Onus Now on Banking Nifty to Drive Market Higher
Nifty registered a fresh all-time high level of 15,660.75 last Thursday and thereafter it continued with its record-hitting binge, but the force behind the up-move was clearly lacking as it seemed as if Nifty was limping and, in the process, it formed not one but four back-to-back indecisive candles. Moreover, the range of these four candles was restricted from 94-111 points, which was below the 10-day average. On Wednesday, another new high was registered at the 15,800 level; however, post setting a new high a sharp intraday weakness got triggered and as a result after a series of small range movements, it was followed by a bearish outside bar and the range of this was almost twice when compared to the 10-day average.
This certainly gave a reality check to those who were purely riding on the momentum; hence, we saw broad-based selling as all the sectoral indices ended in the red. However, the important factor to watch out was India VIX which serves as a measure of market expectation of volatility. It slipped below 15, showing no signs of discomfort among the market participants given that it has been trading at the lowest level. The volatility has consistently been declining, hitting the lowest levels since February 2020 largely due to the fear that has subsided on account of the significant decline in the corona virus cases and moreover due to the announcement of unlocking in a staggered manner by the various states.
This has lit up hopes that the economy will bounce back at a brisk speed. We believe low volatility is a positive sign for the bulls but at the same time it also sends a cautionary signal given the significant fall in volatility as a prolonged period of low volatility is often followed by a highly volatile period. The lesson we can learn from this period of low volatility and intensifying complacency is that when the markets are calm for too long, risks have a tendency to build up in the system without many people noticing, which sometimes sets the stage for massive market dislocations. Meanwhile, with the benchmark index Nifty moving into uncharted territory, we have begun to notice discontent between Nifty and Bank Nifty.
Bank Nifty is seen relatively underperforming the benchmark index and in the last five trading sessions it has been down by 1.45 per cent, whereas Nifty is up by half a per cent. Bank Nifty is almost trading 7 per cent away from its all-time high which was registered in February this year. The underperformance and the recent correction after a sharp up-move which was witnessed in just three weeks should not be seen as negative; instead it can be capitalised to accumulate quality names from the banking and financial space for the next up-move towards the zone of 36,000-36,500. Given that, Nifty looks exhausted and going forward the onus is on Bank Nifty to drive the markets higher.
Talking about the performance of the US’ markets, Dow booked losses for the third day in a row on Wednesday, losing steam in the session’s final half-hour, ahead of an eagerly awaited inflation report due Thursday, which could set the tone for the broader financial markets. The headline consumer price index is expected to rise by an outsized 0.5 per cent in May and 4.8 per cent for the year. But the US 10-year bond yield has shocked everyone by falling below the 1.5 per cent. If inflation is likely to rear its ugly head and touch an estimated 4.8 per cent, how can a 10-year bond yield actually move down? In fact, it should move up and so this means this number is already priced in. Overall, the stance should be positive as long as Nifty holds its head above 15,400-15,450, but one has to closely monitor India VIX and the inflation numbers from the US as these are the two factors which could set the tone for the further direction of the market.
