The markets were absolutely flat and tentative despite opening in the green. The news from the overseas market is positive, but somehow our market is not able to really pick up the lead again. In today’s Daily Bite, we will discuss how stocks perform better outside Nifty. Whenever stocks come into Nifty, somehow their performance goes for a toss, and when they get out of Nifty, they start performing. This is some magic, black magic that happens. We’ll discuss more about this later.
Market Overview
Now, where are the markets headed? We had a very nice pickup in the markets in the previous session, and today, while we didn’t go down, we couldn’t go up either. Although we were in a very nice gap, I was expecting this gap to get filled today, but it hasn’t. Nevertheless, we’ve consolidated near the previous close, which was a very nice big candle. From that point of view, even if we have a flat market for a day or two, it is all right. We are definitely above the two-day high from last time and continuing that with plus 1.13%, plus 0.13%. I’m not complaining; we are just a stone’s throw from the all-time high as well.
Nifty Next 50
In terms of the broader market, Nifty Junior performed much better at 0.59%. It has covered this gap at least and is now in line with the 2nd August candle. The weakness in Nifty Junior has been taken care of, and again, we are now within a couple of thousand points of the new high.
Nifty Mid and Small Cap
Mid caps and small caps look even better than Nifty. Mid caps challenged resistance near 21,540% today, and small caps actually closed in the green. Small caps were the best-looking chart amongst all indices, with a gap up and then going up further, virtually closing this gap here at 1.53%. Small caps have really picked up the need and are probably going to be the first ones to break into a new high.
Nifty Bank Overview
Bank Nifty is still sulking at 50,368. It is not able to move beyond this consolidation, much lower than this 40-day moving average, and also not able to cross this trend line and go higher. Bank Nifty is the sort of index that is pulling or pushing the markets down. Momentum trends show that the number of stocks trading above the 20-moving average has continuously gone up over the last week. Now, 43% of stocks are above the 20-moving average, 55% above the 50-moving average, and 68% above the 200-moving average. So, in the last seven sessions, there has been a market uptick in all these different moving averages in terms of the number of stocks, and hence the pace of the markets in the CNX 500 is actually moving up, which is a good sign.
In the advance-decline ratio, you can see that in the last two sessions, advances have overpowered declines, which is a good sign and a change of trend from the previous three sessions where declines were much higher.
Nifty Heatmap
In today’s heat map, it’s a mixed bag with stocks like TCS, ONGC, Coal India, and Tata Consumer doing well. On the other hand, Mahindra & Mahindra lost ground at 2.65%, the most among all stocks, and ICICI Bank and Axis Bank were also down to some extent. Other sectors such as steel, Tata Motors, Maruti, Bajaj Auto, and Bharti Airtel also lost some ground, while energy stocks like ONGC, Coal India, and BPCL remained in the green.
In the Nifty Next 50 heat map, Dhani Green was up after a long time, with a big up move at plus 6%. You also had Trent up 2.8%, IOC up 1.7%, and Vedanta and Jindal Steel doing well. PSU banks like Bank of Baroda and PNB did well, while other private banks didn’t perform as well, surprisingly down 1.12%. Stock brokerage houses have upped their targets for some of these stocks, so there may be some pent-up buying that will come later.
Sectoral Overview
Sectoral trends show that metals led the rally at 1.9%, energy stocks were up 1.3%, and commodities, PSU banks, and public sector enterprise stocks were all up 1.2% to 1.3%. IT was up 0.9%, while pharma and autos saw virtually no movement, with autos actually seeing a downgrade at -0.9%. For the week gone by, IT outperformed the rest of the sectors at plus 5.4%, while private banking was the worst-performing sector at minus half a percent.
Risk metrics for the past week were just flat within plus or minus 1%.
Sectors of the Day
Nifty METAL Index
Within the metal space, stocks like Hindalco, Nalco, Vedanta, and Jindal Steel did very well as the sector moved up 1.87%.
Stocks of the Day
Caplin Point Limited
A standout performer today was Caplin Point, which was up by 16.4%. A lot of Medicare pharma stocks have started to do well recently, and Kaplan Point, which had been languishing between 2018 and 2023, has suddenly picked up in the last year, virtually tripling from its base at 600.
Story of the Day : Return of the bulls
Some statistics to note: a total of 31 Nifty stocks have been replaced in the last ten years. First, it’s important to note that Nifty itself is a very dynamic index where stocks keep getting changed. So, Nifty is not a static index, and over a ten-year period, 31 Nifty stocks have been changed. This is sort of a momentum strategy in itself, where winners are allowed to run and losers are checked out. So, when you are buying Nifty and holding a Nifty ETF or mutual fund, you are actually investing in a momentum fund of sorts because the constitution of Nifty is determined by market caps. If the price of a stock continues to go up, its market cap goes up, and it remains in the Nifty.
What has happened is that the continuing Nifty stocks have outperformed the incoming stocks two out of three times in the past. So, the stocks that go into Nifty versus the stocks that come out of Nifty have a high probability of not doing as well. On the other hand, stocks that come out of Nifty have a high probability of performing well. For instance, stocks that have exited Nifty, like United Spirits, have done phenomenally well in terms of percentage gain from the date of their exit, while stocks included in Nifty 50 have not performed as well. Some, like Bajaj Finance and Eicher Motors, have done well, but nothing like the performance once they get excluded. This data is from the ETA IG database.
For example, United Spirits exited in September 2014, and after its exit, United Spirits took off, while Zee replaced it, doing well for some time before the stock collapsed. In 2017, Bank of Baroda initially went down after its exit but eventually picked up in a big way. UPL replaced Bank of Baroda and stayed virtually flat. In March 2022, IOC exited, and after some time, it did really well, while Apollo, which replaced it, did not perform as well.
Why does this happen? My gut feel on this is, well, it’s something I can’t fully explain. Even I am bewildered by this phenomenon. But if I were to make a guess, when stocks come into Nifty from Nifty Junior, a significant amount of future performance is already discounted. A number of funds flow into these stocks ahead of their movement into Nifty, and by the time they actually move into Nifty, they are already priced to the sky. It takes a long time for them to really outperform the index because they have already discounted many years of earnings and potential.
When stocks get out of Nifty, they are usually weak, and all the selling that needs to be done probably happens even before they exit Nifty. This is because it’s known in advance which stocks will go out of Nifty and which ones will come in. As a result, a lot of institutional and fund focus goes away, and the arbitrage that happens on Nifty stocks also stops. This may be why the Nifty Next 50 enjoys better movement compared to Nifty itself, as seen in strategies like NF10, where Nifty Next 50 performs wonderfully versus Nifty.
Stocks going into Nifty are over-researched, over-positioned, and have too much open interest, which kills the natural movement of the stock. Maybe that’s why stocks that come out of Nifty perform very well. I could very well be wrong on this, though. What is your take on this? Do let me know. It will be a great discussion to have in the comments. Thank you so much for watching, and I’ll see you in the next one. Bye.
