 34.83 per cent; Inox Wind, which lost 13.60 per cent; and Waaree Renewables, which saw an erosion of 12.02 per cent.

Global Market

Developed world markets continued their rally higher despite the events in the Middle East. The US and Europe ended the week higher as the market focused on inflation and other economic data. However, the UK, China, Hong Kong, and Kospi closed the week in red.

In the US, too, IT stocks were in the limelight, with the rally being led by frontline stocks. However, banking stocks were under pressure as major banks reported subdued numbers. The stocks were also under pressure after the consumer price inflation data exceeded expectations.

Despite the rise in inflation, expectations for a rate cut in March moved to 79.5 per cent from 73.2 per cent in the prior session.

Stocks to watch

Among the frontline stocks showing strong momentum on the upside are ACC, Infosys, Wipro, TCS, Ceat, Reliance Industries, Dr Reddy’s Labs, SBI, and Hindalco.

Stocks showing weakness are HUL, Dabur, Hindustan Zinc, Navin Fluorine, and Page Industries.

Cheers,Shishir Asthana