Reblog: 10-year history shows August is for the bears; can Nifty50 kiss 9K this time?
The original post appeared on the website of Economic Times and can be found here.
The Nifty50 rallied over 4 per cent in July and the trend may continue in August too. Technical charts and options data show a bullish picture as off now, which means if the market managed to sustain the momentum, Nifty may very well touch the 9,000 mark in August.
But here is the spoiler. Data for the past 10 years shows August has not been great for the bulls. On an average, the Nifty50 has given a negative return of nearly 1 percent in last 10 years. The index saw deep cuts of over 5 percent in August in three out of last 10 years.
In 2011, the Nifty50 saw a vicious cut of 8.8 percent in August, followed by a deep cut of 6.6 per cent in 2015. In 2015, the Nifty50 plunged 5.8 per cent.
This is not 2015 or 2011, but 2016, a year of greed, to say the least. The hope rally has already pushed stock valuations higher and most experts advise investors and traders to remain cautious and trade with strict stop losses.
Having said that, the liquidity-driven rally could very well take the Nifty50 towards the 9,000 mark in August series. The maximum Call open interest of over 40 lakh contracts now stands at strike price 9,000.
The possibility of a likely passage of the GST bill in August and hope of a rate cut by the Reserve Bank of India (RBI) in next policy meet on August 9 will keep the momentum going.
“The next push to the market could mainly come from the passage of the GST bill, which is closer to becoming a reality. With the earnings seasons not giving any major worry, the Nifty50 may retrace its lifetime high and touch the 9,000 mark,” Venu Madhav, Chief Operating Officer, Zerodha, told ETMarkets.
Options data shows most participants are bullish on the Nifty futures in August series. The highest Call option buildup was seen at strike price 9,000 while highest Put buildup was seen at strike price 8,500 with total OI of over 40 lakh contracts.
Foreign institutional investors (FIIs) have been the biggest driver of the rally on Dalal Street. They poured in more than Rs 9,000 crore in July. DIIs have been mostly sellers in the market.
“Technical charts suggest the Nifty50 has crossed its crucial resistance at 8,620 level, and a close above this mark as well as above 8,650 on a weekly basis has opened up the possibility of the index touching the 8,790 and 8,860 levels,” Mustafa Nadeem, CEO, Epic Research, told ETMarkets.com.
“On the downside, the line of sand is now at 8,550 and 8,400 as per the OI data. For August, the broader range of the index is placed at 8,500 and 8,890 levels,” he said.
Is there too much optimism?
The market does look ripe for an extended rally. But isn’t there too much optimism? It looks like there is no stopping of this liquidity-driven rally.
It would not be wise to bet against the tide. So, do not go short right now. Instead, traders should trade with strict stop losses So that they can protect themselves from erosion of wealth whenever the liquidity tide recedes.
Sentiments can change from greed to fear overnight, causing a correction to begin, experts said. Traders should trail their stops on long positions and investors should stay on the sidelines.
“There is too much optimism in the market right now. Huge options position in the out-of-the-money contracts is a testimony of pervasiveness of greed on the street. Market seldom heeds to consensus,” Umesh Mehta, Head of Research, SAMCO Securities, told ETMarkets.com.
“As the saying goes, stay away when others are greedy. And that is the right thing to do now. The 8,300 level on the Nifty50 would be safe for positional traders and investors to initiate long positions again,” he said.