Tech­ni­cal Gauges Hint In­dian Stocks in Over­bought Zone

In­cre­men­tal in­flow from quants, ETFs and hedge funds may see a slow­down

The Economic Times - - Companies: Pursuit Of Profit -

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

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