Vijay L Bhambwani's Ticker: Retail bulls latching on to slender hope

Mint

5 hours ago

Dear reader,
Last week, I wrote that the markets were headed towards a tipping point that would determine near-term trends. Bulls failed to revive sentiments, and the markets fell for the sixth week in a row. I have not seen this sequence of weekly declines for multiple years. Big money has been unwinding their positions, and retail buyers are trying to absorb the supply, with limited results.
The retail segment continues to display signs of a bullish hangover and is buying the dips in reflex action. That is validated by the fact that retail borrowing in the MTF (margin funded trading—money lent by brokers to invest in stocks) has fallen by a mere 0.73% after expiry of the July series. Market-wide position limits (MWPL), which indicate the percentage exposure utilised by traders as a component of total exposure permitted by Sebi, have also risen. Higher MWPL is a double-edged sword as it indicates confidence levels in a rising market. On the flip side, it makes the market weaker on the way down as traders scamper to exit recent trades in a crowded exit fashion. Price volatility invariably spikes. This is a clear and present danger that my readers must brace for.
The roller coaster ride on account of newsflow continued unabated as US President Donald Trump sprang a negative surprise on India by imposing 50% tariffs. On the global markets front, there are two bits of news that can extend a sliver of hope to the bull camps. Firstly, Donald Trump has signed the executive order to allow US citizens' retirement savings (Plan 401k) to be invested in riskier assets. That includes but is not limited to equities and cryptocurrencies. Secondly, Trump and Putin will meet on 15 August in Alaska to consider ways and means to end the Russia-Ukraine war. The first trigger is a short-term positive and long-term negative because retail traders seldom look past their noses. Empirical evidence is testimony to the negative fallout of retirement money influencing markets by its entry and exit. The US market fall of 2008 due to the plan Employee Retirement Income Security Act of 1974 (Erisa) is an example. The second trigger is a positive one, provided a solution is found.
This week, the action will continue to be focused on public sector undertakings (PSUs) and banks in particular. The Reserve Bank of India (RBI) maintained the status quo and kept interest rates constant, setting the tone and tenor of the money markets as hawkish. With oil and gas prices falling, the stock prices of companies using fossil fuels as raw materials may rise marginally or fall less in case markets are weak.
In the commodities space, oil and gas are likely to face selling pressure on advances. I maintain that energy markets are well supplied and that shortages exist only in the narratives.
Metals are also likely to be sold on advances if the markets cheer the Trump-Putin meeting on 15 August. Bullion remains a long-term bullish story, as I have been maintaining for many quarters now. Just look beyond calendar 2025 and avoid leveraged buying since the financing costs eat into your profits.
Continue to trade light and maintain tail risk (Hacienda) hedges for capital preservation. The week is truncated due to the Independence Day holiday. Usually, shorter trading weeks imply an uptick.
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 banking and financial stocks, which are the heaviest-weighted sector in the Nifty. The broad-based Nifty 50 followed suit. Bullion rallied on safe-haven buying and a weaker US dollar index. Oil and gas fell as energy markets were well supplied.
The weaker dollar rallied against the rupee, dragging market sentiments lower. Indian 10-year bond yields rose, which was negative for banking stocks. Banks are the biggest holders of sovereign bonds. The National Stock Exchange (NSE) lost market capitalisation as the selling was broad-based.
Market-wide position limits rose routinely after expiry. US headline indices rose 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) –
Turnover contribution collapsed in the higher-risk, capital-intensive futures segment as risk appetite fell off a cliff.
The turnover contribution rose in index options, the relatively lower-risk and lower capital-intensive options segment. This is the least risky segment in the entire derivatives segment. Overall, risk appetite was substantially 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 the number of rising stocks compared to falling stocks. As long as the gains outnumber the losses, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.
The Nifty logged smaller losses last week, but the advance-decline ratio eased to 0.75 (prior week 0.80). That tells me there were 75 gainers for every 100 losers. This is a poor show by intraday traders. Ideally, this metric should stay above 1.0 to signal sustainable bullishness.
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 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 routinely after expiry, but the rise was smaller than the commensurate week in the prior two months. That tells me optimism, though present, is tempered by caution. As I wrote earlier, very high MWPL readings are a double-edged sword.
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. The impetus readings for both indices have fallen significantly with price declines. That tells me there was no forceful sell-off last week, and prices slid lower on account of expiry and lack of adequate buying.
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 Nifty recorded smaller losses last week, and the LWTD indicator rose, too. However, it remained in negative territory at -0.10 (prior week -0.34). That tells me short covering may have improved over the prior week, but fresh aggressive buying may have been lacking.
Short covering can cushion declines and even trigger a temporary rally, but a sustained bull run needs fresh big-ticket buying.
A tutorial video on interpreting the LWTD indicator is here.
Nifty's verdict
The weekly chart of the Nifty shows a sixth consecutive week of declines. That has not occurred in many years. The price has breached the 25-week average, which is a proxy for the six-month holding on the cost of a retail investor. A breach of this average suggests recent investments are incurring notional losses and can create short-term psychological pressure on bulls.
The persistent selloff also creates an overhead supply as trapped buyers at higher levels rush for the exit door on advances as their breakeven costs are achieved. A reliable rally is possible only after the overhead supply has been absorbed completely.
Last week, I advocated watching the 24,200 level on the Nifty as a support area. That holds for now. I suggest watching the same level this week, too. If bulls manage to defend this threshold, a short-term bounce can occur. Only sustained trading above 24,750 levels can indicate the possibility of further upsides.
Your call to action – Watch the 24,200 level as near-term support. Only a breakout above the 24,750 level raises the possibility of a short-term rally.
Last week I estimated ranges between 56,800 – 54,450 and 25,075 – 24,050 on the Bank Nifty and Nifty respectively. Both indices traded within their specified resistance levels.
I estimate this week's ranges between 56,150 – 53,850 and 24,875 – 23,850 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