Vijay L Bhambwani's Ticker: Retail traders show signs of aggression

Mint

2 days ago

Dear reader,
Last week, I wrote that Japanese economic tremors could impact domestic market sentiments even though the US downgrade by Moody's would not. That hypothesis was validated by the markets as the Nifty slipped mildly, even as the Bank Nifty gained marginally. The Reserve Bank of India (RBI) will announce its decision on interest rates on Friday, keeping banking stocks buoyant. Bankers expect a rate cut after the policy meeting. Do remember that the banking and financial sector stocks command a weightage of 37.74% in the Nifty 50. This sector is single-handedly responsible for swaying the broader markets with itself. Which is why it is known as the 'swing sector" by systems traders.
Should the RBI cut coupon rates by up to 0.25%, the markets may take it in their stride. As I wrote last week, any cut of 0.50% or higher will be a negative development from the point of cash carry trade considerations. Banking stocks hold the key to the near-term future trend of the markets.
Big money is likely to continue pushing interest rate-sensitive stocks higher ahead of the RBI announcement on Friday, cushioning the downside. As I wrote in last week's column, the market was preoccupied with the derivatives expiry process, and volatility remained above average.
Sector-wise analysis shows public sector undertakings (PSUs) stocks remaining in the limelight this week, too. Oil and gas stocks will see hectic activity, as the Organization of the Petroleum Exporting Countries Plus (Opec+) has announced output hikes, and lower prices should enthuse inflation hawks. Industrial metal prices witnessed the routine month-end spikes and are likely to see higher levels meeting resistance from sellers. That means stock prices of metal mining stocks may also see limited upside potential.
Oil and gas prices are likely to remain under pressure, too, as higher levels are encountering selling pressure. The recent narrative that was in force of a shortage of natural gas prices has been replaced by a new hypothesis that the markets are actually well supplied. This has been my view for many quarters. Welcome to the oil and gas markets—also known as 'widow makers." The level of dis-information protocols (DIP-ping) is the highest amongst all asset classes.
Bullion remains a long-term bullish story, and delivery-based investors should sit tight on their holdings. Look beyond 2025, if not further. Fixed-income investors should keep the powder dry and wait for the RBI decision on Friday before making their next move.
Analysis of the margin-funded trading data shows that retail segment borrowings from brokers for investing in stocks reached their highest level after the end of January 2025. This shows retail aggression is on the rise, which is a double-edged sword. The retail segment is the most emotional segment of the market and also the weakest financially. Retailers tend to surrender their positions if negative news emerges, resulting in crowded exits.
Continue to trade with protective stop losses and tail risk (Hacienda) hedges in place. A tutorial video on tail risk (Hacienda) hedges is here - https://www.youtube.com/watch?v=7AunGqXHBfk
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 fell, whereas the Bank Nifty gained mildly. The US dollar index gained mildly and triggered profit taking in bullion. Oil fell, and gas rose. Much of the gains in gas prices are due to the cost of carry (rollover/financing charges).
The rupee weakened versus the dollar, which made bulls slightly nervous. Indian bond yields were steady ahead of the RBI meeting. The NSE gained 0.53% in market capitalisation, which shows broad-based buying and some optimism. Market-wide position limits (MWPL) fell routinely on expiry.
US markets rallied and provided tailwinds 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 what percentage of the turnover was 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 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 high-risk, high-volatility, and capital-intensive future segment saw higher turnover as traders rolled over their trades to the next derivatives cycle, resulting in dual turnover being reported.
Turnover fell uniformly in the relatively lower-risk options segment. Even rollover is an indication of higher risk appetite, so the outlook remains optimistic for now.
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 stocks compared to falling stocks. As long as the stocks that are gaining outnumber the losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.
While the Nifty logged smaller losses last week, the intraday buying conviction eased. The advance-decline ratio fell to 1.05 (prior week 1.21), indicating 105 gaining stocks for every 100 losing stocks. That is a slender buying conviction shown by retail traders. This ratio must remain above the 1.0 level throughout this week if bulls are to have the upper hand.
A tutorial video on the Marshmallow theory in trading is here -www.youtube.com/watch?v=gFNKvtsCwFY
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.MWPL fell routinely after expiry, but the 26% level is lower than the 26.13% of the previous month's post-expiry week. This can be partially explained by the addition of nine new stocks to the F&O list on Friday. As long as prices and MWPL rise in tandem, bulls still have a fair chance of remaining dominant over bears.
A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here -https://www.youtube.com/watch?v=t2qbGuk7qrI
The third chart I share is my in-house indicator 'impetus.' It measures the force in any price move.
Last week, the Bank Nifty rose with rising impetus readings, whereas the Nifty fell with lower impetus readings. That means the Nifty fell on poor momentum, and the Bank Nifty rose on higher momentum. This divergence is unhealthy for the market outlook.
I remind my readers that I consider these two indices like the two wheels of a bicycle. Should they move in opposite directions, they can topple the bicycle (markets).
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 logged smaller losses last week, the LWTD indicator rose to 0.11 (prior week -0.28). That tells me buying support maybe improved this week. That is also supported by the fact that the expiry process is over, and fresh retail buying is usually seen.
A tutorial video on interpreting the LWTD indicator is here - https://www.youtube.com/watch?v=yag076z1ADk
Nifty Verdict
The weekly chart shows this index logging a bearish candle for the second week in a row. That tells us that the bulls are hesitant. The 24,800 level, which I advocated as a trend determinator, was violated even on a closing basis.
To reverse the short weakness, bulls will have to push the Nifty above the 25,250 level on a sustained closing basis. In case of declines, too, the 24,800 must be protected. Only then will the outlook turn positive in the near term.
The price remains above the 25-week moving average, which is a proxy for the six-month holding cost of a retail investor. That means the medium outlook is positive for now.
Your Call to Action
Watch the 25,250 level as a near-term resistance. Staying above this level strengthens bulls.
Last week, I estimated ranges between 57,200 – 53,600 and 25,625 – 24,075 on the Bank Nifty and Nifty, respectively. Both indices traded within their specified resistance levels.
This week, I estimate ranges between 57,400 – 54,100 and 25,475 – 24,025 on 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.
Vijay L. Bhambwani
Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani