Fresh Concerns Rock the Markets
The stock market has an uncanny habit of surprising investors and traders and it has been no different this time. After a resolute breakout on Tuesday from a long period of consolidation, the index, which was moving in the northward direction, all of a sudden met with a roadblock in the form of the minutes of the Federal Reserve’s July meeting which showed that its officials expect the pandemic to ‘weight heavily’ on the economy. This sent a quick shiver down the spine of the market participants and the trajectory of the markets across the globe took a U-turn.
However, our readers would have been well-prepared as in the last editorial we had clearly indicated that the Nifty would trade in a broad range of 10,850-11,380. The ongoing year has been all about surprises and experiencing the unknown. Similarly, there is something mysterious going on in the stock market which reminds me of a paragraph from the famous book ‘Tape Reading and Market Tactics’ by Humphery Neill. It states: “An active rising market with a large volume of sales attracts buyers. Retail participation increases as prices advance.”
“Peculiar as it may appear, the faster the stock prices surge upward, the hungrier the public becomes for stocks. In a declining market, the same action holds true. As activity increases, more and more selling sets in and increasing numbers throw stocks into the whirlpool of liquidation. It is mob psychology: human nature reflecting its desire to follow. Schooled market operators and pool managers realise this fondness of the average investor to get in on rising prices and they use this powerful tool in their operations.”
Mass participation by the retail investors in the current scenario matches what Neill said. Domestic institutions have been trimming their position and this is quite evident from the outflow of funds from the stock markets. What is discomforting for them is the historic high valuation with the PE reaching the 32+ levels. However, the market is sustaining at the higher level with a lower momentum.
Let’s study the momentum a little backwards then for the October-February period. During that period as well the market sustained at a higher level with a historical high PE zone. But, soon after the one of the major events unfolded – the Union Budget – the market fell sharply like a falling knife. The current market momentum rhymes with the October- February momentum. Analysing the bar by bar reading, the green bars are smaller compared to the red bars. And most of the green bars opened with a gap-up following which the momentum is not visible. There is shortening of the thrust with diminishing volumes. Further, the negative divergence is quite evident in the oscillators. To add up, the clues from the rise in futures and options ban list hints at market overheating. The interpretation is that in a run-up market participants turn complacent, provoking them to swell positions in several stocks’ futures and options. Certainly the above mention thesis warrants investors to brace up their disciplinary skills and be very clear and thoughtful with their positions in the markets. It’s always wise to be safe than sorry! On the other hand, we are not completely bearish since there is no significant lower high – lower low formation.
On Wall Street, the S & P 500 and Nasdaq retreated after setting a new record of closing high. History has been re-written as the S & P 500 set a new record of the fastest recovery from a bear market. The recent incoming data from the US suggests that the economy is on a recovery path, albeit slowly. However, the million dollar question is whether the recovery can persist, especially after the US’ Federal Reserve minutes have showed continued concern surrounding the pandemic.
Further, escalating tensions between the world’s two largest economies i.e. US and China are likely to act as a headwind. Any sharp fall in the US markets will trigger a domino effect across the global markets. In the coming week, immediate support for the Nifty is seen around the 11,200 mark and a breach of this support could drag the index lower towards its important long-term moving average i.e. 200 DMA which is placed at the 10,833 level.
