Staying Alert is the Best Option
The Nifty has gained more than 1,500 points from the lows of 13,661.75 to hit an all-time high of 15,257 and after this vertical rise it has hit a pause button, which is evident from the closing levels of the last three trading sessions i.e. February 8-10. During this period the Nifty has witnessed similar closures around the 15,110 level. With similar closes, one may assume it to be a period of lull, but closing prices do not reflect the complete action of the day. Rather, the complete story of the trading session is reflected by the daily range i.e. the difference between the high and low of the day, which had surged to 190 points on Tuesday and Wednesday from 118 points on Monday.
Moreover, if one views the difference from the opening of the day to the close of February 9-10, it is minuscule; as a result we are seeing an indecision candle formation i.e. a small body carrying shadows on either side that indicates the market’s indecisiveness. Due to this indecisiveness of the markets, trend traders are clearly feeling the pinch due to lack of directional trades on the index. But the FIIs continue to remain buoyant and this can be gauged from the fact that their fund flow has remained strong FIIs have pumped in Rs 18,559.38 crore month-till-date. On the other hand, DIIs have pulled out Rs 9,049.38 crore from equities so far in February. Therefore, the same old saga continues regarding fund flow activity i.e. FIIs buy, DIIs sell !
If we look at the fund flow activity from FIIs in Indian equities over the last 10 months beginning May 2020, the FIIs have pumped in a whopping Rs 1,81,855.46 crore, where September 2020 has been the only month when they have turned net sellers with an outflow of Rs 11,410.69 crore. With this their investments in Indian equities have reached historically high levels. Further, according to data compiled by PRIME Database, the shareholding of foreign investors in listed companies is at the highest level in five years. FIIs held 22.74 per cent stake in NSE-listed firms at the end of December 2020 quarter, up by 123 basis points over the September 2020 quarter.
The fund flows from FIIs have definitely turned them into superheroes of the Indian markets and with their ownership in the Indian equities reaching up to five years, give a thought as to what will happen when they decide to pull their money back. Won’t it lead to a ‘bubble burst’ when they pull out funds from the Indian markets? We are not saying it may happen tomorrow, but could happen at some point of time when the US Fed returns to normalcy and raises interest rates. And, this could lead to another taper tantrum which was also witnessed in 2013 when fears of higher US interest rates caused foreign investors to pull billions out of all emerging markets, including India.
Also, to grasp the impact of foreign funds’ outflow, we could ponder on a recent incident which took place during the pandemic. When the corona virus pandemic struck, foreign institutional investors pulled out a massive sum close to Rs 65,800 crore in March, and this led to a catastrophic fall in the markets. Nifty crashed from the level of 12,000 to 7,511, recording one of the fastest bear markets in history. So as investors we need to be prepared for a major risk which could threaten the ongoing uptrend. If we see some evidence of playing out these major risks in reality, the best thing to do would be to exercise caution. Hence, it is wise to be prepared and stay alert! In the near term, the level of 14,860 is a crucial support for the index and below this level the bears are likely to flex muscles and demonstrate their strength. Also, going ahead all eyes would be on domestic macro data like IIP, CPI and WPI as they could dictate the near-term trend of the markets.
