Budget 2022 seems to have sung a pretty decent aria, the one the finance minister has been singing for a while now. One of the distinguishing features of recent budgets is that there seems to be a kind of continuity, a factor that was often missing in earlier times.
The consensus was that this was a growth budget. The differences of opinion were largely about when this growth would kick in and under what circumstances. Thus, one of the great fears of marketers has been dispelled, namely that the budget would turn out to be a big party poo. A few also hoped it would pave the way for rapid progress. Neither happened.
The market positioning before the budget was interesting. As the January F&O series had just been completed prior to the event, it can certainly be used to gauge the possibilities. The first thing seen was that Nifty Futures was at its lowest in around seven months, with positions light at around 1 crore in shares, compared to the usual around 2 crore. Early indications of options shorting were missing for call options, implying that people didn’t really want to take a position.
As usual, the volatility index rose ahead of the event, but its upward trajectory was also helped by the sharp decline at the end of January. The VIX’s immediate response was to lower, after the budget. Its advance will certainly indicate whether traders are comfortable or not. Below 17-18, the bulls will reappear while the continuation or rally beyond 22 will see the bears increase the pressure of their grip. The first chart shows the movement of the Nifty against the Indian VIX. It looks like the market may have caught wind of the benign nature of the budget.
Over the last three quarters we have seen the long awaited corrective moves appear in the Nifty and although the drop from October to December was the biggest with a 12% drop, there were two further 8 drop %. The most recent was much more severe with significant damage to stock prices, mainly due to persistent selling by foreign portfolio investors.
On the other hand, bruised bulls may want to see if January’s volume-weighted average price zone of 17,650 can be regained and sustained. During the strong rally of the past few days, the Nifty rallied directly into this zone and found itself caught in a minor stalemate as bond yields rose post budget. But this VWAP zone remains the key zone for the bulls. They must raise the Nifty above this level and stay there if they are to rebuild their campaign.
I’m still looking to buy the dip from the support zone as the big picture (weekly and monthly charts from Nifty) is nowhere near giving up the ground gained over the past couple of years. FII longs in the Nifty have been reduced quite heavily over the past month and are currently a big net short, in fact at their highest since March 2020. If anything positive happens then simple short hedging can do climb the markets while negative situations may not. see lower long sell-off pressure values. For this, they should step into new shorts. Not that they can’t, but this long sell-off in a market where buyers are lacking creates greater damage. The following graph shows the position of FIIs in open interest participation on the index.
Please note that I used the adjective “robustly”, so simple hits beyond the limits of the range will not suffice. A good ongoing trend requires us to be with it rather than against it. Only new evidence can make this possible.
The inventory area was also interesting. Three to four major sectors rule sentiment and show broad trader participation in F&O. Two of them, IT and the pharmaceutical industry, were among the most battered sectors with a drop in prices of 13% and 9%, respectively. Again, this may be due to the significant involvement of FIIs in these two sectors. IT majors released decent results and reviews for T3FY22, but the market remained unmoved. What is even more interesting here is that the sector’s overall open interest has increased by around 22% and this can be interpreted to mean that traders have been building up short positions in the major names here. In contrast, pharma continues to see losses in OI, implying that long selloffs may still be underway here, but some short-term hedging may also occur selectively. So far, the pharmaceutical results haven’t really helped much. Therefore, it will take a few extra hands to create a sustained rally in pharmaceutical stocks.
Banks and metals are the other areas of high interest. Banks saw prices rise but lost OI, implying that the higher levels may have been used to exit pending longs. On the other hand, metal stocks saw their prices increase with a small addition to the OI base.
The following chart shows the Nifty against the Metals Index. By the end of December, the metals were already bottoming higher (i.e. diverging) and the rally on budget day was strong. Expecting this outperformance to continue.
The focus on capital spending should no doubt bring the focus back to cement stocks and we saw a few turn bullish on budget day. The fourth graph shows the performance of Nifty against ACC Ltd., India Cements Ltd. and UltraTech Ltd., three popular cement meters.
In a previous article, I pointed out the close relationship between Dollar/Rupee and Nifty movements. Around the budget, there was high volatility in the USD-INR rate which also introduced some volatility into the Nifty. While the rises in bond yields in the US have been the subject of commentary, we don’t really care about the surge in bond yields in India.
The currency pair rallied, but not enough to scare off Nifty trends. The final chart shows the recent relationship between the dollar/rupee and the Nifty. So far, the Nifty still seems to be in good shape.
In summary, a major event has just ended. The fear in some minds should now dissipate as the budget turned out better than expected. It is possible that the gains are a bit secondary. But the market is known to live in the future. The leadership may change after this budget, towards the infra space. Implementing the government’s course of action would be key to the sector and stock selections going forward. We continue to remain in a declining market. I would expect Nifty levels at the end of February to be much better than today.
CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise and NeoTrader; and Chief Investment Officer of Plus Delta Portfolios.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.