The Jio IPO factor for India's stock market this week

Last week I warned you about the possibility of a dead cat bounce. I also warned you that the rally could be quite vicious because both bulls and bears would be on the same side of the trading terminal (the buy side). That hypothesis was bang on target. I also suggested that my readers err on the side of caution despite FOMO, or fear of missing out. Do note how the neighbourhood markets are trading—Japan, Indonesia and South Korea, to name a few. Excessive leverage (buying stocks with borrowed funds) is causing a landslide-like price decline.

The reason I feel the relief rally might persist is that the Jio Platforms IPO will see markets being supported by institutional players. US President Donald Trump has lifted sanctions on Russian oil exports, which is to India’s benefit. The elevated hopes of an India-US trade deal is another feel-good factor this week. Also note this is a shorter trading week on account of Dussehra. As I have pointed out many times, shorter weeks have historically favoured bulls.

This week, trading activity will continue to focus on public sector undertakings, as they bore the brunt last week. Financial stocks are likely to be in the limelight, given their 37.45% weightage in the Nifty 50. For any rally in our equity markets, banking stocks must rise, or the rally is likely to be stillborn. Watch this sector keenly in the days ahead. The rate-sensitive segments (financials, infrastructure, etc.) will be the other segments to watch this week.

In the commodity space, we saw industrial metals receive mild support on declines as the month-end approached. There is a likelihood of short covering this week too. But do remember what happened to aluminium prices last week. That is a warning of what can transpire in the future to other industrial metals. That means there is a likelihood of a major advance in metal mining stocks this week. Still, I don’t see a supercycle in base metals. Bull markets triggered by supply-side constraints and fiat currency debasement, yes. But a supercycle—no!

Bullion saw rapid unwinding of safe-haven buying as investors anticipated continued coupon rate (interest rate) hikes in the remainder of the year. With our administration announcing that bullion exchange-traded funds will stop buying physical bullion and instead use traded bullion instruments, I expect discounts on bullion ETFs to deepen even further. While short- and medium-term outlook may be muddied, the absolute long-term outlook remains positive. Just stay away from leveraged buying, wait patiently, and you should be alright.

Energy markets saw crude oil prices jump as supply-side constraints (rising shipping charter rates, missile attacks on oil tankers) kept traders on edge. This week there may be a cap on prices as Trump’s withdrawal of sanctions on Russian oil and higher exports by Saudi Arabia come into play. The wildcard will be any surprise attacks by Houthis on oil infrastructure in the Gulf. Here again I stick my neck out and rule out a supercycle in oil and gas. Higher levels are expected to run into profit-taking.

Fixed income investors are headed towards a sweet spot, with yields firming and approaching a level at which ‘laddering’ of sovereign 10-year bonds can begin in the near term. Till then, keep the powder dry and wait for the opportune time. Continue to maintain strict stop losses and tail risk (Hacienda) hedges on all long positions.

Rear-view mirror

Let us assess what happened last week so we can gauge what to expect next week.

The rally was led by the broad-based Nifty 50, and the Bank Nifty brought up the rear. A weak US dollar index (DXY) triggered bullishness in emerging markets, including India. That bullion fell in spite of a weak DXY tells us about the magnitude of profit-taking in bullion. Oil and gas moved in diverging directions.

The rupee strengthened against the US dollar on government moves that made dollars available to oil marketing companies and restricted positions in the currency derivatives segment. That boosted sentiment in the markets. Indian 10-year bond yields continued their northward journey as the cost of funds spiked to a multi-quarter high. The National Stock Exchange gained 1.55% in market capitalisation, which indicates broad-based buying. The market-wide position limits (MWPL) routinely climbed after expiry.

Retail risk appetite

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

If they trade more futures, which require sizeable capital, their risk appetite is higher. Within the futures space, index futures are less volatile compared to stock futures. A larger footprint in stock futures indicates higher levels of aggression. 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)—Turnover contribution in the high-volatility, higher-capital-intensive futures segment was stagnant. That indicates compression of risk appetite. In the relatively lower-risk options segment, turnover contribution rose in the comparatively higher-risk stock options.

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

The Nifty 50 logged the strongest gains in months, but the advance-decline ratio rose mildly from 1.13 in the prior week to 1.16 last week. That tells us the retail segment was not resorting to big-ticket buying in the spot markets.

The second chart I share is the market-wide position limits. This measures 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 into the next session(s).

The MWPL rose sharply to 55.46% (prior week: 50.59%), suggesting swing traders expanded their exposure last week. Rising prices triggered FOMO. Do note—higher MWPL brings higher price volatility, as larger positions get shuffled in times of adversity.

The third chart I share is my in-house indicator ‘impetus’. It measures the force in any price move. Last week, both indices rose with higher impetus readings. That tells us the rally was with higher momentum. Ideally, prices and impetus must rise in unison to indicate a sustainable upmove.

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

The Nifty 50 jumped to log the strongest weekly gains in many quarters. The LWTD reading, however, remained in negative territory at -0.24 (prior week -0.28). That suggests there may be a stronger short-covering bias, but fresh, aggressive buying may remain elusive.

Nifty’s verdict

Last week I suggested that the long-legged doji candle indicated that bulls were attempting to fight back for the first time in eight weeks. I also suggested that the yawning gap between the price and the 25-week moving average suggested a possibility of a mean reversion rally.

We saw a bullish power candle form last week even as the 25-week average continues to edge lower. This average is the proxy for the average holding cost of a retail trader. As weaker hands are eliminated, this average will break the downward momentum and eventually rise again.

Last week I suggested watching the 22,200 level as last-mile support. To the relief of the bulls, this price point held. The support area of 22,200 remains unchanged. In order to gain a fighting chance to return to the driver’s seat, bulls need to overcome the 23,650 level immediately.

Your call to action

The medium-term hurdle still is at 23,650 which is quite a task. Only if this level is overcome confidently can bulls get some reprieve. A sustained trade below the 22,200 level can trigger fresh weakness.

Last week, I estimated ranges between 56,300-54,225 and 22,975-22,075 on Bank Nifty and Nifty50 , respectively. Nifty 50 overshot its stated resistance level by 175 points. Bank Nifty stayed within its specified levels to perfection. This week, I estimate ranges between 56,950-54,725 and 23,650-22,625.

Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks. I have widened the spreads due to heightened volatility present in the markets.

Vijay L Bhambwani has been trading since 1986 and is the CEO ofBSPLIndia, a statistical systems based proprietary trading firm. He tweets at @vijaybhambwani