Vijay L Bhambwani's Ticker: Markets will revert to fundamentals

Mint

a day ago

Dear reader,
Last week, I wrote about retail traders latching on to a slender hope and the impending Trump-Putin meeting in Alaska triggering a hope-based rally. The executive order signed by Trump to funnel US retirement savings plan 401(k) into riskier assets like stocks and cryptocurrencies triggered some greed. As I wrote last week, big-ticket retirement savings in stock markets have not done well in the past, and a near-term benefit is all we might get.
The Trump-Putin meeting in Alaska turned out to be a damp squib with no resolution of the Russia-Ukraine war. Apart from future meetings to thrash out the thornier issues, there seems to be little hope of concrete gains from this exercise, at least for now. The markets will now revert to the usual triggers like retail buying, corporate earnings, cost of funds and inflation, among others. State Bank of India and Union Bank of India announced a 0.25% hike in home loan rates and validated my hypothesis that the cost of funds was rising in spite of headline coupon rate cuts. I had written that borrowers would be unable to avail of loans at the headline rates.
Market players had positioned their trades in anticipation of a favourable outcome of the Trump-Putin meeting, and there is a fair probability of some positions being reversed this week. Traders displayed a higher risk appetite for riskier assets and booked profits in bullion. Safe-haven buying may emerge again in bullion on declines. Oil and gas prices eased on hopes of a US-Russia deal and may stabilise or even rise mildly. I maintain my view that energy markets are well supplied and rallies are temporary and seasonal in nature.
Industrial metals are witnessing signs of being top-heavy as higher levels encounter selling pressure. The US automobile and construction industries are lobbying for rationalising tariffs on industrial metals, and commodity markets are reacting accordingly. The same pressure on advances may show up in the stock prices of metal mining companies in India.
This week, trader focus may remain polarised around public sector undertakings (PSUs) as the government has announced moves to disinvest its stake in the Life Insurance Corp. of India (LIC) and speed up the National Stock Exchange's initial public offering. Public sector banks will likely remain in the limelight as the build-up of positions has been heavy on these counters in the last few quarters.
Markets, being hardwired to seek positive triggers, may seek comfort from the expectation of a lower Goods and Services Tax from October 2025, as announced on Independence Day. There may be a rise in the short run.
Oil and gas companies may also witness higher-than-average traded volumes in two-way trade as financial markets react to large price swings in the underlying assets in the global commodity markets. Oil contracts expire this week, and gas contracts expire early next week. There may be usual short covering ahead of expiry and a temporary rally ahead.
I suggest that my readers continue to trade light and maintain tail risk (Hacienda) hedges.
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 to gauge what to expect in the coming week.
The upthrust was led by the broad-based Nifty 50, whereas the Bank Nifty brought up the rear. Commodities witnessed profit taking despite a weaker US dollar index (DXY) due to profit taking and switching to riskier assets.
The rupee gained marginally against the weaker dollar. Indian 10-year bond yields were flat, and the NSE gained 0.9% in market capitalisation. That tells us the rally was somewhat broad-based. Market-wide position limits (MWPL) rose routinely.
US headline indices gained 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 futures which require sizable capital, their risk appetite is higher. Within the futures space, index futures are 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 average of all trading days of the week) –
Traded turnover slipped in the capital intensive, high volatility futures segment last week. In the relatively lower risk, lower capital options segment the turnover rose in the safest segment of index options. Turnover fell in the stock options segment. These figures betray nervousness in the undertone of the derivatives segment of the markets.
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 rising to falling stocks. Bulls are dominant as long as the number of gaining stocks outnumber losers. This metric gauges the risk appetite of one marshmallow trader. These are pure intraday traders.
The Nifty logged weekly gains after six consecutive weeks of declines. However, the weekly advance-decline ratio did not keep pace with the optimism. It rose to 0.90 (prior week: 0.75), meaning there were 90 gainers for every 100 losers last week. For a sustainable rally, this figure needs to stay above 1.0 with rising prices.
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 (MWPL). 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 is a gauge of the risk appetite of two marshmallow traders. These are deep pocketed, high conviction traders who roll over their trades to the next session/s.
The MWPL data shows swing traders initiated fresh exposure but the same was the lowest compared to the last two expiry months in the comparable week. That tells us the optimism level seems to have tapered off marginally.
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, both indices rose, but their impetus readings sharply fell. That shows the rally was powered more by short covering than fresh aggressive buying.
While short covering can cushion declines or even trigger a temporary rally, fresh buying powers prices to new highs.
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 net gains after a six-week losing spree, the LWTD reading fell from -0.10 in the prior week to -0.20 last week. That implies that even the short covering that is likely on declines may be a tad weaker in the week ahead. Should there be any negative news, the markets may decline without a lag.
A tutorial video on interpreting the LWTD indicator is here - https://www.youtube.com/watch?v=yag076z1ADk
Nifty's Verdict
The weekly chart shows a bullish candle after six consecutive weeks of decline. The 24,200 level I advocated as a support level to watch in last week's column was defended by bulls. This level of 24,200 is now a near-term swing low that must be watched in the near future. Optimism may prevail as long as bulls manage to keep the Nifty trading above it.
On the flip side, it will take the Nifty staying above the 24,750 level sustainably before bulls can regain their lost initiative. The price is precariously poised above its 25-week moving average, which is a proxy for the six-month holding cost of an average investor. Coercive selling is unlikely as long as the price stays above this threshold.
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 56,150 – 53,850 and 24,875 – 23,850 on the Bank Nifty and Nifty, respectively. Both indices traded within their specified levels.
I estimate this week's ranges between 56,425 – 54,250 and 25,125 – 24,125 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