it’s been a good session to start the month. Yesterday, it seemed like the market would continue its downward move, but with China being closed today, it appears that no more funds are moving out of India to China. China is going to be closed for the next seven days, so they’ve triggered the entire world and gone on a holiday.
In today’s discussion, we have some very startling data. You probably haven’t heard about this before, but is the Nifty 50 cursed? Every stock that moves into or out of the Nifty 50 shows a certain behavior, and we’re going to analyze that today.
Where is the market headed?
Market Overview
The market remained completely flat from open to close, down by just -0.05%. It did dip a bit lower during the day but recovered well after two sessions of decline. We are now in a zone where, unless there is motivated selling from FIIs, we should see some consolidation. We are currently around 25,800, having lost about 450 points from the top, which is a decent starting correction. But if things worsen globally, we could lose more ground. We should be fine even if it falls to 25,000, but below that, we may start feeling some pain.
Nifty Next 50
On the Nifty Next 50 front, it performed better than the Nifty, up 0.25%, just a stone’s throw from its previous all-time high, so no issues here. The positive part of the market today was the performance of mid-caps and small-caps. Over the last two sessions, we’ve seen long tails on the candlesticks, which indicate strength at lower levels, meaning that the market pulled back each time. These long tails are a sign that the market wants to move upwards.
Nifty Mid and Small Cap
Mid-caps and small-caps gained 0.3%, and yesterday’s doji pattern gave a strong clue, with small-caps showing no signs of distress. Small-caps rose 0.66% today.
Nifty Bank Overview
The Bank Nifty, on the other hand, was down by 0.1%. It tried to go up but got pushed down. There is now talk of more cuts by the Fed before the year’s end, and if that happens, we might see another leg up for the Bank Nifty. But for now, Bank Nifty is showing weakness, having broken down from its breakout line and looking for consolidation.
Advanced Declined Ratio Trends
As for momentum trends, the advance-decline ratio was even, at 261 to 236, indicating a balanced market in terms of buys and sells among the top 500 stocks. FIIs sold big on the 30th, with Rs 9700 crore leaving the market, but DIIs bought Rs 6600 crore, balancing out the selling pressure. Over the last two days, DIIs have actually exceeded the FIIs’ sell amounts, indicating they can provide a strong counterweight to the market.
Nifty Heatmap
The heatmap today was mixed. On the positive side, Infosys, Tech Mahindra, Adani Enterprises, Britannia, and SBI Kotak Bank moved up, while stocks like Unilever, Reliance, Asian Paints, Maruti, Titan, and Bajaj Auto continued to decline. In the Nifty Next 50, Siemens, ABB, Adani, Indigo, Shriram Cement, Varun Beverages, and DLF rose, while stocks like Dmart, Chola Finance, PNB, ICICI Prulife, LIC, and Adani Green moved down.
Sectoral Overview
Sectors of the Day
Nifty IT Index
In terms of sectors, IT as a defensive sector came out on top, gaining 1.2%, erasing all losses for the week and the month. Energy was down 0.8% and is now flat for both the week and month. PSU banks are gradually inching up but are still negative on the monthly charts.
Stock of the Day
KFin Technologies
In stock-specific news, KFin tech surged by 11% today. Second-rung IT stocks like this one are performing well, so look for pullbacks as they seem to be making a base and are poised for further gains. KF Tech, for instance, has risen from below Rs 250 to Rs 1100 in just a year and a half.
Story of the Day : If Nifty Cursed?
There was a rejig in the Nifty 50 index on 30th September, with Trent and BEL being added, and TVS Lab and LTI Mindtree being removed. This means that 1.4% of the Nifty is now represented by Trent, and 0.9% by BEL. Historically, stocks that are added to the Nifty 50 tend to underperform post-inclusion, while stocks removed from the index tend to outperform.
A study from ET Wealth showed that, on average, stocks have a five-year CAGR of 35.4% before entering the Nifty 50, but this drops to 6.9% after inclusion. Trent, for example, has gone up 70x in nine years, 20x since the COVID lows, and 6x in the last year. BEL has also seen remarkable growth, rising from Rs 20 to Rs 284 since the COVID lows. However, based on historical trends, both Trent and BEL may not perform as well post-inclusion.
Interestingly, stocks removed from the Nifty 50 tend to do better after their exit. The same ET Wealth study found that the CAGR of stocks after being removed from the Nifty 50 was higher than when they were part of the index. For example, stocks like DLF, HPCL, Lupin, ACC, and Tata Power saw significant performance improvements after leaving the Nifty 50. When they were part of the index, their average returns were -6%, but after removal, this jumped to 12%.
So, why does this happen? In my view, much of the stock’s future potential gets discounted before it enters the Nifty 50, and once it’s part of the index, it becomes over-researched and over-owned, losing its alpha. Stocks entering the Nifty 50 have already been juiced, and once they leave, they often regain momentum as they become less scrutinized, allowing them to focus on fundamental improvements.
