Weekly Market Recap
The market has rallied a lot in the past two weeks and a ton from its March low, which is certainly encouraging. As expected, and in line with last week’s strong closing, this week started off with a solid upsurge, however, it appears that the rally on NIFTY interrupted precisely at a crucial level, as I mentioned last week the possible overhead resistance could be at the extended line drawing from its previous two peaks see the chart below.
In the week gone by, the benchmark SENSEX after having a strong gain and a sharp pullback ended almost flat with a minor gain of 170 points, or .29% at 59447. Similarly, NIFTY added 113 points, or .64% to close at 17784. While BANKNIFTY which is changing its stance quite frequently from laggard to leader ended strong with a gain of over 1.5%.
Current Outlook
After having a big surge this Monday, NIFTY fell back modestly later this week but looks like some important changes took place beneath the surface. I investigated a few changes which I feel are important to consider. Most importantly, I witnessed a reverse divergence between NIFTY and the VIX (volatility index) ideally, they move in the opposite direction, however, this week when NIFTY corrected from its high VIX continued to decline. Since the NIFTY recovered from covid, the VIX predominantly hovered in the range of 15-30, where high reading in VIX reflects a low on NIFTY. In July and August 2021 VIX breached its lower level and fell to the lowest reading of 12, consequently which echoed on the level of NIFTY when it made a new all-time high in October 2021.
Now, again the VIX has reached near its lower level of 17, and NIFTY is approaching higher, there is a fair probability that the top on NIFTY is not far away. Though, this relationship sometimes is not perfect in identifying the peak and bottom but helps us to be prepared before the final turnaround occurs.
Moreover, inflation worries are again getting the attention of investors and the central banker’s word wide. That is reflecting gold prices after falling significantly from their recent peak it has again started moving higher. Combining these factors tells us to remain cautious.
Conclusion
What we think does not govern how the markets actually behave. Our job is to figure out the impending possibilities of the stock market, not to prejudge how perfectly these possibilities ought to work. There is sufficient history to show us that the above relationship is not favorable for stock prices. Hence, perseverance is the key.