Moneycontrol Pro Market Outlook | Multiple oversold indicators suggest a likely reversal

Indian markets had a rough week.

Dear Reader, 

The Indian markets experienced selling throughout the week, largely attributed to the relentless selling from Foreign Institutional Investors (FIIs) who sold Rs 24,975.5 crore worth of shares in a week, resulting in a 1.87 percent decline in the Nifty50. Notably, India emerged as one of the weakest performers globally.

Market talk of some India-specific foreign funds winding up their India operations is being cited as the main reason for the fall in the markets. This speculation coincided with a week where most markets displayed considerable strength. Consequently, the volatility index, represented by India Vix, surged to 18.4, marking its peak for the year.

In addition to FII selling, the subdued voter turnout in the ongoing general elections has compounded market anxieties. The combination of these factors underscores the current apprehensive sentiment prevailing within the market landscape.

Oversold indicators

Nifty closed the week down but very close to the 20-week moving average. Some of the short-term sentiment indicators are now oversold, and we have a setup for higher prices from here. Once we can sustain above 22080, then a rally back to new all-time highs can be seen.

Sector rotation continues to be a crucial factor in the ongoing rally. This rotation has kept indices in a range since January, even as individual stocks have experienced deeper cuts from time to time. It's interesting to note that sectors that have corrected already are slowly making a comeback.

The daily swing (see chart: Daily Swing) fell to 13 this week, an oversold reading associated with near-term bottoms from where markets bounce. Will the bounce only retrace 61.8%, or lead to new highs will be seen. 61.8% is at 22467.

Daily Swing

Source: web.strike.money

The 20-day advance-decline ratio has moved quickly from extreme oversold in March to overbought at the first red line above and now oversold at the first red line below. This can be a good place for market bottoms based on past instances. Of course, we need to get an actual price reversal. There is no guarantee that the market cannot go down further. However, it will not surprise if price momentum picks up from these oversold readings.

Source: web.strike.money

Lastly, we look at client positioning. Most of the time, we only look at FII positions index futures-- if they are extremely short, it is a bullish signal. But since January, data has not moved to either extreme for FIIs. Client is another category that gets reported and often has the opposite extreme compared to FII numbers.

Clients are often long at market bottoms, and today's reading is 2.3 lakh contracts long (see chart: Client Futures Position). Market bottoms coincide with around 2.2 lakh contracts since Jan 2024. Historically, over 2.8 lakhs have been the most extreme region. Based on five-month data, we are already near an extreme where client positions are long enough to call a near bottom.

Client Futures Position

Source: web.strike.money

Indices and Market Breadth

Indian markets had a rough week, with the benchmark index falling 1.87 per cent. The broader market suffered more, with the Nifty 500 falling 2.34 per cent, the Nifty Mid Cap 100 falling 2.75 per cent, and the Nifty Small Cap 250 index falling 4.36 per cent.

Among the sectors that took a beating was Nifty PSU Banks which fell 6.03 percent, Nifty PSE fell by 4.87 percent and Nifty Media stocks lost 4.25 percent during the week.

However, there were gainers during the week with Nifty FMCG stocks closing 1.85 percent higher, Nifty MNC category gained 1.46 percent and Nifty Auto stocks were up 1.36 percent.

Among the top gaining stocks were Pashupati Cotspin that gained 62.63 percent, Baheti Recycling was up 44.63 percent and Bombay Metrics was up 43.46 percent.

The top losers during the week were Shubh Laxmi Jewellers, which fell 33.33 per cent, Sonata Software, down 22.98 per cent, and SEMAC, which fell 22.62 per cent.

Global Markets

Unlike Indian markets, global markets had a strong run, with the MSCI World Index gaining 1.74 percent.

The Dow Industrials index registered its eighth daily advance and closed the week with a gain of 2.16 per cent, while S&P 500 closed 1.85 per cent higher, and Nasdaq was up 1.14 per cent. Strong corporate numbers helped push stocks higher in the US despite signs of a slowdown.

European shares posted their biggest weekly gain since late January, with the STOXX 600 index rising for a sixth straight session and the FTSE 100 in London hitting yet another record high. However, the DAX was the top-performing index among the top exchanges in Europe, gaining 4.24 percent during the week. European stocks traded higher on hopes of rate cuts in the near future.

After a strong performance in the recent past, momentum in Chinese and Hong Kong markets has slowed. Shanghai closed the week 1.60 percent higher, while Hong Kong closed 2.64 percent up. Japanese markets closed the week flat.

Stocks to watch

Among the stocks expected to perform better during the week are ABB, CG Power, Tata Motor, Eicher Motor, Havells, Marico, Cummins and DMart.

Among the weaker stocks are KRBL, Bata India, HDFC Life, CCL, PVR Inox, Atul, Page Industries, and TTK Prestige.

Cheers, Shishir Asthana