Analyzing market trends; Assessing December’s surprising rise and speculative capital flows

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If we look at the rise since late October, which has been surprising in terms of steepness as well as how broad based it has been, we can see that while Nifty registered a gain of approximately 14%, mid and small cap indices had risen around 22 and 24% respectively.

This suggests that the smaller cap companies had already become buoyant and travelled quite far when compared to the blue chip companies, as it is usually the case with most bull markets. Thus, given how broad based the ongoing rally has been, and the return of FIIs lending positivity, we could still see speculative capital chasing smaller stocks, but given how far the theme has stretched so long, fresh entry is very likely to be stock specific.

Atleast during the last five years, a more deciding factor for the second half of December has been the nature of the lead up to it. Positive run ups during the lead period have had corrections or consolidations in the subsequent fortnight, while declines during the lead up were followed by upswings especially so in the last five years.

On the eve of the last elections, the first 10 days of December saw declines helping the subsequent push higher in the next 10 days followed by consolidation in the rest of December as well as till the beginning of March. Now we are entering the second half of December red hot, and if history repeats, we are likely to see a decline in the rest of December, followed by a consolidation period, before election vibes bring in more traction.

Being overbought is a relative term, especially in a bull market, when stocks remain in highly overbought levels for sustained periods. This is the case now as well, and overbought conditions prevail even in weekly periodicities. However, negative divergences have also started to show, suggesting that a swing lower or a consolidation is highly likely in the next fortnight. This construct leads us to put a cap on upsides at 21600/670 for the next fortnight. Further, 2sd range is at 10%, calling for high volatility expectations going into the next week. Meanwhile, Bank Nifty appears to have room for upside till 49000-49800 unless we see a turn back below 47300.

First published in Financial Express

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