Is It Market Data or Mumbai Rains?

The start of 2022 had been an interesting one. After two straight calendar years of bull market, 2022 was expected to be a bit tough. With inflation inching higher, clearly troubles were looming. That got accentuated by geo political, supply chain and production related issues. We saw one large swing from 18200 to 15500 and back to almost 18200 from Jan – April. But by then high inflation and rate hikes were clearly in offing. The summer has been really scorching since then. We have lost close to 3000 points on Nifty this Summer.

Since early March US benchmark yields kept inching higher and have touched nearly 3.5% from 1.8% back in March, when the first hike was announced. Since the subsequent hikes have been higher at 50 bps and 75 bps. Back home as well we saw two hikes by RBI, taking the repo rate from 4.0% to 4.9%. We have been similar feature globally except for China and Japan. This saw a meltdown globally in equities, bonds and even crypto assets.

After a sharp correction June month started slightly better, but could not keep the momentum going and Nifty hit close to 15100 17th Jun. While Mumbaikars struggled with the heat and humid outside, inside it was getting even more tough to cope up with the pressure in the markets. Amidst all this past two sessions is giving some hope back. Now, is this hope due to rains which is easing the summer trouble or based on data pointers, I leave to your judgement. But will love share the data points:

1.) Base commodity price have eased off. This can help ease inflation concerns. Any easing off in terms of interest rate hikes can keep recession woes well in check. Let’s not miss the fact that Quantitative tightening will start soon, which can further ease off the commodity prices.

2.) Brent prices have seen some easing off in last few sessions. As compared to base metals which have corrected anywhere in the region of 30%-50% this is much lower. But generally its base metals which gain first and even retreat first. Any easing in geopolitical issues or further improvement in supply or stock of Brent can further bring down the price. Clearly, this is one of the biggest trigger for high inflation which will get addressed.

3.) Technically, Nifty is heavily oversold, with RSI closing in near 30 levels. In last 5 years there have been 4-5 events of RSI skidding below this level, including Covid fall.

4.) Mid cap stocks have been significantly beaten down and their underperformance vis a vis Nifty has increased sharply; an uptick here can be positive for Nifty as well. So, is the case with Small Cap where this divergence is even higher.

5.) The short positions in Nifty futures have increased by nearly 9%. Shorts are clearly stacked up in Nifty and stock futures.

6.) Also, in few heavy weights like Reliance and ITC where the Long trade was extremely crowded, decent bit unwinding has been seen, nearly 10%.

7.) On the options front 15500 Put has the highest buildup for June expiry. Some Call writing has started there, a covering in the Call position can be additional trigger for strong uptick. 16000 Call strike has the highest and meaningful positions, so post a break above 15500, glide can be swift.

So, as the Summer heat dies down and we enjoy the rains (not considering the traffic hassles) probably markets may also see some easing off from the stress it’s facing over last few weeks.