Vijay L Bhambwani's Ticker: Retail traders getting into overdrive

Mint

4 days ago

Last week, I analysed statistical data and wrote that retail traders were getting more aggressive. That aggression not only continued, but retail traders stepped on the gas to go into overdrive. As per the last data available on NSE's website at the time of writing this piece, retail traders bought the highest number of shares with a margin-funded facility. Clearly, there is a sense of urgency in this buying because they are resorting to borrowing when their own capital is falling short. I have repeatedly warned you from many quarters that high leverage and statistical ßeta (pure price volatility) go hand in hand.
Also note that I have written about how calendar 2025 marks the onset of procyclicality in financial markets. This economic phenomenon occurs after prolonged periods of time when asset prices and the economic outlook diverge. Mean reversion is triggered, and asset prices align with economic data. High volatility is a direct result. Brace up for a challenging but profitable ride ahead.
Last week, I wrote that the banking and financial sector stocks would be buoyant ahead of the RBI (Reserve Bank of India) announcement on interest rates. That hypothesis was validated by the markets. Also, remember this sector commands a weightage of over 37% in the Nifty 50. The announcement of the government being open to foreign buyers as major holders in Indian banks boosted banking stocks further. Which means it was banking that boosted markets higher. This optimism may spill over to this week as well.
I had also written that the interest rate cut of over 0.25% would be a negative development for cash carry trade. That RBI cut the rate by 0.50% tells me markets saw a short-covering-based rally. There is a good probability of profit-taking setting in the weeks ahead. Rising oil and gas prices can trigger volatility in oil marketing companies (OMCs) stocks. Fears of higher inflation can return in the near term unless energy prices fall. The rise is due to geopolitical concerns, and the energy markets remain well supplied.
Bullion saw a sterling week as gold and silver rallied sharply. I maintain my view that my readers should look beyond 2025 and stick to delivery holdings rather than pay cost-of-carry (financing charges) that futures & options (F&O) buyers have to incur. All big declines will be bought into by institutional players, so the long-term story remains intact. My readers can refer to my video wherein I have explained how to buy purest bullion at honest-to-God prices, conduct fool-proof checks for purity electronically and negotiate buyback prices.
Industrial metals are witnessing some buying, but resistance at higher levels continues to cap gains. Much of the price rise is due to tariffs rather than anticipated demand hikes. That means metal mining companies' stocks may rise due to rate cuts, but the rally may be calibrated.
Public sector undertakings (PSUs) will continue to attract trader attention as newsflow is positive for this segment of the market. Fixed income investors should keep the powder dry for better rates.
Continue to trade light with stop losses and tail risk hedges. A tutorial video on tail risk (Hacienda) hedges is here.
Let us assess last week's happenings to gauge what to expect in the coming week.
Due to their sheer weightage, banking stocks led the rally. A weak US dollar boosted haven buying in bullion and energy commodities, too. The rupee weakened mildly against the dollar, capping the gains in our markets. Watch the USDINR carefully this week.
Indian 10-year bond yield rose mildly, which means bond prices fell mildly. Barring this, banking stocks would have risen even higher. Market capitalisation of the National Stock Exchange (NSE) rose 1.59%, which means the rally was broad-based. Market-wide position limits (MWPL) rose routinely along expected lines.
US headline indices rose and provided tail winds to our markets. Change in asset prices
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 capital-intensive, high-risk futures segment saw lower turnover contribution as higher volatility kept traders at bay.
In the lower capital and lower volatility options segment, the index options saw the turnover contribution rise. This segment is the least capital-intensive and the least volatile.
That tells me retail risk appetite in the leveraged segment fell off a cliff. NSE F&O Component Turnover Breakdown
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 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.
The Nifty notched up gains last week, and the advance-decline ratio followed suit. At 1.15 (prior week 1.05), it indicates there were 115 gainers for every 100 losers. Intraday traders showed improved buying conviction, and as long as this ratio stays above 1.0 this week, bulls will remain in charge.
A tutorial video on the Marshmallow theory in trading is here. NSE Advance-Decline Ratio
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.
The MWPL reading rose along routine lines after a post-expiry dip. What is noteworthy is the increase to 31.24% in the first week after expiry. This level is the highest after the commensurate week post expiry of the January 2025 series. Do note that the derivatives list has seen sizable new stock additions, which means the absolute amounts invested by swing traders are sharply higher. This is more evidence that the retail segment is going into overdrive.
Higher greed may lead to crowded exits if the news flow turns adverse. Do remember, volatility is on the rise already. Keep looking over your shoulder and maintain tail risk hedges.
A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here. Market-Wide Position Limits
The third chart I share is my in-house indicator, 'impetus.' It measures the force in any price move. Last week, we saw the Bank Nifty lead the rally, but the impetus reading fell. The Nifty 50 rallied with mildly higher impetus readings, which tells me the upthrust was more due to short covering than fresh buying.
Ideally, the price and impetus readings must rise in tandem to indicate a sustainable rally in the markets. Nifty and Bank Nifty Impetus
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.
Last week, the Nifty rose, but the LWTD reading dove from 0.11 to -0.21. That tells me the rally was more due to short covering, and fresh buying may have been limited. Ideally, prices and LWTD readings must rise together to indicate a sustainable rally.
A tutorial video on interpreting the LWTD indicator is here. Nifty and LWTD Indicator
The weekly chart shows a bullish candle with a bigger body than the prior week's candle. The last bullish candle's body also engulfs the prior week's bearish candle body, which is called a bullish engulfing pattern. It indicates the dominance of bulls over bears.
Last week, I suggested a 25,250 level as a last-mile hurdle that bulls had to overcome before pushing markets higher. That level remained inviolate. The 25,250 remains a hurdle to watch this week. The price is above the 25-week moving average, which is a proxy for the six-month holding cost of an average retail investor. That means the medium-term outlook is positive. The 24,500 level is a support that bulls must defend in case of declines. Failing which further declines may occur. Nifty Spot
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 57,400 – 54,100 and 25,475 – 24,025 on the Bank Nifty and Nifty, respectively. Both indices traded within their specified resistance levels.
This week, I estimate ranges between 58,200 – 54,950 and 25,725 – 24,300 on the Bank Nifty and Nifty, respectively.
Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks.
Vijay is the CEO ofwww.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani