As the trading week commences, market participants are eyeing the Nifty 50’s sustained upward trajectory, with initial targets set between 26,460 and 26,550, potentially extending to 26,900-27,200. However, beneath this headline growth, a more nuanced picture emerges, particularly concerning the broader market’s participation. Our Monday Watchlist delves into critical indicators suggesting that while large-caps surge, certain segments are exhibiting signs of fatigue and caution. Let’s explore the hidden currents that could shape market dynamics this week.
Small-Cap Stocks: The Missing Partygoers in a Record Rally
Despite the Nifty 50 touching new peaks, a significant divergence persists within the market. Small-cap and mid-cap stocks continue to underperform, highlighting a cautious sentiment among investors. A clear indicator of this disparity is seen in the Nifty 500, where fewer than 35% of stocks closed above their 10-day Simple Moving Average (SMA), compared to a robust 60% among Nifty 50 constituents. This lack of broad-based participation is concerning.
Furthermore, the small-cap index witnessed only 25% of its components closing above their middle Bollinger Band, in stark contrast to 62% for Nifty stocks. This metric actually declined for small-caps throughout the week, while mid and large caps rebounded strongly after an initial dip. Such behavior points towards a prevalent risk-averse mode, suggesting that the ‘risk-on’ enthusiasm typically associated with a strong uptrend is notably absent in the broader market.
FII Short-Covering: A Pause for Thought at Peak Levels
Concerns previously raised about Foreign Institutional Investor (FII) activity appear to be materializing. The surge in the long-short ratio, a positive sign for market sentiment, has begun to ease, reminiscent of its behavior post-October expiry. While short positions had reached their lowest since early July, they have now started to creep upwards, while long positions are simultaneously softening. This development, with the Nifty at an all-time high, is not an encouraging signal and warrants close monitoring.
Nifty Bank: Short-Term Buoyancy Meets Long-Term Caution
The Nifty Bank index, having been in a recovery phase since September, presents a mixed bag of signals for the upcoming week. While Friday’s session concluded with a bullish Marubozu candle on the daily chart, hinting at potential upside at the week’s outset, the weekly chart reveals a ‘Hanging Man’ candlestick pattern. This pattern, coupled with the weekly Relative Strength Index (RSI) nearing overbought territory, suggests hesitation and potential near-term exhaustion in the prevailing uptrend.
Such early strength could attract profit booking, potentially leading to a corrective move towards 57,000 in the coming weeks. Derivatives data also remains ambiguous; while Friday saw long additions in 75% of stocks, broader weekly trends suggest underlying uncertainty. Key banking players like HDFC Bank, SBI, Kotak Bank, and ICICI Bank may lead initial gains, but investors should consider capitalising on early momentum while exercising caution as the week progresses.
Nifty Financial Services: Early Gains, Lingering Warnings
Similar to Nifty Bank, the Nifty Financial Services index has shown recovery since September, yet recent price action necessitates vigilance. A ‘Hanging Man’ formation observed on both weekly and monthly charts signals a lack of conviction in the rally, while its RSI also hovers near overbought levels, amplifying the risk of short-term fatigue.
Despite these warning signs, the index finished the week with a strong bullish daily candle, maintaining positions above key moving averages, which points to some early upside. However, this upswing is likely to be met with profit booking, potentially leading to a corrective slide towards 27,500 and possibly 27,000 in subsequent weeks. Friday saw long build-ups across several stocks, including major banks, the Bajaj twins, HDFC Life, PFC, and REC, but overall weekly trends are inconclusive. Prudence dictates leveraging initial momentum while preparing for potential selling pressure later in the week.
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