Moneycontrol Pro Market Outlook | Short term bullish momentum to sustain

market

Dear Reader, 

The US Fed’s dovish comments helped Indian and global markets close the week in the green. The week also saw the Bank of Japan abandon its negative interest rate policy, and the Bank of England retain its interest rate policy. The US markets touched a new high after comments from the US Fed increased the chances of a reduction in the policy rate in the June 2024 meeting.

In the Indian markets, the week also saw the broader market outperforming benchmark indices. Small and mid-cap stocks had corrected sharply over the past few weeks on various actions taken by the market regulator SEBI.

A short term bounce likely

After many short-term sentiment indicators touched oversold territory, the Nifty index rebounded. These indicators suggest some more strength in the rebound in the short term. However, the medium-term indicators, like the RMI, are in sell mode on the weekly chart (see chart Weekly Nifty with RMI), and FII positioning in the index futures is not encouraging either.

Weekly Nifty with RMI

Source: web.strike.money

The 61.8% retracement of the March decline at 22214 should act as a major resistance level in the near term. On the way down, the 20-week average at 21411 should eventually get tested.

To summarize, there can be a pullback in the near term, but it would be a counter-trend rally, and once the pullback is complete, the Nifty index should drift lower to the 20-week average.

The Daily Swing, a short-term sentiment indicator, rebounded from an oversold condition (see chart Daily Swing). Even the Nifty index formed a short-term bottom this week and rebounded. However, the Daily Swing reading reached 74 levels in the recent pullback. Normally, a reading in the range of 80–90 indicates overbought conditions, which can lead to a short-term top formation. Since the current reading is 74, there is a scope for more upside in the short term.

Daily Swing

Source: web.strike.money

Another short-term sentiment indicator that hinted at an oversold condition and has rebounded from its recent low is the percentage of stocks above the 20DMA of the Nifty 50 index (see chart Percentage of stocks above 20DMA). If the Nifty index is headed for a medium-term correction, which is what the weekly RMI suggests, then we may have minor pullbacks from time to time, but directionally, the Nifty index should head lower and make lower high-lower lows.

The current rebound in the Nifty index was due to oversold conditions in the short term, but it is just a counter-trend move. You can see in the previous instances that when this indicator reached the oversold zone, the Nifty index saw a bounce, but once the pullback fizzled out, it made lower lows. The same playbook can unfold in the forthcoming trading sessions.

Percentage of stock above 20DMA

Source: web.strike.money

This week, the FIIs' short position in the index futures increased to 95,224 contracts, and from there, the FIIs covered some of the short positions. Currently, it stands at 72,379 contacts. If we look at the pattern over the last year, we can see that the FIIs' positioning in the index futures has usually gone from one extreme to another (see chart FII Net position).

In December 2023, the FIIs' position reached its upper extreme and declined. Now, it should reach its lower extreme, which is net short of 1,70,000 contracts. If that happens, it is likely to put pressure on the Nifty index in the forthcoming trading session. Also, as mentioned earlier, the weekly RMI indicator in sell mode further strengthens that case.

Source: web.strike.money

Indices and Market Breadth

The highlight of the week was a recovery in the small and mid-cap indices, which relieved retail investors.

The Small-cap, Mid-cap, and Large-cap indices rose 1.8 percent, 1.4 percent, and 0.6 percent, respectively, compared to the benchmark index, which increased by 0.33 percent.

The sectors that performed strongly during the week were the Realty Index, which shot up by 5.4 percent, and the Auto and Metal indices, which gained 4 percent each. On the other hand, the IT index lost 6 percent as Accenture gave a poor guidance for the current quarter.

Foreign institutional investors continued selling in the cash market, bringing the total selling for the week to Rs 8,365.53 crore. For March 2024, FIIs are still buyers at Rs 945.71 crore.

The top gainers for the week were Manoj Vaibhav Gems N Jewellers gaining 42.81 percent, eMudhra, up 39.67 percent, and Vadilal Industries, closing 24.64 percent. Among the losers was Tata Investment, losing 20.95 percent; MK Proteins, losing 16.56 percent, and Jai Balaji Industries, shed 12.35 percent during the week.

Global Market 

Significant pronouncements from central banks were pivotal in guiding the market's trajectory. Commencing the week, the Bank of Japan implemented an interest rate hike for the first time in 17 years. Despite the potential negative implications, such as a shift in Japanese investors' focus from global to domestic markets, the market demonstrated its resilience by already factoring in this news, resulting in a subdued reaction.

This was followed by the Bank of England's decision to keep interest rates unchanged. However, the US Fed's dovish view, which was well-received by the market, helped steer it in a positive direction. S&P 500 and Nasdaq closed at record highs and gained nearly two percent during the week. MSCI World also gained by the same amount.

European markets also performed well, with the Euro Stoxx 50 gaining nearly one percent. Except for CAC, all other exchanges gained nearly two percent. CAC closed the week in the red, falling 0.15 percent.

Nikkei took the interest rate in its stride, closing the week 5.45 percent higher. Besides China and Hang Seng, most Asian market indices closed positive.

Stocks to watch

Apar Industries, Colgate Palmolive, OFSS, Bajaj Auto, Dixon Technologies, Maruti, and Cipla are among the stocks that can witness upside momentum.

HUL, HDFC Bank, Bata India, Polyplex, and Shipping Corporation can remain under pressure during the week.

Cheers, Shishir Asthana