Nifty hovering in overvalue zone

The benchmark index’s relative strength still lagging behind; It’s advised

to protect the profit and capital at higher levelsNSE Nifty scaled a new all-time high on frenzy FII buying on Friday as it touched 25,849.25 and finally settled at 25,790.95 with a 1.71 per cent gain. BSE Sensex is up by 1.99 per cent. But the broader market indices were underperformers. The Midcap gained 0.29 per cent, and the Smallcap declined by 0.89 per cent. On the Sectoral front, the Nifty IT and Media indices fell by 2.74 per cent and 2.62 per cent, respectively. The Nifty Realty is the top gainer with 4.55 per cent. FIIs bought heavily on Friday by Rs14,064.05 crore, the highest single-day purchase in recent history. Overall, they bought Rs26,336.52 crore, and DIIs bought Rs8,249.79 crore during this month.

The Nifty continued its unabated rally to new record highs. It met all patterns and extension targets. After five days of range-bound moves, it sharply jumped by almost 400 points in a single day. Before the five-day consolidation, the Nifty rallied 470 points. Friday’s move was nothing, but a breakout and meeting the pattern target. The massive volume after August 30 shows fresh demand for equities. The FIIs’ buying frenzy on Friday is an indication of the buyer’s demand.

The Nifty broke out of the rising channel with higher volume. It met the 61.8 per cent extension level (25,643) of the prior swings. Now, the immediate target and resistance are at 25,885 points, which is a 78.6 per cent extension of the prior swings. This target is very close, so watch the price behaviour around the target. The swing 100 per cent extension is at 26,193 points. Our next year’s first quarter target of 26,256 is also very close.

As mentioned in the last column, the index is overstretched. The index closed out of the Bollinger bands, and four per cent away from the 50DMA. It is also 15 per cent above the 50-week average, which is 3,342 points. This evidence shows that the index is far away from the mean. Even though there is no weaker signal, the mean reversion may hurt the portfolios badly.

The mid-cap and small-cap stocks were the underperformers. The PSE index is below the key supports. Many of these stocks are trading below their 40-week average. The Bank Nifty is at a lifetime high, but PSU Banks are lagging. Even the private sector banks are much below their prior all-time highs. Interestingly, many mutual fund houses sitting on cash feel that the market rally is overextended. Fundamentally, the Nifty PE is around 25, which is near the overvalued zone.

After the Federal Reserve rate cut decision, the US market is now at the lifetime high. The Dow Jones and S&P-500 indices are trading above the prior pivots and broken out of a decent consolidation. The Dollar Index (DXY), which has an inverse relationship with equities is now below the prior low. The Gold is also at new high.

The RRG chart doesn’t show much changes in sector performance. The FMCG index is at a new all-time high and is in the leading quadrant with strong momentum and relative strength. The sector stock may outperform. The Consumer Durable index is back into the leading quadrant. The Pharma, IT indices are also in the leading quadrant. The Auto index improved its relative strength within the weakening quadrant. The private sector banks, which are improving their relative strength, may continue to perform better than PSU banks.

Overall, the Nifty was surprised by a huge rally of 940 points or 3.78 per cent in the last two weeks. It deviated from the mean, technically, and fundamentally near overvalue zone. The Relative Strength of Nifty is still lagging behind. In these conditions, it is advised to protect the profit and capital at higher levels. Any decline will be sharper and may not get a proper exit.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)