By Vijay L Bhambwani
Indian equity markets celebrated as the headline indices rallied under a percent. The broader based Nifty-50 reached an all time high and surpassed the round number of 20,000 on an intra-day basis. The rally has been in the face of worries emanating from the overseas markets. Oil prices are on a tear and gas prices are volatile as Chevron (Australia) faces labour strikes at their LNG plants. Technical analysts usually classify this as a bullish environment when markets rally inspite of negative news.
Modern electronic markets are “order driven” which means buyers will enter buy orders at lower levels and sellers will enter sell quotes at higher levels. The difference between the buy and sell quotes is called “spread.” We will, in all likelihood, witness wider spreads as weaker hands attempt to exit and stronger hands place their bids at lower levels. This is a routine process of price discovery at new highs and is an early warning sign of higher volatility setting in. While inexperienced retail traders may get suckered into bad trades during this phase, veterans place their bids carefully and in smaller lots to avoid these volatility shocks.
Vijay Bhambwani highlights that caution is the name of the game in current market scenario.
Much depends on which segment of the market that has bought the majority of the stock. Since the last six months the rally has been largely fuelled by buying from the retail investors segment. In the futures space, retail traders hold 13,99,386 net long (long positions minus short positions) in individual stock futures. This is the highest build up by the retail segment up after April 2022. Should the retail traders attempt to book profits even partially, the total quantum of unwinding will be substantial enough to trigger higher volatility in the near-term.
The second aspect is the returns garnered by the traders in the recent past. As the table below shows clearly, the broad based Nifty-50 has clearly outperformed the Bank Nifty by a decent margin. One of the two things should transpire going forward – either the Nifty slows down and the Bank Nifty catches up or the Bank Nifty picks up speed and matches the returns offered by the Nifty-50.
Index4 Week Returns12 Week Returns20 Week ReturnsNifty3.55%7.13%10.69%Bank Nifty3.92 %4.47%5.41%
How does the market provide clues about which way the equation will head? When any traded security prepares to make large moves, the first thing that happens is the intraday price range expands. Second the traded volumes and open interest will rise as smart money sinks its teeth into the counter. Over time that security will turn from an under performer to match the returns of the broader markets.
Should all other factors remain constant, the statistical weight of evidence based on the market data we have so far tells us that the near term may witness some volatility, but the long term outlook of our equity markets remain buoyant.
Patient investors should continue to hold on to their long term core portfolios.
Happy investing.
(Vijay L Bhambwani is the CEO of http://www.Bsplindia.com a proprietary trading firm. Views expressed are the author’s own. Please consult your financial advisor before investing.)
