The market started with a bang this morning but succumbed by the evening, at least on the Nifty. The rest of the market remained reasonably intact. The weakness we saw before the state election result has taken care of itself. Now, it’s on to the next event we are looking for: the upcoming elections.
From a local perspective, on a global front, the Chinese market cracked 6.5% today. This has created mixed emotions in the market regarding whether to follow the Chinese trend for the FIs or return to India. On the other hand, the RBI mentioned in today’s meeting that they are willing to look at a rate cut coming soon. He didn’t say it in so many words; he remarked that the horse has gone out of the stable, and while we have managed to bring him in with great difficulty, we should not let it escape again easily, referring to inflation. It does seem like there may be a rate cut in India by December.
From all these perspectives, I think the market should stabilize, unless we are going to form a technical head-and-shoulders pattern on the Nifty, which I will show you on the chart currently underway. If that breaks, then some chaos will ensue. Everything else seems reasonably stable. On the global front, tech stocks are doing well, and interest rate expectations in the U.S. have decreased quite a bit. Consequently, gold has also collapsed in dollar terms because it seems there are no further rate cuts coming.
Additionally, Trump’s rating has dramatically increased compared to Miss Harris, adding another layer of uncertainty moving forward.
We will discuss how you can index better than Nifty 50. This is a hot topic that everybody should be aware of.
Where is the market headed?
Market Overview
This is an extremely important question. You can see today’s market again clipping that moving average of SMA 40 and coming down. This is a very important psychological point. It just went above two days high but could not sustain there. Remember, I have told you many times that unless you see a two-day high close, you are not really getting into the trend. That is the first indicator for me that a potential trend is happening that way—at least a two-day high in that direction.
In any direction, actually. I mean, once this candle dropped below the two-day low, there was a good probability we would go lower, and we did today. If we had closed above the two-day high, we might have had a good probability of going higher, but right now that has been hurt. We’ve come back, clipped the moving average, and come back. If you observe closely, there is a left shoulder here, a head here, and we may create a very tight right shoulder. If that happens, you could be looking at about a 1600-point fall, potentially taking us back to around 23,200, near the election day high.
I think that is a very big if, but from a technical Chartist perspective, that potential has opened up.
Nifty Next 50
The Nifty Junior, however, has closed above the two-day high and has closed above the average. It does seem like the rest of the market is not following what the Nifty is showing. We saw a +1.09% increase on the Nifty Junior
Nifty Mid and Small Cap
Nifty mid-cap also saw a +1.07% rise. The small caps are just about there, showing a 1.24% increase. Most of the damage from the last couple of sessions seems to have been covered back, so there should be no regrets.
Nifty Bank Overview
Again, in Bank Nifty, you can see it went to the SMA 40 and collapsed back to yesterday’s close. Nothing has really been lost; we are still where we were at closing yesterday. Bank Nifty is down -0.03%, but this enthusiasm of having come back and negated this fall has taken a hit. If we go down further, you can also see a left shoulder, head, and right shoulder forming here, where the fall may lead us below 246,000, down to the election day low.
If we break this head and shoulders pattern, there are a lot of ifs and buts, and I’m just painting some possible scenarios.
Advanced Declined Ratio Trends
Momentum trends certainly indicate an upwards trajectory, with 341 gains to 154 declines—a good outcome there. FIIs continued to sell in the previous session, with 5,700 crores down on 8 October. DIIs are pumping in much more than FIIs are dumping, at 7,000 crores.
When you add up all these DII cash inflows, it is much more than the FII inflow, so the market is getting more than adequate support from the domestic front.
Nifty Heatmap
ITC and Nestle experienced remarkable falls today; FMCG was collapsing. Typically, if the market is correcting, defensives do not fall more than aggressive stocks, but today, FMCG is down. It seems this rally is not over and may go higher, but nobody’s really calling for Reliance, which is down 1.6%.
ONGC and Coal India are all down on the back of crude oil prices coming off. HDFC drops at every opportunity, down -1.08%. You can see that I have no particular liking for HDFC Bank, but in one of our strategies, we have recently added this stock, so I hope it does well. SBI, Bajaj Finance, Bajaj Finserv all performed well. Maruti and Tata Motors also did well. Trent has been continuously doing well after joining Nifty, which is surprising.
