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The Seeds Are Sown

Every time the markets take a dip, seeds are being sown. The seeds grows bullish tendencies in the heart of reluctant bears and slowly the bears starts to agree with the bulls. Its a process leading to a melt-up.


I had expected Nifty to rally to mid 17k, which it did, albeit not as quickly as expected. It was astonishing to see remnants of bearish sentiment even after Nifty broke out of consolidation in June. Bearish sentiments were visible when I last wrote about an impending rally back in June 2021. I had expected a swift rally to occur after the breakout, because a 3 month consolidation would have exhausted the bears. With market forming yet another consolidation after breakout instead of a runaway rally, that expectation got nullified. Bearish sentiment simply lived on. What could possibly be feeding bearish sentiment still? Is it because majority of the retailers missed the bus and are waiting for a correction to enter? Surely a bull having nearly doubled the capital, wouldn't be wishing for a correction. Sentiment-wise, non-participation can only justify lingering bearish sentiment.


Nifty Dragged Its Leg Up
Nifty Dragged Its Leg Up

That can lead to only 1 outcome. More rallies. And it was evident. When Nifty broke out of the second consolidation in August 2021, the rally was swift this time. Though I had expected the rally to pause little lower than 17400 which was derived with standard technical analysis, the rally over-extended to nearly 17800. Those were the first signs of bearish remnants fading off. Why do I say that? Partly because of the phenomenal funds collected with recent NFOs. Non-participants don't jump into reckless trades immediately, they first test the waters to gain the confidence which the existing bulls already acquired. What better way than to test the water with NFOs sold by big fund houses?!


Index heavy weights like Reliance starting to show promise after an year of under-performing the broader market, are clear indicators that its too early in the melt-up. That fits the narrative that non-participants have started testing the waters. The sleeping giant ITC, moving 10% in a day is also an indication of testing waters. Even-though the index rallied, the broader market was a mixed bag. As usual, sectors rotations pulled the index up instead of pulling the entire market. Financials, Metals, PSUs, Pharma and few others did not perform. A melt-up is assisted by a uniform increase in prices among the whole spectrum of stocks. Only when both the heavy weights and the light weights of Nifty rallies together, you would see an exponential move on the index and gets qualified as a melt-up. But we haven't seen that yet.


But the seeds have been sown. The litmus test to the seeds is the sharp pull back seen over the past few days with news and event driven volatility. The market used the Evergrande news and FOMC event to expand volatility. Sharp corrections just ahead of an event are usually deceiving. They are setups for bear/bull traps. Pockets of bullish sentiment are visible too. People were quick to brush away the Evergrande event as one-off, non global in nature and justified their bullishness stating China would control it. The event in isolation may not be a threat like the Lehman crisis, still the broader issue at hand is that corporations are defaulting on debt. As cognizant investors, people should keep a tab on similar events across the globe, to see if there is a pattern of defaults. But bulls are in no mood for that.


So ultimately, these individual events feed volatility for bears to cope. Volatility is the trigger for sentiment conversion. It plays with your mind, making you feel you are correct at one moment, wrong the next moment and ultimately making you lose confidence. Whether the bears lose confidence or the bull will depend on which side the price emerges from volatility. With non-participants brooding over the options, its likely that price emerges on the topside. Market action correlates too. The very next day after a 250 point drop, DII pumped 2000 crores into the market, probably the NFO money. With Mutual Fund inflows turning postive in the past few months, money flow is expected to keep increasing in cycles of dips being bought, creating incremental returns, increasing non-participant confidence, leading to more money deployed, eventually into stocks directly.


No Melt-Up Yet
No Melt-Up Yet

It is a long process. There is no telling how long it takes for bearish sentiment to be fully cleansed. If the market recovers to post fresh all time highs, the bear cleansing process only quickens. It instills the idea that dips are to be bought and strengthens the narrative of the bull market. If market falls deeper, say 10-15%, depending on effect of FOMO on their conviction, it could go either way. The recovery coming out of the correction is the hint. When reluctant participants become willing participants, that's when things go vertical. But until that happens, a blow-off top is not possible. As far as levels are concerned, any rally from here on should take Nifty to mid 18k. Om the down side, a mere 10%, points to 16k on Nifty. With market sentiment as fragile as it is now , it would take significantly longer time for bearish sentiment to become unconditionally bullish. Whatever level is reached first, the sentiment indicators and patterns forming on the price chart at that time would tell us whats in store for the market. But first, let watch this hurdle.

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