2 weeks Ago
Good morning! Last week, I wrote the dice was loaded against bulls. Sure enough, the markets continued on their downward spiral. However, the intensity of the sell-off appeared to be slowing down, at least temporarily.
Retail traders, on their part, appeared to be relatively unfazed by the record-high statistical ßeta (pure price volatility). They continued to buy, albeit cautiously. The US markets, too, appeared to be showing signs of a technical rebound.
I believe it is premature to call an absolute bottom at this point. President Trump showed some signs of backing off from his tough stand on tariffs. By announcing a 90-day moratorium on tariffs for everyone except China, he seems to be concerned about the sharp sell-off in financial markets.
If one were to compare the US and Greek 10-year bond yields, investor confidence in Greek sovereign paper is relatively higher than comparable US bonds. That means the Trump administration will find it challenging to arrange refinance for US bonds due to mature soon if he continues with his stand on tariffs. Financial market history watchers will realise that erstwhile president Bill Clinton had succumbed to the pressures of the bond market.
Also read: ‘Looted’ nation: The ultimate guide to decoding Trump’s Liberation Day tariffs This is why I have been nudging you, dear reader, to learn about the “cost of funds” concept as explained by Dick Stoken in his books, which are a gold standard on this subject. This week the probability of the market decline slowing down further and/or even reversing temporarily is fair. Would I buy aggressively into the upthrust? Not yet, at least not in large lots.
You may wet your toes to test the waters and see how it goes. Action will remain focused on banking and finance sector stocks. This is due to its ~34% weightage in the Nifty.
If any market-boosting efforts are to be seen, focusing on banking and financial sector stocks makes mathematical sense. By boosting heavily weighted banking stocks by 10%, the Nifty can be boosted by 3.4%.
No other sector comes close to this weightage metric. This also means this sector will probably be the most volatile in the markets, and not all retail traders may be able to stomach the outsized price moves. Other sectors that can see some action will be power and energy stocks.
This is due to the sharp fall in oil and gas prices last week. Remember that I have been warning you that the rally in fuel prices was seasonal, and energy markets are well supplied. The Saudis have announced fresh discovery of viable wells.
Industrial metals may also witness a relief rally, and that could provide a temporary floor to metal mining companies’ stock prices. With the expectations of a normal monsoon this year, market anxiety levels on inflation may cool down noticeably. Also read: Kaushik Basu: Trump’s tariffs will only steepen America’s slide I remain optimistic about bullion for the delivery-based long-term investor.
There may be hiccups, but looking beyond 2025, I see buying on major declines from some of the world's most powerful institutional investors. Maintain your allocation to bullion. Remember, the week is short due to holidays on Monday and Friday.
All other factors remaining constant, short trading weeks tend to favour bulls. Volatility may be higher, which means adherence to stop losses is non-negotiable. Maintain tail risk (Hacienda) hedges on all your trades.
A tutorial video on tail risk (Hacienda) hedges is here - https://www.youtube.com/watch?v=7AunGqXHBfk Rear View Mirror Let us assess what happened last week to gauge what to expect in the coming week.
The Bank Nifty led the fall, whereas the broad-based Nifty was relatively calmer. The US dollar index (DXY) fell below the psychological threshold of 100. That was a boost for emerging markets, including India.
Bullion rose sharply as uncertainty rose sharply. Oil and gas fell along expected lines. The rupee weakened against the dollar.
The National Stock Exchange (NSE) lost market capitalisation, which tells us the selling was somewhat broad-based. Indian bond yields fell after the Reserve Bank of India (RBI) cut the repo rate by 0.25%.
Market-wide position limits (MWPL) rose routinely. US markets rallied and provided tailwinds to our markets. Risk and Appetite I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders—where are they deploying money.
I also measure what percentage of the turnover the lower- and higher-risk instruments contributed. If they trade more futures that require sizable capital, their risk appetite is higher. Within the futures space, index futures are less volatile than stock futures.
A higher footprint in stock futures shows higher aggression levels. Ditto for stock and index options. Last week, this is what their footprint looked like (the numbers are the average of all trading days of the week) – Turnover contribution rose in the high-volatility, capital-intensive futures segment.
Traders showed higher participation, which means a lack of fear, which is a positive trigger. In the relatively safer options segment, turnover fell sharply for index options, which are the least volatile and capital-intensive instruments. On the other hand, stock options saw a higher turnover contribution, which tells me traders focused on higher-risk instruments.
Matryoshka Analysis Let us peel layer after layer of statistical data to arrive at the core message of the markets. The first chart I share is the NSE advance-decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way the winds are blowing.
This simple yet accurate indicator computes the ratio of rising to falling stocks. As long as gaining stocks outnumber the losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders.
These are pure intraday traders. The NSE clocked smaller losses last week compared to the prior week. The advance-decline ratio, on the other hand, approached a multi-month high.
This is due to the big buying bias seen on Tuesday and Friday. As long as this ratio remains above the 1.0 level, bulls will retain an upper hand.
This high reading may not be sustainable though. A tutorial video on the Marshmallow theory in trading is here -www.youtube.
com/watch?v=gFNKvtsCwFY The second chart I share is the market-wide position limits. This measures the amount of exposure utilized by traders in the derivatives (F&O) space as a component of the total exposure allowed by the regulator. This metric gauges the risk appetite of two marshmallow traders.
These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s. Swing traders (buy-and-hold traders) showed rising risk appetite as the MWPL rose in spite of a short week, and this week also being a short week. That tells me traders were expanding their exposure levels in the hope of a rebound in the markets.
I consider this metric to be one of the most important tools for a trader. A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here - https://www.youtube.
com/watch?v=t2qbGuk7qrI The third chart I share is my in-house indicator, ‘impetus.’ It measures the force in any price move. Last week, both indices fell with rising impetus readings, which tells me the fall was accompanied by increased selling momentum .
While it indicates nervousness, the scenario can change provided markets witness follow-up buying support. The final chart I share is my in-house indicator ‘LWTD.’ It computes lift, weight, thrust and drag encountered by any security.
These are four forces that any powered aircraft faces during flight, so applying it to traded securities helps a trader estimate prevalent sentiments. The Nifty clocked smaller losses last week and the LWTD indicator finally turned positive. At 0.
05 (prior week -0.95), it indicates an improved possibility of fresh buying support or even higher short-covering bias. This leads me to believe that selling pressure may ease in the near term.
A tutorial video on interpreting the LWTD indicator is here - https://www.youtube.com/watch?v=yag076z1ADk Nifty's Verdict The weekly chart of the Nifty shows a bullish power candle as the weekly close was at the upper end of the weekly range.
Price remains below the 25-week average, which is a proxy for a six-month holding on the cost of an average retail investor. The medium-term outlook remains cautious. I have been writing about the 23,200 level as a near-term hurdle that remains in place.
This must be overcome forcefully if bulls are to regain their lost initiative. Bulls must defend the 21,750 level at all costs if markets are to witness a short-term bottom being built in the near term. Your Call to Action Watch the 23,200 level as near-term support.
Staying above this level strengthens bulls. Last week, I estimated ranges between 53,025 – 49,950 and 23,550 – 22,275 on the Bank Nifty and Nifty, respectively. Both indices fell below-specified support levels before recovering.
This week, I estimate ranges between 52,450 – 49,550 and 23,500 – 22,150 on the Bank Nifty and Nifty, respectively. Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks.
Have a profitable week. Vijay L. Bhambwani Vijay is the CEO of www.
Bsplindia.com , a proprietary trading firm. He tweets at @vijaybhambwani.
