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Retail bulls display recklessness

Dear Reader,

Last week when I wrote follow up buying was still lacking it may have surprised some of you since the markets were appearing cheerful. As I peel layer after layer of statistical data it is increasingly evident that this cheerfulness is built on an inadequate and/or faulty foundation. Retail traders are also showing signs of recklessness since they are throwing caution to the winds. That is borne by the statistical data which points towards retail players averaging many of their losing positions.

If the retail investor is running out of money, he is resorting to borrowing from brokers under the MTF (margin trading facility) to invest in stocks. The last available data is of 28 August 2025 (Thursday) which shows absolute rupee value of borrowing at ₹94,269 crore comprising borrowing against 473,99,90,823 shares. These are lifetime high figures. What is even more noteworthy is that markets were down last week which means retail traders were averaging down. As any savvy trading veteran knows, averaging a falling stock is like catching a falling knife.

What is the average retail guy facing? Since last week was the expiry of the August 2025 derivatives series, futures and options traders who were long would have carried over their long positions and incurred rollover (financing) costs in addition to execution costs and commissions. Add these total costs and you realize your average buy price rises every month. Add the notional (mark-to-market) losses which have to be paid daily before the trading session begins and you know the stress is likely to make retail investors edgy very soon. 

On the other hand, delivery based investors who have borrowed under the MTF arrangement wind up paying up to 17-18% interest cost per annum! As long as asset prices which you have borrowed from your broker to purchase are rising, this borrowing makes commercial sense. When the same leveraged assets’ prices are falling, interest costs are nothing but a double whammy. When you borrow more to buy more of the same asset/s, it is nothing short of recklessness!

     

Rear View Mirror

Let us assess what happened last week so we can gauge what to expect in the coming week.

The fall was led by the Bank Nifty as the Nifty 50 brought up the rear. With a weightage of 37.8% in the Nifty 50, the banking and financial sector is the swing sector of the markets. The US dollar index (DXY) showed weakness which propped bullion prices as safe haven buying spiked. Oil prices rose on geopolitical stress and Ukrainian attacks on Russian oil installations. Gas prices appear to have risen but a closer look tells us much of it is the cost of carry.

The rupee fell against the dollar to lifetime lows and that dragged sentiments lower. Indian 10-year bond yields spiked yet again and that is likely to keep banking stocks under pressure. The National Stock Exchange (NSE) lost 2.21% market capitalization which tells us the selling was broadbased. Marketwide position limits (MWPL) fell routinely after expiry.

US indices fell and provided headwinds to our markets.

Retail Risk Appetite – I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders—where they are deploying money. I measure what percentage of the turnover was contributed by the lower and higher risk instruments.

If they trade more futures which require sizable capital, their risk appetite is higher. Within the futures space, index futures are less volatile than stock futures. A higher footprint in stock futures shows higher aggression levels. Ditto for stock and index options. 

Last week this is what their footprint looked like (the numbers are average of all trading days of the week) –

The high risk, capital intensive future segment saw rising turnover contribution as traders rolled over their trades on expiry. This rolling over logs dual turnover which is routine. Even a healthy rollover is a sign of optimism.

In the lower risk options segment the turnover rose in the safest derivative instruments in the markets—index options.

Overall outlook is that of derivatives traders displaying signs of a hangover of bullishness even at lower prices.

Matryoshka Analysis

Let us peel layer after layer of statistical data to arrive at the core message of the markets.

The first chart I share is the NSE advance decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way the winds are blowing. This simple yet accurate indicator computes the ratio of the number of rising to falling stocks. As long as gaining stocks outnumber the losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.

The Nifty logged the biggest weekly loss in the last 20 weeks covered by the chart. That saw the advance decline ratio ease to 0.60 (prior week 1.37) which is the lowest level in the 20-week period. That underscores the nervousness in the undertone. Which is one of the data points that tell us retail investors are buying falling stocks. 

A tutorial video on the Marshmallow theory in trading is here

The second chart I share is the market wide position limits. This measures the amount of exposure utilized by traders in the derivatives (F&O) space as a component of the total exposure allowed by the regulator. This metric gauges the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s.

The MWPL chart tells us a sombre story. The routine post expiry decline was at the lowest level in the last five monthly expiries. That this has come after eight stocks have been excluded from the F&O list and one stock has been added is telling.

Bullish swing traders are clearly not writing out cheques as big as they were writing a few weeks ago.

A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here

The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move. Last week I raised a red flag as both indices moved in opposite directions but their impetus readings were higher. That warned us trading momentum was forceful.

Now we see impetus readings for both indices have diverged whereas both indices logged losses. The Bank Nifty impetus has spiked when the Bank Nifty clocked bigger losses. That fact that the Nifty’s impetus reading was down last week is nothing but a minor comfort. Do note that the banking and financial stocks command a weightage of 37.8% in the Nifty. Even if there is little or no forceful selling in the Nifty, weakness in banking stocks can drag the index lower.

The reverse case scenario also holds true. Watch the Bank Nifty keenly this week.  

The final chart I share is my in-house indicator ‘LWTD.’ It computes the lift, weight, thrust and drag encountered by any security. These are four forces that any powered aircraft faces during flight so applying it to traded securities helps a trader estimate prevalent sentiments.

While the Nifty clocked the biggest weekly loss in the last 20-week period covered by the chart, the LWTD indicator slipped back into the negative zone, too. At -0.02 (prior week 0.27) it indicates little if any bear covering. As I have mentioned in the past, short covering can at best cushion declines. It takes aggressive fresh buying to propel markets to new highs. Barring unforeseen news triggers, the possibility of bulls getting aggressive seems remote this week. Temporary short covering can occur however.  

A tutorial video on interpreting the LWTD indicator is here

Nifty’s Verdict

Last week we saw a large bearish power candle. When a candle is prominently large in size and especially at a crucial juncture in terms of price point, it is a crucial power candle. Note how last week I had warned you that the bullish gap up opening resulted in an inverted bearish hammer, which had bearish implications.

That hypothesis was validated as the bearish power candle breached the prior week’s low and the 25-week moving average at the same time. This average is a proxy for the six-month average holding cost of an average retail investor, which is now underwater after last week's fall. That makes the medium-term outlook nervous for now.

Since a fortnight I have advocated watching the 24,200 level as a last mile support. That support still remains as a threshold to watch. Should this be breached, expect further downsides to open up.

On the flip side the 24,750 level is a trend determinator in the absolute near term. Only above this level will bulls get a reprieve from the weakness.

Much depends on banking and financial stocks due to their sheer weightage in the Nifty 50. 

Nifty is precariously poised near a support
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Your Call to Action – Watch the 24,200 level as a near term support. Only a breakout above the 24,750 level raises the possibility of a short term rally.

Last week I estimated ranges between 56,150 – 54,150 and 25,325 – 24,425 on the Bank Nifty and Nifty.  Both indices breached specified support levels. That indicates weakness and range expansion on the downside.

This week I estimate ranges between 54,675 – 52,625 and 24,900 – 23,950 on the Bank Nifty and Nifty respectively.

Trade light with strict stop losses. Avoid trading counters with spreads wider than eight ticks. 

Have a profitable week.

Written by Vijay L Bhambwani, Vijay is the Ceo of www.Bsplindia.com. He tweets at @vijaybhambwani. Edited by Michael Steve Correya. Produced by Shad Hasnain.