Weekly Market Recap
Market continued to rally to new high this week, both SNESEX and NIFTY have closed at their all-time high. Although there was slight sign of decline in momentum appeared in last two days but need to watch coming week price action before we can conclude that.
In the week gone by the benchmark SENSEX reached at new height with a solid gain of 1019 points or 2.26% to settle at 46099, similarly, NIFTY added another 255 points, or 1.93% to close at 13513. And BANKNIFTY gained 1.84% in line with major indices.
Current Outlook
I think, it is the fastest unprecedented rally in the history of the stock market from the low in March to new all-time high in November and since then new highs are being witnessed every week. However, looks like never ending rally finally appears, is going to take a pause post this week price action. Momentum and sentiment speak a lot. Ideally, deterioration in momentum appears first before the cardinal top formed by the price. Similarly, sentiment measures are environmental to the stock market. They speak to the general state of speculation in stocks, but at the same time it is difficult to use for precise timing. Moreover, sentiment is considered in a contrary way for speculative market. Current rally might not be the speculative driven provided the market has discounted the strong recovery in the economy. However, put call ratio indicating that speculative conditions are taking place.
when an extreme volume of Puts is trading in relation to Calls it is considered generally bullish for the future direction of stocks. An excess of Call buying is seen as bearish for stocks. I find the CBOE Equity Put / Call Ratio to be helpful in measuring and understanding the state of speculative sentiment toward overall stock prices. Current put/call ratio reading has reached at extreme lower level and at the same time overall price momentum appears to be slowing. In contrast, in March there was extreme higher reading in CBOE, where put buying was extremely high along with slowdown in falling stock price momentum, consequently price got reversed dramatically.
I am not saying that market is going to fall sharply but put/call ratio is reflecting high call buying which reflects bullish speculation. There is no telling the when or how of a market reaction to extreme sentiment readings. Stock market indexes can respond by mildly pausing, or conversely have sudden stiff price reactions as have been experienced few times earlier in past years. From these indicators we do know that bullish speculation is high, and that it is a crowded trade. It is harder to profit when the crowd has grown large and many are doing the same speculative activities. Therefore, caution is warranted and outlook turning out to be more speculative and less positive.
Conclusion
As I said it is difficult to timing the cardinal top when speculative conditions appear, but we can take disciplinary action in order not to be a victim of speculative market because the swings in that kind of market is going to be wild. Hence, be patient and do not chase the price, let the price provide you a descent entry.
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Be disciplined…; Be a Savvy Investor..!!
Pankaj