Vijay L Bhambwani’s Ticker: Bulls are running out of time

Dear reader,

Last week, I wrote bulls must flex their muscles and make their presence felt, or risk losing the initiative. The market fell for the fifth week in a row, which means bulls are a worried lot. They are fast approaching a tipping point where they will need to defend the markets or get overwhelmed by their mark-to-market (notional) losses. 

To be fair to the bulls, they have multiple reasons to worry. The India-US trade deal is turning into a nightmare. The resultant fall in the rupee opens the floodgates of “imported inflation.” This occurs when the domestic currency weakens so much that imported goods become expensive due to the exchange rate alone. The biggest fear is oil and gas turning expensive. These commodities are known as multiplier commodities, since they have a trickle-down effect on the price of every other commodity. That means higher inflation posing a threat to the feel-good-factor.

The Reserve Bank of India (RBI) will announce its decision on interest rates on 7 August. Any lowering of the repo rate may not have the expected and/or desired impact on the markets. That is because the actual cost of funds remains high. That is triggering declines in banking and financial sector stocks, which in turn command a combined weightage of 37.41% in the Nifty 50. This is where the problem lies. Unless bulls act fast, and buy banking and financial sector stocks aggressively, the market may witness some more declines.

On the global stage, last week I wrote about pension regulations in US and Europe threatening to slow down inflows into financial markets in the coming quarters. You can read it here. That has the potential to spook bulls globally. As I have written in my past articles, this is the phase of procyclical hysteresis in financial asset markets. This phenomenon occurs when asset prices revert to the prevalent economic realities, after moving against it for a while. The 2020-2024 period was one such period of counter-cyclicality, when businesses were sluggish but financial markets were defying gravity. The mean reversion is anything but smooth and retail traders run the risk of being hurt the most.

This week will continue to witness action on stocks of public sector undertakings, particularly in banking. The monetary policy announcement on 7 August will set the pace thereafter. Oil and gas stocks may witness larger-than usual weekly ranges, as energy commodities are highly volatile. That could include wild two-way price moves. My hypothesis that oil and gas markets are adequately supplied and price rises, if any, would be short-lived, was validated by last week’s market action. Bullion continues to witness buying support on declines and the long-term story remains intact.

Industrial metals witnessed a sell-off along expected lines. Since July contracts expired for base metals, prices eased. That could see some declines and/or selling on advances for metal and mining stocks this week. Fixed income investors should continue to keep the powder dry till the RBI verdict is out.

Do not trade without adequate tail risk (Hacienda) hedges in place. That could make all the difference between crippling losses and a rap on the knuckles this week.

A tutorial video on tail risk (Hacienda) hedges is here – https://www.youtube.com/watch?v=7AunGqXHBfk 

Rear View Mirror

Let us assess what happened last week, so we can guesstimate what to expect in the coming week.

The fall was led by the banking and financial sector stocks and the broad-based Nifty 50 brought up the rear. A strong US dollar spooked emerging markets including India. The rupee weakened against the dollar, which added to the nervousness. Gold rallied as safe-haven buying returned. Silver reacted lower on profit sales.

Oil and gas witnessed selling on advances, which is likely to persist unless a fresh a trigger emerges to indicate otherwise. Indian 10-year bond yields rose again, which dragged the Bank Nifty lower. NSE lost 1.61%, which indicates broad-based selling.

Marketwide position limits fell routinely after expiry. US headline indices fell, adding headwinds to domestic markets.  

Retail Risk Appetite

I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders – where are they deploying money. I measure what percentage of the turnover was contributed by the lower and higher risk instruments.

If they trade more of futures which require sizable capital, their risk appetite is higher. Within the futures space, index futures are less volatile compared to stock futures. A higher footprint in stock futures shows higher aggression levels. Ditto for stock and index options. 

Last week, this is what their footprint looked like (the numbers are average of all trading days of the week):

We saw turnover contribution rise in the high-risk high-capital-intensive futures segment largely due to expiry of the July series. Traders tend to roll over their trades from the expiring month to the next month which logs dual turnover. The fact remains that it indicates higher risk appetite too.

