Trouble in bulls’ paradise

Dear reader, I have been warning you to brace for higher volatility and, finally, for deep impact last week. The peeling of the mosaic shows just how nervous retail sentiments are.

I have been drawing your attention for a few months to the extreme leverage (buying with borrowed funds), which is used in margin-funded trading (MTF) and in futures and options. Last week saw early signs of cracks in retail investors’ collective confidence. The number of shares purchased with margin-funded funds fell to levels not seen after 16 January 2026. It is difficult to gauge whether this decline occurred due to margin calls or voluntary unwinding. But the magnitude of the fall cannot be ignored. At the same time, the broad-based Nifty 50 fell to a 10-month low.

The downside of leveraged buying is that the buyer takes on two adversaries—price hostility and time. While the former cannot be wished away, the latter (time) means accumulating interest payouts. As long as the leveraged asset prices are rising faster than the interest rates paid, the risk is paying off. But the fact that the broad indices are unable to break out above their September 2024 peaks suggests that an average retail-leveraged buyer is deeply underwater. For him, the only recourse is hope, and that is a poor strategy in financial markets.

Should there be any fresh adverse development in the markets, there is a real and present danger of a crowded exit as nervous traders resort to panic-driven unwinding of leveraged positions. Note how the fossil fuel prices have jumped in international markets. That raises the spectre of India following suit if prices do not cool off. The rise in liquified petroleum gas (LPG) cylinder prices for domestic and commercial consumers means our food bills just went up.

Of all types of inflation, food inflation is the worst, as it cannot be controlled or negotiated. The Food and Agriculture Organisation (www.fao.org), a subsidiary of UNO reported a rise in global food prices in February 2026. That was before the war in the Middle East started. That means lower household savings and smaller investments in bank deposits.

Sensing this in advance, the Bank Nifty led the way down last week. Due to the Nifty's approximately 36% weightage, banking and financial stocks tend to swing the broader markets along with them.

This week, I expect nervousness to continue, especially if oil (and gas) prices remain higher. Industrial metals are likely to be news-driven as well, given the limited shipping options. That can make metal mining companies' stock prices shaky and fickle. Bullion witnessed selling amid a flight to cash as investors liquidated holdings. Margin calls and losses in other asset classes also contributed to the sell-off. The outlook for the absolutely patient delivery investor remains positive for now.

This is a period to focus on capital preservation over capital appreciation. Trade small lots with strict stop-losses and tail risk (Hacienda) hedges in place.

Fixed-income investors should keep their powder dry as better yields are likely going forward.

A tutorial video on tail risk (Hacienda) hedges is here.

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, which was the first casualty in terms of the cost of funds. Due to the sheer weightage of banking and financial sector stocks in the Nifty 50, the Bank Nifty dragged the Nifty lower. The US dollar index (DXY) rose as safe-haven buying returned, amid a flight to safety and liquidity. A strong dollar weighed on emerging markets, including India.

A strong dollar and flight to cash dragged bullion prices lower. Oil and gas spiked due to fears of supply disruptions triggered by missile attacks by Iran. The rupee eased against the dollar, dragging sentiment lower. Indian 10-year sovereign bond yields rose 3 basis points, which dragged Bank Nifty lower.

The National Stock Exchange (NSE) registered a nearly 3% decline in market capitalisation, indicating a broad-based decline. Market-wide position limits routinely rose post-expiry. US headline indices fell in tandem, providing headwinds for our markets.

Retail risk appetite: I use a simple yet highly accurate yardstick to measure the conviction levels of retail traders—where are they deploying their money? I measure the percentage of turnover contributed by the lower- and higher-risk instruments.

If they trade more of futures, which require sizable capital, their risk appetite is higher. In 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.

Turnover contribution rose mildly in the index options segment. That tells us bulls were sitting on the fence, as stock futures are more capital-intensive and volatile as compared to index futures. That tells us risk appetite was subdued.

In the lower-risk, less capital-intensive segment, traders focus on riskier stock options. That tells us the overall risk appetite was lower.

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 rising to falling stocks. As long as gaining stocks outnumber the losers, the bulls are dominant. This metric is a gauge of the risk appetite of one marshmallow traders. These are pure intraday traders.

The Nifty clocked the biggest weekly fall in a few quarters, and the same was mirrored by the advance-decline ratio. It fell to 0.79 (from 0.86 the prior week), indicating that there were 79 gaining stocks for every 100 losing stocks last week. Intraday buying conviction was clearly lower than last week. For a bull market to sustain, this ratio must remain above 1.0 as prices rise.

A tutorial video on the Marshmallow theory in trading is here.

The second chart I share is the market-wide position limits (MWPL). 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).

Last week, the MWPL rose routinely, but the magnitude of the rise was minuscule. Note how the post-expiry low was lower than the comparable week last month. Now the post-expiry gain was smaller too. That tells us that retail traders were not aggressively increasing their commitments.

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, both indices fell significantly, and that too with very high momentum as the spike in impetus readings shows. That usually means smart money was active on the sell side. I expect higher levels to encounter some overhead supply this week.

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 any powered aircraft faces in flight, so applying them to traded securities helps a trader estimate prevailing sentiment.

While the Nifty clocked its largest losses in many months, the LWTD reading rose again last week. That suggests there may be some short covering. While short covering may cushion declines, it may be inadequate to boost markets significantly.

A tutorial video on interpreting the LWTD indicator is here.

Nifty’s verdict

The swing high logged by the Nifty in September 2024 remains intact despite 17 months having elapsed since that peak. That makes retail bulls restless and edgy. Especially if they have leveraged themselves (bought with borrowed money). Note how the price has fallen with a sharp gap to May 2025 levels. Remember what I wrote earlier—margin-funded exposure is falling slowly. That is a sign of fatigue in the bull camp.

The price is clearly below its 25-week moving average, which is a proxy for the six-month holding period cost for an average retail investor. That means the medium-term outlook is nervous for now. Last week, I wrote that the Nifty must stay above 26,400 to become bullish again. Markets failed to manage that task. For now, staying below the weekly low of 24,300 on a continuous closing basis could open the door to fresh declines.

Bulls appear on the back foot

Your call to action: Sustained trade above the 26,400 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 25,100 level can trigger fresh weakness.

Last week, I estimated ranges of 61,950–59,125 and 25,800–24,550 for the Bank Nifty and Nifty, respectively. Both indices breached their support levels due to the war. This week, I estimate ranges of 59,325–56,225 and 25,100–23,800 for the Bank Nifty and Nifty, respectively. Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks.

Have a profitable week.