In our last post, we looked at the implications of the Nifty 500’s breadth and momentum divergences.
In this post, we’re outlining the three charts we’re watching this week to help determine risk appetite for stocks.
First, let’s start with the Nifty 100 vs Nifty Free Float Small-Cap 100 ratio chart which is breaking out to new all-time highs.
The continued rush into Large-Cap stocks which we’ve seen since stocks topped in January 2018 shows that market participants are “hiding out” in quality names as opposed to going out on the risk spectrum into the Mid and Small-Cap space. Until this defensive posture changes, there’s little reason to think “the bottom” in stocks has begun to form, let alone finished.
Click on chart to enlarge view.
Our second chart is the Nifty 50 on an absolute basis. If the strongest area of the market, Large-Caps, cannot get back above their 2015-2016 highs of 8,900 then the bullish momentum divergence formed last week remains unconfirmed and the risk remains to the downside. And if Large-Caps are falling, there’s no shot that Mid and Small-Caps hold a bid.
Last, but not least, is the Nifty Bank Index which looks very similar to the Nifty 50 and Nifty 500 charts we’ve been sharing…no surprise there given it’s the largest sector of the market.
Nonetheless, until the Nifty Bank Index gets back above 20,500 and sustains above it for several days/weeks, there’s no reason to be buying stocks. Quite the opposite in fact.
These three charts, along with the divergences outlined in the Nifty 500, will set the tone for the market in the coming week(s).
If you are a shorter-term trader, enjoy the volatility. There will continue to be enormous swings in both directions.
If you are a market participant with a time horizon of several weeks to several months, cash remains best until we see the things noted above and outlined in our other post. And even when we do start getting aggressive, any longs we take will likely be short-lived as there is a ton of overhead supply in stocks…people with a lot of losses looking to get out as close to even as they possibly can.
This type of damage doesn’t repair overnight. It takes time, but these are the things we’re watching for in the near-term to suggest last week’s subtle improvements are deemed meaningful by the market.
Thanks for reading and let us know if you have any questions!