top of page

A New Shark In The Waters

The seasoned sharks of the financial market have a new rival. The new shark in the waters is matching the big ones bite for bite and is growing more teeth. But these are unexplored waters and can be treacherous for both the new and the old sharks.


The new shark is none other than the retailers (Individual investors) and the bigger ones, the institutional investors. Gone are the days when the FII flows dominated the market direction. The collective power of retailers, who are on a buying frenzy, is powerful enough to overcome the FII influence on the markets. Be it a rising dollar or the FII net outflows, retailers have thus far absorbed punches and has thrown back punches much above its weight. Thanks to the steroid injected by the pandemic. The pandemic provided an opportunity for the money sitting on the sidelines to enter the markets at attractive valuations and it has produced a positive feedback loop to sustain the momentum.


Retailers Turnover In NSE
Retailers Turnover In NSE

The shift in market dynamics was more evident in recent months. The recent NSE data regarding the net turnover by each client category, has shown a significant increase in retail activity since 2020. The retail section contributes to 44% of the overall turnover in the cash segment. Retailers are dominating even the F&O segment despite the stricter margin rules imposed by SEBI. The uptick could be attributed to the lock-down, but it has sustained well into 2021 even as the economy has opened up, with no signs of a change in this trend. Not just market participation, retail shareholding has also increased in listed companies. Retailers own 7.18% of the overall shareholding as of June 2021. In value terms, retail holding was at 16.18 lakh crore in June 2021. This was an increase of 16.07 per cent over the last quarter. The retail shareholding is much higher in the mid and small caps. Institutional investors are still the biggest players in terms of financial muscle, there is no doubt about it. But their role in determining the market direction has been surprisingly subdued recently. The retailers have taken the onus upon themselves. And it's evident in the recent rally.


Nifty Movement vs Retail Turnover
Nifty Movement vs Retail Turnover

The above chart compares the NIFTY movement with the net turnover of retailers in the cash segment. It shows a clear correlation. Each of the rallies in NIFTY is supported by an increase in retail trading activity. Whenever retail activity is subdued, NIFTY either went flat or corrected slightly. The September/October turnover data, once published by NSE, could give an interesting perspective into the recent rally. The retail activity ate into the FII turnover percentages too! Refer how the FII turnover was subdued during the months when the retail activity picked up in the chart below.


Subdued FII Flows In 2021
Subdued FII Flows In 2021

Turnover data can be indicative of speculative short term bets, hence I specifically included only the cash segment data, which are generally long term money. Still, to drive down the point that the rally was primarily driven by the retailers, let's check the FII / DII net flows in the cash segment. Since the start of the year, FII flows have been insignificant, being flat to negative. DII inflows have been marginal positive. Yet the index has rallied 31% since YTD. That's a phenomenal performance by the retailers. The retailers contributed to the rally not just through direct equity, but also through mutual funds. Record breaking NFO subscriptions of big fund houses, penetration of index funds / ETFS and the general acceptance of “Mutual Funds Sahi Hai” have all helped the market scale new heights. Investors have started embracing passive investment as indicated by the monthly inflows into index funds and ETFs.


Index Funds / ETF Net Flows
Index Funds / ETF Net Flows

All these data points to a much improved investor sentiment since March 2020. And this sentiment is broadening. Retail money is flowing more into the broader market. The relative strength of CNX MidCap 100 index to Nifty50 has been improving throughout the year except for a short period when the global news flow such as the Evergrande default, the supply chain problems and the energy crisis in China made the investors jittery in their Mid-Cap investments.


MidCap relative strength to Nifty
MidCap relative strength to Nifty

This is not just the speculative money that's flowing into the broader market. These are long-term investor money flowing through FlexiCap, MidCap, and Thematic funds. Money flow into large cap funds are dwarfed by the quantum of money flowing into other equity funds. Even SEBI's MultiCap restriction of 25% holding on each of mid, small and large cap didn't dampen investors spirits.


