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Equity Market Lift-Offs From Consolidation

More than a month on from the previous post explaining why the market was consolidating and not correcting, Nifty has made new all-time highs. The new phase of the rally is in it's infancy and has left the bears second-guessing a correction every other day, the whole of last week. Analysts were warning with the clichéd "market is overbought" statements and ta pullback is eminent. Some even called a top when Nifty teased them a dip on Wednesday, only to make new all-time highs to end the week.

The common investor sentiment echoes that of the analyst's themselves, expecting a correction. Some of the frequent questions that crop up on social media posts, chat forums etc are about, "when a correction can occur," "why the stock market keeps rallying", etc. The questions sort of indicate the disbelief in the rally, may be because the pause in the rally during March-May lead them to believe that the market is showing weakness. This scepticism is what feeds a bull rally.

Sentiment indicators confirms the same too. Put-Call Ratio is one such sentiment indicator, a contrarian one. A higher PCR indicates a negative sentiment among speculative retail investors based on their bearish option positions. The general consensus is, retailers are poor at guessing market direction. So, as a contrarian indicator, high PCR is viewed bullish for the market. PCR has been trending higher over the past few weeks, meaning more and more people are betting against a rally. That makes me believe the Nifty rally has only begun. The PCR is still high, which means the bears are still waiting for the correction.

Given that Nifty has rallied a 1000 points over the last 3 weeks, a technical pullback might be on the cards. May be next week, or may be later. But the pullback would be quickly bought into as the market has just come out of a consolidation phase of 3 months backed by FII inflows and improving MF inflows. The backdrop to the market rally is not yet fully attributed to the probability of the dollar index breaking the support zone by the local retailers. Given the inflation story in the US, a weaker dollar only means more inflows into emerging markets. Probably the FII have already anticipated that move, which lead to a steady inflow into the Indian markets in June. Under this global market setup, if DXY (Dollar Index) breaks the support of 89, the FII inflows would only pick up pace like it did during Nov-Dec 2020. And, the bears would be left with no other choice than to cover the shorts, which would only add strength to the rally. So dollar index is high on my watchlist.

To add more fuel to the fire, we have the reopening of the economy, vaccine-induced back-to-work story to feed our own inflation cycle similar to the US. We are only lagging the US because of the huge 2nd wave of Covid. To sweeten the bull's cause, the RBI completed it's planned 1 Crore G-Sap 1.0 yield curve control measures which adds more liquidity into the system. With inflation perceived as within control, the interest rates are expected to remain stationary for late into the year too. All data points are favouring the bulls for the short-term. So I don't know why the retailers are expecting a crash in the current juncture. May be the % returns on their portfolio is triggering the disbelief. That would only lead to more FOMO in the coming months.

The India VIX has also been indicative of favourable bullish conditions. VIX hit sub-14 level that is not seen since Feb 2020, just before the pandemic. VIX has been trending lower for months now and until it starts showing a definitive trend reversal, the indications are that bulls are in control.

Nifty Weekly June 13 2021
Nifty Weekly June 13 2021

Technical's wise, Nifty has just broken out of the 1.618 Fibonacci extension after the narrow consolidation between 1.618 & 1.414 Fib ratios, as noted in the previous article. The price respecting a narrow channel and eventually breaking out of an important Fib ratio has strong bullish significance. The contrarian market sentiment, expectations of economic revival & the FII flows, back up the technical case too. Some of the Elliott-Wave theorists have already given monster targets on Nifty in the zone of 25k-27k by mid-decade time period. Though I don't agree with such rosy returns which they are indicating by pointing on the fact that Nifty gave 6-7X returns during 2003-2007, direction-wise the expectation matches. Only difference is that they are not expecting the final melt-up until later in the decade, which I feel can occur much sooner. There would be more such technical / economic / sentiment indications to explain why the market could still keep up the rally, but I am not delving into those details for the lack of time. Irrespective of those, albeit a minor pullback, the market is expected to cause more disbelief among common investors to the point that they throw-in their towel to join the bull run soon. Nifty could cover some large ground in a short time, the first level being 16200 running into mid-17k or even mid-18k as the retailers start to join the run.

The hot-air balloons are just lifting off.

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