Ticker: Feel Good Factor Returning

Good morning!

Feel Good Factor Returning

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Last week, I wrote bulls were attempting to claw back. The view was backed by statistical data we checked out in Matryoshka (Russian doll) analysis style.

The markets performed along expected lines and rallied. That brought back some feel-good-factor.

     

I have written in my past articles about markets being cyclical and how time and price cycles exist in the markets. March ending is one such time cycle.

The big boys (mutual funds) gear up for financial year-end. They are required by securities laws in India to disclose their NAVs (net asset values) in regional and national media. So some amount of NAV boosting is routine every year in March.

Traders were enthused by Indian Oil Corp. Ltd and Bharat Petroleum Corp. Ltd plans to purchase discounted oil from Russia, which cheered markets. Add Life Insurance Corp. of India’s forthcoming IPO, and we have a heady cocktail of optimism.

Rear View Mirror

Let us view a round-up of what transpired last week to guesstimate what lies ahead this week.

What is apparent from the table above is a decline in the dollar. This is a sentiment booster for emerging markets as most have dollar-denominated debt and are usually import-dependent. A strong dollar triggers inflation in such nations.

The reverse is also true. Emerging market stocks rose as the dollar weakened. The fact that oil prices fell too also added to the optimism. Profit booking was seen in bullion which shows a fall in safe-haven buying.

NSE gained market capitalization for the second week in a row. US stock market indices surged, which accelerated the up move in domestic markets.

Matryoshka Analysis

We attempt to peel layer after layer of statistical data to arrive at the subtle messages of the markets. We start with the advance-decline ratio chart. This is nothing but a ratio of rising stocks versus falling stocks.

Though the week was truncated due to a holiday, the latter half of the week saw bullish sentiments. Despite a long weekend, bulls preferred to initiate intraday longs. This shows one marshmallow traders were enthusiastic.

The marshmallow theory is a good gauge of risk appetite as per behavioural finance. One-marshmallow traders are intraday players who don’t roll over their trades to the next session.

Let’s examine the MWPL (market-wide position limits) on the weekly chart below. The longer period enables us to take a big picture view of the risk appetite of the two-marshmallow traders. These are players who carry over their traders to the next session/s. Two things are striking about this chart.

First, the MWPL rises for three weeks into a new derivatives cycle (expiry month) and peaks out after that. There is a sharp plunge in the expiry week, and the build-up commences again.

Second, the peaks are falling after January. Traders prefer to buy but not rollover their trades. That indicates scepticism at higher levels. It must be remembered that the Ukrainian war started in February.

Let us observe the impetus chart on a weekly period. What is apparent is that Nifty has been gaining with a rising impetus, whereas Bank Nifty’s weekly impetus reading has been falling for a fortnight.

Unless the same improves immediately, I will bet that the markets are tilting towards trading the Nifty long rather than the Bank Nifty. Higher levels may see long unwinding on banking stocks at the first sign of trouble.

Nifty’s Verdict

The index gained on three of four sessions. That a long weekend followed after Thursday did not stop the markets from rallying after a big gap up.

Risk appetite was clearly high. The index is back above its 25-day average, which indicates a month-long holding on the cost of bulls. Recent buyers are in the money right now. Medium-term traders may be way below their holding cost. It’s these traders who may provide overhead supply at break-even levels.

Staying above the psychologically important round number of 17,000 is critical for the bulls to retain charge of the sentiments. Keep watching the advance-decline ratio and impetus reading every day.

Your Call to Action – Last week, I advocated ranges between 36,475–32,600 and 17,300–15,950 for the Bank Nifty and Nifty, respectively. While the Bank Nifty stayed within these parameters, the Nifty topped out at 17,344, i.e. 44 points above expectations.

The coming days may see ranges of 38,350–34,500 and 17,975–16,600 on the Bank Nifty and Nifty, respectively. Continue to trade light and maintain stop losses diligently.

Have a profitable week!

Vijay L. Bhambwani – Head of Research, Behavioural Technical Analysis, Equitymaster

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Written by Vijay L Bhambwani. Edited by Saikat Chatterjee. Produced by Samiksha Khanna. Send in your feedback to newsletterskatanalivemint.com.