In the relatively lower risk options segment, turnover contribution rose in index options, whereas stock options turnover fell sharply. This indicates lower risk appetite in the options segment.

Overall risk appetite seemed a tad higher.

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Matryoshka Analysis

Let us peel layer after layer of statistical data to arrive at the core message of the markets.

The first chart I share is the NSE advance-decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way winds are blowing. This simple yet accurate indicator computes the ratio of number of the rising stocks compared to falling stocks. As long as gaining stocks outnumber the losers, bulls are dominant. This metric is a gauge of the risk appetite of ‘one marshmallow’ traders. These are pure intraday traders.

A tutorial video on the marshmallow theory in trading is here – www.youtube.com/watch?v=gFNKvtsCwFY 

The Nifty clocked bigger losses and continued its five-week long losing streak. That resulted in intraday buying conviction remaining subdued. At 0.80 (prior week 0.67) it indicates 80 gaining stocks for every 100 losers. For a sustainable bull market, it is essential that this ratio stay above 1.0 consistently to propel markets higher. Watch your trading terminal screen keenly this week.

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The second chart I share is the market-wide position limits (MWPL). This measures the amount of exposure utilized by traders in the derivatives (F&O) space as a component of the total exposure allowed by the regulator. This metric is a gauge of the risk appetite of ‘two marshmallow’ traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s.

The MWPL reading fell routinely after expiry of the July 2025 derivatives series. As I mentioned last week, the extent of the fall would tell a story. The post-expiry low is lower than the comparable week last month. This tells us traders have rolled over fewer positions post-expiry as compared to the prior month. That hints towards caution.

 
A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here – https://www.youtube.com/watch?v=t2qbGuk7qrI 
 

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The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move. Last week, both indices fell with higher impetus readings, which indicates the fall was triggered by forceful selling. That is not good news.

Ideally, the fall should have occurred on lower impetus reading or even better, indices should have risen on higher impetus reading. Should our headline indices continue to fall with higher impetus readings, it could open the doorway to further declines.

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The final chart I share is my in-house indicator ‘LWTD.’ It computes lift, weight, thrust and drag encountered by any security. These are four forces that any powered aircraft faces during flight; so, applying it to traded securities helps a trader estimate prevalent sentiments.

Last week, the Nifty extended the decline and fell for the fifth week in a row. The LWTD reading rose but remained well below the zero mark at -0.34 levels. That tells me fresh short covering and/or fresh support may improve compared to the prior week, but will remain below optimal levels. Bulls need to flex their muscles and fast or risk losing the initiative.

A tutorial video on interpreting the LWTD indicator is here – https://www.youtube.com/watch?v=yag076z1ADk 

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Nifty’s Verdict

The weekly chart indicates a fall for the fifth week in a row and the price has now settled below its 25-week average (blue line). That average is a proxy for six-month holding cost of an average retail investor. Since recent buyers are holding losing positions, they may experience short-term anxiety. That raises the possibility of some distress selling.

Last week, I suggested watching the 24,800 level on the Nifty as a last-mile support. The same was violated on a closing basis. That puts bulls at a disadvantage. The last mile support is at the 24,200 threshold which must be defended or bulls can face even more distress.

On the flipside, the Nifty needs to trade consistently above the 24,800 level to imbibe confidence in day traders. Investors will derive comfort only above the 25,250 level.

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Your Call to Action – watch the 24,200 level as a near-term support. Only a breakout above the 25,250 level raises the possibility of a short-term rally.

Last week, I estimated ranges between 57,725 – 55,325 and 25,375 – 24,300 on the Bank Nifty and Nifty respectively.  Both indices traded within their specified resistance levels.

This week, I estimate ranges between 56,800 – 54,450 and 25,075 – 24,050 on the Bank Nifty and Nifty respectively.

Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks. 

Have a profitable week.

Vijay L Bhambwani

Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani