Vijay L Bhambwani's Ticker: Bulls carry a heavy load
Bulls need to absorb all the selling and more to take the Nifty to new highs.
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Dear reader,
Last week, I advocated that the Nifty needed to clear the 26,100 hurdle on a sustained closing basis or bulls would find the going tough. That analysis was validated by the market action. Read that article here. I cautioned my readers about the rapid rise in speculative buying fuelled by borrowed funds. I expressed concerns about the destabilising effect of this sizable borrowing on prices. When a market participant buys in the spot segment with his own money, drawdowns have a limited or no psychological impact. With borrowed money, falling prices and interest payable worry a bull.
The noteworthy trend I found in the MTF (margin-fund trading) segment was that the total borrowing under the MTF category rose to its all-time high at ₹1,11,931 crore, spread over 546,59,02,189 shares bought with this money. That represents a 13.96% rise in Rupee terms and 12.19% in terms of the number of shares purchased with this borrowed money over 30 trading sessions. The difference in gains is due to the price erosion in traded securities since markets have been falling continuously for three weeks.
Borrowers are unknowingly taking on dual adversaries—price risk and interest costs. The prices of securities bought with borrowed money need to rise at least twice as much as the interest costs to justify the risk taken. The odds of that happening appear to be long indeed.
I am not suggesting that you close your positions in a state of panic. But do not leverage. Buy what you can with your own funds. Avoid borrowing money. Please note that we have a highly sensitive news event on the horizon, with the announcement of the Bihar election results. There are times when discretion is the better part of valour. This is such a time.
This week again, I expect the action to be polarised around public sector undertakings (PSUs), particularly banks. Since banking and financial sector stocks carry the highest weightage in the broad-based Nifty 50, this sector is considered a swing sector. No sustainable rally is possible unless this sector rallies. In the commodities space, oil prices remained under pressure and gas prices rose. This was due to a combination of colder weather and the destruction of storage capacity in Eastern Europe due to the Ukraine war. Much of the gain was due to seasonal factors. I maintain my view that energy markets are adequately supplied.
Bullion saw profit taking, as I have been advocating that the short-term outlook is muddied. However, patient delivery-based investors looking beyond 2026 still have good gains to look forward to. Maintain long positions in the delivery segment and avoid leveraging.
Industrial metal prices saw a routine sell-off after the usual month-end short covering in October. That may result in some profit sales of metal mining company stocks in the near term. I recommend a light exposure in your trade book due to the Bihar election result factor. Maintain stop losses and tail risk (Hacienda) hedges at all times.
Fixed-income investors should keep the powder dry in anticipation of better yields in the future.
A tutorial video on tail risk (Hacienda) hedges is here.
Rear View Mirror
Let us assess what happened last week so we can guesstimate what to expect in the coming week.
The profit was more pronounced on the broader-based Nifty 50. Friday’s price action served as a warning to my readers about the kind of statistical beta (pure price volatility) clustering that can occur in the future.
Bullion witnessed some profit-taking as the prospects of a trade deal with Russia started doing the rounds in the market grapevine. Oil prices fell as supplies remained robust, while demand was feared to be weak. Gas went up due to seasonal-cum-geopolitical factors.
The US dollar index DXY eased, which cushioned falls in commodities since the dollar is the invoicing currency in commodity markets. The rupee strengthened against the dollar, which cushioned declines in our equity markets. Indian 10-year bond yields eased marginally, boosting the Bank Nifty.
The National Stock Exchange (NSE) saw market capitalisation ease marginally, indicating that nervousness was broad-based. Market-wide position limits (MWPL) rose routinely. US headline indices fell across the board, providing headwinds to our 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 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. Within the futures space, index futures tend to be 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 the average of all trading days of the week) –
The contribution from turnover in the capital-intensive and higher-risk future segment declined. In the relatively lower-risk options segment, turnover increased in the index options segment. This is relatively the least risky of all segments in the derivatives space. The overall picture suggests risk appetite contracted sharply last week.
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 calculates the ratio of rising to falling stocks. As long as the number of gaining stocks exceeds losers, bulls are dominant. This metric is a gauge of the risk appetite of one marshmallow traders. These are pure intraday traders.
The Nifty fell last week, and so did the advance-decline ratio. At 0.80 (prior week: 1.04), it indicates that only 80 stocks gained for every 100 stocks that lost. The bias was tilted towards profit-taking. This ratio must remain above 1.0, even with rising prices, to indicate a sustainable upward upmove.
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.
MWPL reading rose last week and is poised to hit new period highs. In addition to the MTF (margin-funded trading), this segment suggests that retail traders are optimistic about market prospects and are aggressively leveraging their long positions. Unfortunately, a high MWPL means higher volatility, as larger lots are more susceptible to fluctuations in either direction. Friday’s price action should serve as a warning for my readers.
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, the Nifty 50 index logged losses, whereas the impetus readings rose. That tells me the selling was on higher momentum. On the other hand, the Bank Nifty rose, but the impetus readings fell, which means the rally was more due to short covering than aggressive buying.
I have warned you about the divergence in both indices since these two are like the wheels of a bicycle. Both must move in the same direction or risk toppling the markets.
Ideally, the impetus and prices must rise in tandem to indicate a sustainable rally.
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.
The LWTD reading rose marginally to 0.17 (prior week 0.15), which suggests the possibility of improved short covering on declines. It should be noted that short covering can cushion declines or even trigger a short-term upmove, but it takes aggressive fresh buying to scale new highs.
A tutorial video on interpreting the LWTD indicator is here.
Nifty's Verdict
Last week, I suggested that the markets would rally only above the 26,100 level on a sustainable closing basis. Unfortunately, the bulls lacked the firepower to do so. The 26,100 resistance level remains the key to watch. The Nifty fell for the third week in a row. That means bulls now carry a heavier burden of overhead supply.
On the way up, there will be nervous, weaker hands who will be eager to exit long positions at breakeven prices. Bulls will have to absorb all that selling and more to take the Nifty to new highs.
The price remains above its 25-week average, which is the six-month average holding cost of a retail buyer. That means the medium-term outlook is currently optimistic. A fall below this average may open doors to new downsides.
Your call to action – Only a sustained trade above the 26,104 level confirms the possibility of a fresh rally. In the event of declines, the 25,000 level needs to be defended.
Last week, I estimated ranges between 58,950 – 56,575 and 26,225 – 25,200 on the Bank Nifty and Nifty, respectively. Both indices traded within their specified ranges.
This week, I estimate ranges between 59,025 – 56,725 and 26,000 – 25,000 on the Bank Nifty and Nifty, respectively.
Have a profitable week.
Vijay L. Bhambwani
Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani.
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