The Nifty Next 50 looks more positive, with only a couple of stocks really in the red. Capital goods stocks like Siemens, ABB, and Bosch are all doing well, and Divi’s Lab is up 7.9%. This stock has come out of Nifty and has performed very well. Dmart is up 4%, and Lodha is up 3.6%.
Sectoral Overview
In terms of sectoral trends, it’s a mixed bag. FMCG and energy are down, while real estate and pharma are up—an odd combination. It is strange to see real estate and pharma, typically defensive and offensive sectors, both at the top. Autos and PSU banks managed more than half a percent gain along with it, but nothing exceptional other than that. Most sectors are still red for the week gone by.
Sectors of the Day
Nifty REALTY Index
Real estate is sort of stuck in this range. Phoenix Mill, Oberoi Realty, Macro Developers, Lodha, and Prestige are all making some ground. The real estate market is not collapsing, and the talk of a potential rate cut is providing some support.
Stock of the Day
Jaiprakash Power Ventures
Jaiprakash Power Ventures experienced dramatic moves in the last two days; yesterday it was at Rs. 17, and today it’s at Rs. 22. Amazing moves are happening in this small stock.
On a long-term basis, it went from Rs. 70 to 30 paisa and then from 30 paisa to Rs. 22. We did have it somewhere in our portfolio but didn’t really make any significant amount of money. On a chart basis, over a monthly and three-month basis, it has kind of bottomed out, and a stop should be placed below Rs. 10.
Story of the Day : Can you index better than Nifty 50?
Between 2013 and until COVID, the Nifty had gains of 39%, while Nifty Equal Weight had only 22%. Nifty is a collection of 50 stocks with given weightage, where certain stocks have very high weights. Nifty 50 Equal Index is one where all stocks are kept at equal weights, performing a bit differently from Nifty over time.
Before COVID, Nifty Equal Weight was underperforming, but post-COVID, Equal Weight has really outperformed. It saw gains of 68% compared to Nifty’s 47% since the financial year 2024. In the last 18 months, Equal Weight saw a 293% rise compared to Nifty’s 209%. The gap has significantly widened because the heavyweights of Nifty are not performing as well from the pre-COVID peak.
The cumulative weight of the top ten constituents of Nifty 50 has been continuously rising from 2016 until about 2020, going from 50% to 63%. Just ten out of fifty stocks account for 63% of Nifty, leaving the remaining 40 stocks with only 37% weight. The cumulative weight of the top five constituents was 41.8%, the top ten was 60.9%, and the top fifteen was 63.9% until January 2021. In contrast, in an equal weight scenario, it would be more evenly distributed.
For instance, Reliance is weighted at 10% in Nifty, while it is only 2% in Equal Weight. HDFC Bank has a 9.3% weight in Nifty and only 2% in Equal Weight. Stocks that were at the bottom of Nifty, such as Bajaj or Coal India, were only at half a percent or together made up only 5.4% as of April 2023. In Equal Weight, they would be much higher at 20.4%.
These stocks have done really well in the last few years, which is why their lower weights did not significantly impact Nifty. If your portfolio is skewed towards certain stocks, they better perform. If they underperform, your entire portfolio is going to underperform. Market regimes shift from time to time—sometimes it’s banking finance focused, sometimes pharma and auto, sometimes energy.
The concept of having concentrated allocations toward certain industries may not continuously help you. Index investing is, in my view, just a starting point. If you’re new to the market and want to get your feet wet, index investing is fine for some time. However, it’s not the most efficient way to get returns. You can improve on the index by selecting strengths from that index itself, thereby enhancing your strategy.
Momentum strategies help improve on the base index by removing weaknesses. Momentum is not only bias-free in terms of weightage but also allows you to invest only in the top-performing stocks. An index is very late in eliminating underperforming stocks. For example, Yes Bank was in Nifty when it was at Rs. 400, and as an index investor, you were unknowingly allocated to it. The stock fell to Rs. 22 before being eliminated from Nifty, costing investors significantly.
If you were selecting stocks out of the index based on strength, you would have removed it much earlier. While some may be satisfied with a 12% return from index investing, if you can do better, you should eliminate those weaknesses and invest in strengths. Focus on top-performing stocks with equal weights, and your journey will diverge significantly from that of a regular index.
So, look at momentum investing in the context of selecting strengths and maintaining equal weights, rather than concentrating bets in sectors that may not perform for long periods.
