Macro data to set the tone for markets

Buoyed by the US Fed decision to pause interest rates, positive domestic macroeconomic data and expectations over developments during the PM visit to US; the week gone by was a stellar one for the Indian markets with Nifty and Sensex closing at record levels. The Nifty advanced 1.4 percent closing at 18,826 points and the Sensex gained 1.2 per cent ending at 63,384.58 points. Broader markets also participated in the rally with Nifty Midcap rallying 2.9 percent and Nifty Small-cap index up 2.8 percent.

It is pertinent to observe that the Mid-cap index is at its record high level, the Small-cap index is still about 11 percent away. While benchmark indices are taking baby steps towards lifetime highs, the broader market and even penny stocks remained on the fast track lane. As many as 60 penny stocks have given returns of over 20-66 per cent last week. These stocks have a market capitalisation of less than Rs500 crore. The general sentiment in the broader market has remained positive in the recent weeks and there is tell-tale evidence of irrational exuberance developing in the market. Avoid cats and dogs caution old timers. FIIs bought shares worth Rs6,644 crore in the week gone by and DIIs bought shares worth Rs1,320 crore. In June so far, FII net buy stands at Rs6,886 crore and DII net buy stands at Rs4,329 crore. After the late arrival of this year’s monsoon, the spread of rainfall to the rest of the country is behind schedule. The pace of rainfall distribution and consequently, Kharif crop sowing, will need to be closely watched. Lifted by the Federal Reserve’s decision to pause its interest-rate increases as well as data showing US consumer confidence and spending is picking up; the S&P 500 notched its fifth consecutive weekly gain, the longest such streak since autumn 2021, before the Fed began raising borrowing costs to cool inflation. The tech-loaded Nasdaq had its eighth consecutive weekly gain, which hasn’t happened since early 2019. US investors have braced for recession for more than a year while the Fed raised interest rates at the fastest pace since the early 1980s, but are warming to the possibility that inflation can be tamed without tanking the economy. Going forward, in the week ahead, the market will continue to take direction from both global as well as domestic factors. However, Skymet Weather predicting a bleak monsoon in India over the next one month is likely to keep the investors’ sentiments cautious.

Listening Post: Don’t Let Other Investors Make Up Your Mind

New research shows that confidence of others can influence your decisions even more than your own experience can. Confidence is contagious. But acting on it can be dangerous. Nifty and the Sensex are nearing 52-week highs, and surveys show that investors are feeling sharply more optimistic. It’s fine to bask in that good feeling if you wish, but new research shows that the confidence of others can influence your decisions even more than your own experience can. With markets still high, investors need to be even more vigilant than usual against the risk of getting stampeded by other people’s emotions. An article published recently finds that a particular region in the human brain monitors how positive other people seem to be about their choices. Humans are biologically equipped with the potential to allow more-confident people to have greater sway over their own beliefs.

Participants in an experiment guessed whether the next marble drawn from an urn would be red or green. They could rely on the colours of the last few marbles they had picked themselves. They were told they could also take account of what up to four other people were forecasting and how confident the strangers were in those predictions. Naturally, the participants were more likely to predict that the next marble would be red if most of their recent draws from an urn had also been that colour. They were more prone to pick red, however, when they learned that other people had confidently chosen it. Confidence was represented by how fast the other people picked the colour and whether they smiled as they did so. Brain scans showed that the prefrontal cortex responded differently, depending on whether the participants relied on their own experience or on how decisive other people were. And confident investors suddenly seem to be everywhere. The ongoing rally in Small-cap and mid-cap stocks has made everybody who’s invested in the market more optimistic. Confidence varies, often going up after the market rises and falling after it goes down. So you could visualize the stock market as a poltergeist or hobgoblin who takes a twisted delight in playing pranks on the expectations of the investing public.

This bull market for stocks is 38 months old, making it one of the longest in recent times. Now, more than ever, you should take extra risk only because your own rigorous analysis leads you to conclude that it’s a good idea, not because other folks think it is.

Quote of the week: The four most dangerous words in investing are, it’s different this time

— Sir John Templeton

Follow market trends and history. Don't speculate that this particular time will be any different. For example, a major key to investing in a specific stock or bond fund is its performance over five years.

F&O/ SECTOR WATCH

Mirroring the bullish undertone in the cash market, the derivatives segment witnessed brisk trading activity. The turnover in the derivatives of benchmark Sensex touched Rs3.42 lakh crore on the weekly expiry on Friday. This is double the turnover registered last week. In the options segment, the turnover was Rs3.41 lakh crore and in futures, it was Rs211 crore. Currently, the NSE enjoys a near monopoly position in the derivatives market in India. Last year, NSE emerged as the world’s largest derivatives exchange. BSE has been struggling to increase participation and gain market share in the derivative segment. Since the relaunch of Sensex derivatives, the Open Interest has been steadily climbing, signalling a sustained and growing interest from market participants. According to options data in the NSE, maximum Call Open Interest (OI) was seen at 18,800 strike, followed by 19,000 strike. On the Put side, the 18,700 holds the maximum OI followed by 18,800 strike. The Implied Volatility (IV) for Call options concluded at 10.09 per cent, while Put options closed at 11.25 per cent. The Nifty VIX, a measure of market volatility, ended the week at 11.08 per cent. Low levels of VIX are associated with the formation of market tops. It means markets remain vulnerable to profit-taking. The PCR of OI (Put-Call Ratio Open Interest) settled at 1.29 for the week. Techies indicate that 18,800 is expected to be crucial for further upside towards the 19,000 mark, while 18,700 is likely to act as immediate support for the index and 18,500 is going to be critical support. In the Bank Nifty, the highest OI concentration for both Call and Put options was at the 44,000 level. From a technical standpoint, both the indices are still trading in a bullish territory and expected to move steadily towards their all-time highs. Expect markets to remain buoyant with stock specific moves in upcoming sessions. Traders are advised to create fresh longs in case of any dip seen in coming sessions. Among the sectors, the Healthcare, FMCG, and Pharma sectors performed well, while profit booking was observed in banking and financial stocks along with IT. Post a subdued FY23, Oil Marketing Companies (OMC) earnings would witness significant turnaround in FY24 as diesel/ petrol marketing margin has recovered significantly to Rs12/ to Rs10 per litre in Q1FY24QTD (versus negative marketing margin of Rs10/Rs1 per litre in 9MFY23) given a steep fall in the Brent crude oil price to $79/bbl in Q1FY24QTD versus $95/bbl in FY23 and peak of >$120/ bbl post Russia-Ukraine conflict. Accumulate OMCs ahead of Q1 results. Stock futures looking good are LIC Housing, Tata Communications, Mannapuram, Tata Consumer, IRCTC, SBI Life and Metropolis.Stock futures looking weak areContainer Corporation, Tata Chemicals, NMDC, SRF, Mphasis, Wipro and Voltas.