Technical Gauges Hint Indian Stocks in Overbought Zone
Incremental inflow from quants, ETFs and hedge funds may see a slowdown
ET Intelligence Group: A sense of cautiousness may be developing among hedge and quant fundsastheIndianequitymarket scales new highs.
Three technical parameters indicate this. First, as high as 23% of the Nifty stocks are trading at 52-week highs. Compared to this the percentage of stocks at oneyear highs in the top 20 markets is between 2 and 14%. The US market, which is trading at record levels, has only 10% stocks in benchmark index that have crossed one-year high prices.
Second, barring Hong Kong, the stocks trading above the 200 days daily moving average (DMA) is highest in India. According to Bloomberg data, 80% of the Nifty constituents are trading above 200-DMAs.Whilecrossingthe200 -DMA mark hints at underlying bullishness, the scrips that have languished so far have joined the rally. It’s a sign of higher risk appetite of traders, brewing fears of aggressive selling if current trend reverses.
Lastly, relative strength index, or RSI — a measure of momentum — of the Nifty is over 70. (RSI is based on per day rise of stocks or index in the past 14 days) Typically, technical analysts believe that if RSI is more than 70, a market is in an overbought zone. Except Hong Kong, India is the other key market where RSI has crossed 70. In the past 10 years, RSIhasconsistentlystayedabove 70ontwooccasions.Itwasaround 79 in 2015 and 79.4 before the collapse in 2008.
It will not be a surprise if incremental inflow from quants, exchange traded funds (ETF) and
hedge funds to Indian equities slow down in the coming days. These funds have been significantly investors this year. Typically, these momentumbased funds follow a ‘pyramid strategy’ — they multiply their bets as long as their directional call is proved right; this means they can dump shares or go short as agg ressively as they bought. ETFs have inve s t e d more than $1 billion in Indian equities; assets under management of India-focused ETFs, such as WisdomTree and ishare MCSI India ETF have increased 20-40% since January 2017. Also foreign portfolio investors (FPIs) have invested $8.7 billion in India equities in the seven months of the current year — higher than their total investment in the past two years.
FPIs have invested $8.7 bn in India equities since Jan — higher than their total investment in the past two years