LargeCap vs Other Equity Funds
LargeCap vs Other Equity Funds

Even though the investor sentiment has improved, there are remnants of bearishness. Refer to my previous article on how the market still has ground to cover to say bullish sentiment has reached a peak. Each rally is viewed from the lens of scepticism, all the while, the retail participation has picked up. This scepticism itself adds fuel to fire for the bull run. More and more investors who missed the bus are eager to get an entry into the bull run, but the market is in no mood to grant their wishes. It forces them to act now. Since the turn of the year, each market correction has been shorter both on duration and on depth. Such a price action is an indicator of a build-up in momentum. Each contracting corrective phase drives the endangered bear species into extinction.


Contracting Corrections On Nifty
Contracting Corrections On Nifty

The market sentiment hasn't reached a melt-up phase probably due to the investor-trader psychology conundrum. The investor class is already well entrenched in bullish sentiment, but it's the naive trader class, where the most scepticism is. The scepticism is aided by high RSI readings and expectation of a reversal among traders. But the trader class too is seeing accelerating sentiment conversion. Volatility is the catalyst for sentiment conversion. India VIX, the volatility index has been on a down trend. Each mild correction has been forming a lower top on the VIX, which means the bearish bets among traders are disappearing. With each correction that quickly gets bought into by the investor class through direct equity or mutual funds in the cash segment, traders will be forced to follow the trend.


Nifty vs India VIX
Nifty vs India VIX

The Put-Call Ratio (PCR) has been consistently more than 1 for months. A value more than 1 indicates more Puts options are being bought. PCR has a negative correlation with market sentiment. Higher PCR (more Puts) mean more retailers have a bearish bet in the F&O segment, but the market rarely sides with the popular opinion. This is a strong indicator that traders' sentiment has a lot of ground to cover up. But unlike the investor sentiment, trader sentiment can change drastically in no time. So don't be surprised if the traders start taking bullish bets quite soon. The steepness of the index curve will ensure the traders are also brought into the fold quickly. In Fact that process has already started as we are seeing the slope of the index increasing. The market sentiment is catching up thick and fast.


Global markets have been susceptible to hiccups in the recent past, which is the primary reason for the traders' bearish sentiment. Both US and European markets have seen a 10% correction over the past few weeks. Inflation pressure due to supply chain constraints, energy crisis etc has put the global markets jittery about a potential tapering from central banks. But, like the Indian bourses, the global markets are also witnessing similar trends of sentiment conversion. If the recent correction in the global market stabilises to kick start a bull run, that could be the perfect storm for the melt-up in financial markets to gather strength, both globally and domestically. The current scare involves a possible lower top / H&S pattern on indices such as S&P 500 and Nasdaq caused due to the above mentioned reasons. But, nothing pushes the bears into extinction faster than a scare that's being sorted out (at least temporarily). So it's crucial for us to keep a watch on the global markets. I had expected the melt-up to reach a checkpoint at Nifty 18600. We are in touching distance. The momentum has picked up over the past week. But with pockets of bearishness in the market, the melt-up could be straight in front of us.


With that said, the expectation of a melt-up in equity is a climax to the larger cycle. The new shark in the water, for all it's teeth, lacks experience. It either panics at the wrong time or freezes at the wrong time. The seasoned sharks on the other hand, are better equipped to make quicker decisions. Retailers are poor decision makers. They can't adapt to changing reality as quickly as institutional investors do. Especially during a melt-up phase, the retail sentiment gets heavily anchored on the expectations of never ending momentum (Euphoria), that their decision making suffers even more. With retailers dominating the equity turnover and trading activity, the system carries a higher risk. The new shark is actually a school of fishes masquerading as a shark. And they are always susceptible to scatter off. But until then, the new shark is the king in the waters.

115 views2 comments

Recent Posts

See All

2 Comments


Good write up. I feel the young and fearless (school of fishes masquerading) retail investors are growing high in number. The wish and desire to become rich early is driving the billions of traders not allowing the market to correct as a whole.


In social media the new investors and traders are debating tirelessly about the stocks, products and of course the markets. They learn the trends quickly and cashing the sentiments, Indian government drive to revive the economy in all new sectors, Chinese government is putting the restrictions to the businesses which gives freedom to the entrepreneurs noose. All these factors firing on all cylinders.

Like
Get Finsight
Get Finsight
Oct 24, 2021
Replying to

Yes that's so true. The bullish sentiment is a contagion. Social media has quickened that process. Sentiment that used to take years to build before the age of social media, its now happening in months.

Like
bottom of page