Moneycontrol Pro Market Outlook | Market weakness can continue, structural analysis shows

After showing weakness for many weeks, the small and mid-cap indices fell sharply.

Dear Reader,

The Indian market's four-week winning streak came to an end as benchmark indices experienced a 2 percent decline over the week. After weeks of displaying weakness, the small and mid-cap indices dropped. This decline was further exacerbated when SEBI chairperson Madhabi Puri Buch pointed out the excess speculation in small and mid-cap stocks.

Additionally, SEBI’s directive to asset management companies to conduct stress tests on small- and mid-cap funds added to the market's apprehensions..A Long-awaited Correction

The Nifty concluded a four-week winning streak, while the Nifty 500 wrapped up a six-week winning streak. This marked a long-awaited reversal in price action, signalled by the weekly Rohit Momentum Indicator [RMI] giving a sell signal. Consequently, we anticipate a drop towards the 20-week average at 21300.

One notable indicator is the volume put-to-call ratio (Vol PCR). This ratio, which has ranged between 0.6 and 0.9 over the past two years, has often been instrumental in identifying market tops and bottoms. In January and March, the Vol PCR dipped to nearly 0.66, approaching the lower red line, indicating significant shifts in market sentiment.

Source: web.strike.money
Let us look at how many stocks are trading above the 50 DMA (Daily moving average) out of the Nifty 50. Over the last fifteen months, the indicator has developed a negative divergence with Nifty before a lasting top, and a correction followed. The most recent top has the same setup, and we should be looking for the indicator to head back to an oversold condition near the lower red line before we say the word bottom. Nifty should continue to decline with weak breadth till that happens.

Source: web.strike.money
Coming to FPIs, in January, they had built up a short position of -108k contracts in the index futures. But since then, as the market went higher, they were reducing their short positions. However, over the last few days, they have increased it from -30k to -57k. So, a new high in the Nifty did not result in a higher long position by FIIs but a short position. This was a negative divergence, as we saw between July and September 2023. If the market goes lower, there is a possibility of a build-up of a large short position near -170k contracts, at least before we can get to the next market bottom.

Source: web.strike.moneyIndices and Market Breadth

After trading in the green for four weeks, Nifty posted the biggest weekly loss since October 2023. Among the sectors that lost ground were Realty, which lost 9.4 percent in a week, the Media index, which fell 8.3 percent, PSU Bank, which lost 8 percent, and the Metal index, which fell 6.8 percent.

The only winner was the Information Technology index, which gained one percent.

The fall was more severe in the Smallcap index, which posted its biggest weekly loss since December 2022, plunging 5.49 percent, and the Midcap index falling 4.66 per cent. Over 200 stocks fell more than 10 percent during the week. At the peak of the fall on Wednesday, over 1,500 stocks lost more than 10 percent.

Among the top losers were India Pesticides, which fell by 39.41 percent, Paisalo Digital, by 28.02 percent, and Gensol Engineering, which fell by 24.80 percent.

Global Market 

For the week ending March 15, global markets gave a mixed performance. The MSCI World index closed 0.51 percent lower.

The US markets closed in the red, with the S&P500 closing marginally lower, and Nasdaq lost 0.7 percent during the week. Higher than expected inflation numbers and rising oil prices affected the US market.

Across the Atlantic, the European markets closed higher, rising for the eighth consecutive week. The Euro Stoxx 50 gained 0.56 percent, and CAC40, with a 1.70 percent rise, was the top-performing market on the continent.

After a strong performance, the Nikkei 225 was down 2.40 percent ahead of the much eagerly awaited Bank of Japan monetary policy early next week. During the week, the Chinese and Hong Kong markets closed in positive territory. China’s first positive CPI reading since August 2023 helped revive market sentiment.

Stocks to Watch

TCS, Tata Chemicals, OFSS, Cipla, Maruti, HCL Tech, and ICICI Bank are among the stocks that can witness upside momentum.

HUL, Bata India, Naveen Flourine, Polyplex, PVR Inox, Page Industries and Manyavar can remain under pressure during the week.

Cheers,Shishir Asthana