The week ahead: Brace for earnings, inflation data

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A sharp decline in VIX by over 4% on Friday suggests that volatility expectations have receded. Will this pave way for the continued rise in Nifty? This is the moot question as we go into the second week of July, and as earnings start to flow in.

Though it cannot be said that FIIs have started to buy, it is evident that their persistent selling is easing off. Their average net sales per day, in the first week of July, was just Rs 443 crore, when compared to Rs 2,641 crore net sales per day in June. This gave a buoyancy to the market in the last week, but we are not convinced that this can be unilaterally seen as a trigger for more upsides. Matter of fact, as much as FII selling receded last week, average equity purchases by DIIs declined to just Rs 782 crore per day on an average in the same period, as opposed to Rs 2,118 crore worth of purchases per day on an average in June. 

FII’s positions in index future shorts have declined sharply from extreme situations of previous month, and this was one for surmises expecting 16200 last week. However, their boosting of Index future longs has not been commensurate with the expansion in the index future segment, with larger increases done by proprietary traders and retailers, even as FII’s index future longs remained well below July average. Additionally, Nifty’s option spectrum, points to premium scalping approaches with OTMs of both PEs and CEs attracting shorts. All of these suggest a lower chance of a directional upside in the coming week.

Meanwhile, last Friday’s US Non Farm Payrolls release showing a healthy jobs market will push all the recession talks into the background, and give bigger room for the Fed to continue with their hawkish stance. This would mean that we would start the week on a dollar positive note. Additionally, commodities which have been on a sharp decline through June, are poised to recoup some losses, which should add decibels to the inflation speak. This could mean that the caution will dominate in the first half of the week, as US CPI and India CPI are scheduled for Wednesday and Thursday respectively.  

We had gone into last Monday, with 16200 for the week as the base case scenario followed by a turn lower, and 17000 for the medium term as the optimistic scenario. With Friday’s opening burst meeting rejection trades at the 60d SMA of 16280, the strength of uptrend would be put to test on Monday. A push above 16235 early in the day, would encourage up moves to aim for 16340 during the day. Sustainability is doubted though. Inability to float above 16195 will expose 16150, Friday’s strong support, as well as 16115, the downside marker for the present up move, with 15940 seen as catchment area, in the event of major downsides. 

First published in Financial Express