A seesaw trading week is upon us

Last week, I wrote ‘hopium’ levels were rising in the retail investors camp, read here. That reading was validated by the markets as they edged higher. I maintain my view that the rally is powered by hope more than conviction. As I present statistical data sets, that hypothesis will become clearer.

Since 2023, I have been waxing eloquent on the outsized weightage of bank stocks in the Nifty 50. It’s truly the swing sector—wherever they go, the market follows.

Last week, the Reserve Bank of India announced a new set of guidelines that marks a significant shift in how lenders assess and provide for credit risk. That’s set to drag stock prices and, therefore, the indices. The state election results due today can weigh as well. Last week, being a shorter one also cushioned the decline. This week, the field is wide open.

While the usual push-and-pull of the war is likely to continue, the impact on asset prices will probably recede over time. Remember how markets would fall initially every time the Islamic State released a video of beheadings in West Asia? Over time, markets went back to business as usual. Ditto for the Ukraine and Gaza wars. I expect prices to remain impacted by geopolitical events, but the magnitude of the price moves may be muted.

Last week, we said margin-funded exposure rose to new highs at ₹1.18 trillion. Retail investors borrowed aggressively to buy the dips. This validated my hypothesis that hopium levels would rise in the near term.

This week, we’re likely to see continued focus on public sector undertakings, particularly banks. Markets will discount the new RBI norms for provisioning. Expect larger-than-average price moves on bank stocks. The rate-sensitive firms, with capital-intensive business models and heavy debt, are likely to witness above average volatility. And if fuel prices are hiked at the pump, the markets may get even more nervous.

As I write this piece on Saturday morning, there has been no confirmation on these bits of news. However, bond and currency markets took it on the chin as the rupee tested new lows and bond yields shattered the 7% ceiling. These are cautionary signs for equities. Should the Bharatiya Janata Party win West Bengal elections, markets may rally initially, but follow-up buying needs to be aggressive if the rally is to be sustained. Higher levels will probably encounter progressively higher resistance levels.

Crude oil prices are likely to remain volatile, but higher levels are witnessing resistance. While the bias may be upwards and get a boost if any large-scale hostilities break out, the upside is witnessing poor follow-up buying. Gas prices remain relatively subdued. Bullion shows divergent trends as silver attempts to find its feet compared to gold. I maintain my view that the long-term outlook for patient delivery investors remains robust. Just do not leverage (buy with borrowed funds).

Industrial metals witnessed a routine month-end spike and need follow-up buying to sustain the momentum. Higher levels are likely to meet resistance in metals, too. Which means stocks of metal mining companies will have calibrated upsides.

Continue to trade cautiously with stop losses and tail risk (Hacienda) hedges in place. Fixed-income investors should keep their powder dry in anticipation of better yields.

Rear-view mirror

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

The broad-based Nifty 50 was buoyant, while the Bank Nifty slipped. Bullion was divergent as silver stole the thunder from gold. Oil and gas jumped on fears of hostilities resuming. The dollar slipped, but the rupee weakened against a weaker greenback. That curbed sentiment too.

India’s 10-year sovereign bond yields spiked past 7%, which added to the downward pressure on the Bank Nifty. NSE market capitalisation rose 0.62%, which tells us the broader market remains optimistic. Market-wide position limits (MWPL) eased routinely. The US markets saw a late rally, which cushioned declines in domestic markets.

Retail risk appetite

I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders: Where are they deploying money? I measure what percentage of the turnover was contributed by the lower- and higher-risk instruments.

If they trade more of futures, which require sizeable capital, their risk appetite is higher. Within the futures space, index futures are less volatile compared to 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 the average of all trading days of the week):

The capital-intensive, high-volatility futures segment saw turnover fall as risk appetite compressed. In the relatively lower-risk, lower capital-intensive options segment, turnover rose in the stock options at the expense of index options. That tells me retail traders were optimistic but played a safe hand via options rather than futures.

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 the way the winds are blowing. This simple yet accurate indicator computes the ratio of the number of rising stocks to falling stocks. As long as the 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 clocked small gains, and the advance-decline ratio reflected that at 1.22 (prior week 0.95). For every 100 losers, there were 122 gainers. As long as the ratio remains above the 1.0 level with rising prices, bulls will have the upper hand.

The second chart I share is the market-wide position limits. This measures the amount of exposure utilised 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 eased routinely post-expiry, but the fall was shallow, and lower levels found keen buyers. That tells me the probability of MWPL rising this week is fairly good. As long as MWPL rises rapidly with prices, there will be optimism in the markets.

The third chart I share is my in-house indicator ‘impetus’. It measures the force in any price move. Last week, the Nifty rose with poor momentum, whereas the Bank Nifty fell with higher momentum. I reiterate my view that both indices are wheels of a bicycle and must move in unison, or the bicycle may topple. This week, if both indices diverge, bulls may be in trouble.

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

While the Nifty clocked small gains, the LWTD reading fell to -0.19 (prior week 0.07). That tells us fresh buying support may be weak. While short covering may always be expected, it can at best cushion declines or trigger a temporary relief rally. But it takes aggressive fresh buying to trigger a new high.

Nifty’s verdict

The weekly chart shows an inverted hammer of sorts as the bulls attempted to push prices higher, failed, and the price slipped to the lower end of the weekly range. The price remained below the 25-week moving average, which is the proxy for the six-month average holding cost of an average investor. The average itself is falling, which tells us there is some downward pressure in the near term. The price must overcome this moving average and stay above it.

I have been advocating resistance at the 24,650 levels, which remains in place. I want this hurdle to be overcome if the bulls are to get their initiative back. On the flip side, continuous trade below the weekly low of 23,796 may trigger fresh declines.

Your call to action

Sustained trade above the 24,650 level indicates the possibility of a fresh rally. Only if this level is overcome confidently can a new bullish phase begin. A sustained trade below the 23,800 level can trigger fresh weakness.

Last week, I estimated ranges between 58,650-53,525 and 24,800-23,000 for the Bank Nifty and Nifty 50, respectively. Both indices traded within their specified ranges. This week, I estimate ranges between 57,425-52,300 and 24,900-23,075 on the Bank Nifty and Nifty 50, respectively.

Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks. Have a profitable week.

Mint Ticker ia a weekly analysis of India's stock market—technical, incisive and a must-read for the seasoned investor as well as the amateur testing the choppy waters of Dalal Street. Want this newsletter delivered to your inbox? Subscribe here.