Vijay L. Bhambwani's Ticker: Beneath the surface, an undertone of cautious optimism

Mint

8 hours ago

Dear reader,
Last week, I wrote that the bulls had an upper hand. However, markets showed signs of being top-heavy, as higher levels attracted selling. Nervousness over the India-US trade deal and Friday's Sebi ban on Jane Street dampened sentiments. The latter event triggered worries among retail options traders, since options make up the lion's share in the derivatives segment. Traders feared there would be a temporary drought of liquidity as institutional players, especially since algo and AI-capable traders such as Jane Street constitute approximately half of the entire derivatives turnover.
My call to deploy tail risk (Hacienda) hedges on all open positions turned out to be a robust strategy, and my readers should continue to maintain this strategy as the period of higher volatility is not over yet. Market internals still indicate that bulls still nurse optimism, though they avoided providing big-ticket support at higher levels. Markets showed resilience by not falling significantly either. Studying the statistical signals below should clarify matters further.
Last week, I wrote that industrial metals were likely to witness a routine month-end rally. That occurred, and provided a boost to metal and mining stocks. The month-end is done and dusted, and upsides may run into some profit-taking on these commodities, and by extension, in some of their stock prices too. The long-term bull story in bullion is alive and kicking. Patient delivery-based investors who are willing to overlook short-term volatility with a steely resolve are yet to witness the peak prices of bullion -- just look beyond calendar year 2025.
Oil and gas are likely to remain subdued and rallies, if any, are likely to be temporary. I maintain my view that energy markets are well-supplied. This view remains unchanged for months, and should hold for the calendar year, barring sudden unforeseen circumstances.
This week will see continued trading action on public sector undertakings, particularly banks. There are some hopes of a divestment in government banks, and the markets are cheering that expectation. Besides, the weightage of the banking and financial sector in headline indices itself means that a boost for these stocks will lend cheer to the markets. Oil marketing companies may see above-average daily ranges, and should provide high-risk traders with good trading opportunities for two-way trading moves.
Option traders should note that the Jane Street episode may impart higher-than average volatility; therefore, they should trade light till clarity emerges. Tail risk hedges are a robust idea. Fixed income investors should still keep the powder dry and await the festive season that starts in September. I expect consumer credit demand to perk up, which may push coupon rates mildly higher too.
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 week's fall was led by the banking sector, and the broad-based Nifty-50 brought up the rear. A weak US dollar index (DXY) propped up emerging market indices including India. Bullion gained week-on-week, as defensive buying continued. Energy remained under pressure and cheered inflation-wary bulls.
The INR displayed strength, adding to the cheerful sentiments. NSE gained market capitalization despite weak indices, and that tells me the broader market sentiment remains cheerful. Market-wide position limits (MWPL) rose routinely post-expiry. US indices gained, providing tail winds to our 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) –
Turnover contribution in the higher-risk, capital-intensive futures segment eased. That tells me traders were unwilling to go out on a limb to go long.
In the relatively lower-risk, lower capital requirement options segment, it was the lowest-risk index options that saw the turnover contribution rise, which means derivatives traders were unwilling to take aggressive bets.
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 the winds are blowing. This simple yet accurate indicator computes the ratio of the number of rising stocks compared to falling stocks. As long as gainers outnumber the losers, bulls are dominant. This metric is a gauge of the risk appetite of 'one marshmallow" traders. These are pure intraday traders.
The Nifty-50 fell on a week-on-week basis, but the advance-decline ratio remained above the 1.0 level. At 1.03 level (prior week 1.61) it indicates there were 103 gaining stocks for every 100 losing stocks. Bulls remained optimistic. Watch this metric keenly this week. As long as the daily and weekly average stays above 1.0, bulls are still in control.
A tutorial video on the Marshmallow theory in trading is here - www.youtube.com/watch?v=gFNKvtsCwFY
The second chart I share is on 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 rose routinely, and that indicates traders were willing to enhance their exposure post-expiry. It was marginally lower than the commensurate week last month. That was due to the nervousness over the trade deal and Jane Street. Overall, risk appetite remained steady among swing traders.
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
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 lower impetus readings. That means the fall lacked selling momentum and/or panic sales.
Ideally, prices and impetus readings should rise in unison to indicate a sustainable uptrend.
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 LWTD to traded securities helps a trader estimate prevalent sentiments.
The Nifty ended last week with small losses. The LWTD reading fell too. At -0.04 (prior week 0.19), it indicates the possibility of weak fresh buying. While short-covering can cushion declines, it takes fresh buying to boost levels to all-time highs.
A tutorial video on interpreting the LWTD indicator is here -https://www.youtube.com/watch?v=yag076z1ADk
Nifty's Verdict
The weekly candle chart shows a small-bodied bearish candle with the prior week's prominently bullish candle. The last candle size was too small to present a major worry to bulls. The price is comfortably above the 25-week average, which is a proxy for a six-month-long holding cost of a retail investor. That means the medium-term outlook is positive for now.
Last week, I advocated watching the 25,250 level as an immediate support, which remains in place. As long as bulls defend this level, they remain in the driver's seat. On the flip side, overcoming the 25,750 on a sustained closing basis can trigger a fresh upthrust.
Your Call to Action
Watch the 25,250 level as a near-term support. Breaking out above the 25,750 level raises the possibility of testing fresh record highs in the coming weeks.
Last week, I estimated ranges between 57,800 – 54,700 and 25,725 – 24,500 on the Bank Nifty and Nifty respectively. Both indices traded within their specified resistance levels.
This week, I estimate ranges between 58,450 – 55,625 and 26,075 – 24,825 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