Weekend Investing Daily Byte - 25 Nov 2024

There’s an expected outcome following the strong election results over the weekend. It was anticipated that Nifty would bounce, and that’s exactly what happened. There was a rally on Friday, up by more than 500 points, and it did seem like the market caught a whiff of the election outcome and speculated a positive result. As it turned out, the speculation was correct.

Those who were shorting the markets in the first half of Friday are now finding themselves in a bit of a jam, as they’ve experienced two strong sessions of market upswing. This has certainly caused a lot of pain for the sellers. So, the question now is: is the worst already over for the markets in the short term? This is the thesis we can explore, or one can always argue that this is just a flash in the pan and the market may revert to the downside. We’ll look at various charts and narratives to discuss this further in today’s video.

Table of Contents

Where is the market headed?
Sectors of the Day
Stock of the Day
Story of the Day :Is the worst already over for the markets?

Where is the market headed?

Market Overview

Now, let’s dive into the Nifty chart. As we’ve pointed out earlier, the support at the previous election high of around 23,300 has come true. The fall from the September high was steep, and there weren’t any major bounces. There were only brief 2-day and 3-4 day rallies, but no significant relief. Now, we have a relief rally, but it’s built on reasonably strong footing because the market has come off a solid support base. Friday saw a high-volume day, and it closed above the two-day high, which aligns with the high-probability condition we’ve been talking about. A gap-up occurred, and it didn’t close for the day.

If it were just a flash in the pan, you would have seen the gap close down today itself, and the closing price could have been near the Friday close. But that didn’t happen. Of course, the 24,500 level is likely to act as resistance if we get there. For now, though, we can assume that this could be the start of a new leg up. At some point, this leg may grow strong enough to push the market to a new high, or it could collapse and return to the support level again.

Why is the 24,500 level important? Because, on a slightly longer-term basis, the head-and-shoulders pattern we’ve been observing gets invalidated above the 24,500 mark. The smaller head-and-shoulders pattern we’ve seen completed its target at 23,300, as was pointed out earlier. Now, the larger pattern may have an irregular right shoulder forming, and if it does, the target could move towards the 21,000 mark.

Right now, it seems the short-term pain is over, and the market needs to negotiate the 23,900-24,500 zone. If the market manages to break above 24,500, it could signal that we won’t see lower levels in the near term. In the last two days, Nifty gained 3.3%—1.32% today and a couple of percent on Friday.

Nifty Next 50

The Nifty Next 50 also saw a 2% rise. Both these indices had a good gap-up and managed to hold onto their gains, which is a positive sign. However, unless the 72k mark is broken on the Nifty Next 50, it will remain an uncertain position going forward.

Nifty Mid and Small Cap

The Nifty Midcaps also had a good gap-up, closing up 1.53%. It’s still within the range of the major five-day fall, so it’s not fully out of the woods, but it’s a strong comeback from the previous election high. Small caps are looking decent, closing at a two-day high, up 2.11%, and did not give up the gap. This shows that small caps are showing strong resilience compared to other indices.

Nifty Bank Overview

Bank Nifty had an impressive comeback, jumping from nearly 50,000 to 50,200 in just three sessions, from Thursday’s bottom. It’s now just about 4% away from its all-time highs, and today it gained 2.1%. The Bank Nifty is the only chart above its 40-day moving average, signaling strength.

Advanced Declined Ratio Trends

In terms of market breadth, advances were clearly in favor, with 408 advances versus 91 declines. On 22nd November, FII cash outflow was among the lowest in many weeks, and FII index buying in options and futures was also very high. While this signals some short covering from the FII front, it hasn’t yet reflected in positive cash inflows.

Nifty Heatmap

The heatmaps for today were largely green. Reliance was up by 1.7%, State Bank by 3.4%, TCS by 1.6%, HDFC Bank by 2.2%, and ICICI Bank by 1.79%. Many public sector stocks were also up, such as JSW Steel, Infosys, Tech Mahindra, and Bajaj Auto, though some stocks like Adani stocks were losing ground. Among the notable gainers, Varun Beverages fell by 2.48%, while Siemens saw a 7% rise and ABB was up 5%.

Sectoral Overview

Looking at sectoral trends, PSU banks made a huge comeback today, rising 4.2%, turning positive for the week. Just last week, these stocks were in the red, but now several sectors have turned green on a monthly basis, and almost all sectors are in the green on a weekly basis. The only exception is metals, which were down 3.7% for the week. For the day, metals, IT, and auto sectors were relatively muted.

However, the market is gaining confidence in the stability and strength of the government, given the election outcome, and this is helping public sector stocks lead the way. PSU banks, in particular, saw a significant rally, with stocks like Central Bank up 8.4%, Indian Bank up 6%, Yuko Bank up 5.8%, Bank of Baroda, PNB, and IOB all doing well.

Sectors of the Day

Nifty PSU Index

The overall gain in PSU banking was 4.18%.

Stock of the Day

Polymedicure Limited

A stock spotlight today was on Poly Medicure, which surged by 16.2%. The stock had fallen from nearly 3,300 to 2,500, but today’s 16.2% jump indicates a strong recovery. Its long-term chart shows solid growth, having gone from 200 to 3,000 in the past four to five years, making it a strong contender for potential buying opportunities.

Story of the Day :Is the worst already over for the markets?

In my opinion, the answer is probably yes, but I could always be wrong. My sense is that nothing has really changed in terms of domestic flows. Despite the market’s dip, FII outflows seem to be reducing or even reversing. Confidence in India remains strong. CLSA recently highlighted that markets like China are more attractive but has revised its view, bringing MSCI inflows back into large caps. There has been a necessary correction in many stocks, and it seems that the fluff has been cleared out.

While experts still say that India is overvalued, by about 20% above its long-term average, the same is true for the rest of the world. The US is also 20-30% above its long-term average, so if we’re comparing relative situations, we are not as far off as it may seem. I believe the long-term averages have less relevance in a world where money is being printed in vast quantities, but that’s a discussion for another time.

As I tweeted earlier, the mood has shifted, at least for now. The talk of 21,000 and 20,000 levels has disappeared. Those sitting on high cash may now start to feel FOMO. If the market sustains these levels for a few sessions, cash holders might feel left out and start reinvesting, which could trigger a chain reaction upwards. Sentiment tends to move like a pendulum from one extreme to the other.

From a technical perspective, we’re seeing strong signs of optimism. The market bounced from a solid support at 23,300, and once again, the elections have proved to be a significant catalyst. The market looks like it has corrected and is starting a new leg up. If we go above 24,500, we might see a head-and-shoulders pattern failure, which could lead to more short covering. The 200 DMA was breached briefly but has now made a strong comeback, which is a positive sign. Additionally, several indicators that were oversold have now bounced back from those levels, adding more confidence.

There are sectors that had been consolidating for some time, like public sector banks, real estate, and PSU stocks, which are now doing well. Real estate, for example, had been correcting since July but is now showing strong momentum. Public sector enterprise stocks, which have been flat for the last 6-9 months, are showing strong support, and PSU banks, which have been flat since the start of the year, might be ready for a higher move.

There’s also optimism surrounding the Maharashtra election results, a new parliament session with many bills expected, and the hope that the upcoming budget (just 60-65 days away) could bring more stability to the markets. While I’m not expecting a runaway market, I’m reasonably confident that the recent lows will not be breached easily. Even the Adani news, which was a shock for the market, hasn’t derailed the overall sentiment.

MSCI rejig is also contributing to market optimism, with $2.5 billion inflows, though this may not be reflected yet in the cash numbers. Stocks like HDFC Bank, JSW Energy, and Tata Power are seeing fresh inflows, while stocks like Reliance and Infosys are seeing outflows. This readjustment is part of the normal process and reflects that capital is still flowing into India’s growth story.

To sum up, the market seems poised for a recovery. But, as always, it’s best to follow the trend and sectoral indicators, and take positions accordingly. For those following momentum investing, like us, we don’t react to day-to-day market movements. We trust the system to guide us on when to enter or exit stocks.

As long as you believe in the long-term India growth story and have a strategy to ride with strong stocks while cutting the losers, you will likely see significant wealth creation over time. The daily or weekly noise should not distract you once you have a clear strategy in place.

So, which sectors do you think will lead the recovery? Do share your thoughts in the comment section. I strongly believe that the recent lows will not be breached easily, and we should approach the market with optimism moving forward.