Nifty – Bank Nifty Week 1 – 2018
This is going to be a long post. So please bear with me. Subsequent weekly updates will be much smaller and wont take up much of your time.
What to expect in 2018
Firstly, I doubt this will be the year for Index. Trading moves will definitely come up but sustained trending move is doubtful. Secondly, I think this year we’ll see sharper pull backs and more volatility. Stock pickers will still benefit but timing in 2018 will be more important than ever. I would also like to caution Option writers this year as we will have more frequent reversals and more gap openings. Option buyers on the other hand stand to benefit if they periodically book profits on the trade. In short, moves will be short lived and will be marred with volatility.
Apart from valuations, there are lot of genuine concerns across the globe. While valuations are subjective, some Geo political issues need more attention at this stage. For the first time in many decades, there’s a genuine leadership crisis in the World. Many World leaders at present lack the vision and common sense to ensure peace and prosperity around themselves and their immediate neighbors. Too much of lose talk and lack of purpose dominates foreign policy these days. While this is fine at some level, but on a larger scale this is not healthy for Equity markets. Equities are more sensitive to Geo political events and I feel in 2018 we’ll see lot of irrelevant and meaningless rhetoric which might escalate to things which markets don’t like.
Locally, we have many things to be worried about. Growth is yet to show a pickup and to top this, inflation is showing signs to trend higher. Given the recent Election verdict, it does seem that NDA is heading for a tougher than expected fight in 2019. I personally feel that General elections will be held sooner than expected. This could happen anywhere between November ’18 to January ’19. Present Government will also face anti incumbency along with a united opposition in 2018-19. Its never easy to win a second term and unless Economy shows massive improvement, there are many things on which the Opposition can hold this current Government accountable heading into Elections.
Domestic Institutions to the Rescue
Last year, we have seen how Domestic inflow has helped the market scale new highs. Staggering amount of domestic money is flowing into equity markets. If this theme continues in 2018, our markets will remain well protected. However, it needs to be seen if the quantum of flows remain the same. With uncertainty, flows can reduce and if that were to happen, our markets would eventually correct. FII’s have pulled out money consistently since Feb’17 and DII’s have bought at least 1.5 times of what FII’s have sold and this has helped our markets perform well for the year 2017. Fund flows will have to be watched this year as well. Especially after how Budget shapes up.
Price Structure & Trend Strength
On higher time frames, both Nifty & Bank Nifty are still sustaining good price structure. Higher high and higher low is still intact. Long term charts are still very bullish for most major Sectors and Indices. However, medium term chart for both Nifty and Bank Nifty is indicating loss of momentum and signs of consolidation/correction ahead. Its difficult to ascertain whether we will have a time or price based correction but as of now, we are just having a time based one with well defined ranges. Individual stocks though will continue to give opportunities throughout the year. Trend strength ratings for both Nifty and Bank Nifty are below 1 on medium term charts. Ratings are above 1 for short term and long term charts and this is a bit of problem as all three time frames are not aligning with each other. Trending moves usually happen when all time frames (short term, medium term, long term) suggest the same thing.
Volatility is at historically low levels and this is very well documented. India VIX did show signs of edging up in the last 2 months, but Global volatility remains at very low level. History teaches us that volatility is more cyclical than price and if we were to go by past leanings, I think we should brace ourselves for very volatile moves. What this means for traders is to have less aggressive stop losses and account for volatility while setting them. Aggressive (too near current market price) will cause whipsaws and unnecessary exits from current positions. Therefore, keep slightly wider stop losses and be prepared to ride the volatility along with the underlying trend. Focus more on position sizing and risk management. In most cases, your positions should be determined by the risk you are willing to take per trade.
While India has done well in 2017, its important to note that we are not among the best performing markets in the current bull cycle. Therefore, keep a tab on what S&P 500 is doing throughout 2018. If global trend starts to dwindle, we will follow the same despite positive reforms taking place in our country. I do not think India is still shielded from any Global uncertainty. We still have a long way to go in those terms.
Wishing you and your loved one’s a very Happy and Prosperous New Year. Trade well and be safe.