If Nifty50 falls below 16,500 mark, it will be a short-term bearish signal

Higher interest rates and tighter monetary policy, combined with slower growth, are a bear-market recipe. These are synchronised global trends at the moment. On the risk-off logic, many investors are pulling out of emerging-market equities.

In purely technical terms, the Nifty’s trend is indeterminate and hard to read.

The accompanying chart has been normalised to illustrate Nifty movements since January 1, 2021 - set as the base. The index gained 30 per cent by mid-October 2021 (peaking at 18,600-plus levels). It trended down until June 2022, when it hit a low of 15,183 - a correction of about 16 per cent. Even after this drop, it was still 9 per cent above January 2021 levels.

Between June 22 and September 14, there was a sharp rally. The index went negative in mid-September 2022 after it hit a 11-month high of 18,090, and it dipped below its own 200-day moving average (DMA) last week before recovering to just above 200-DMA on Friday. It is currently held at around 21-22 per cent above January 2021 levels.

The 200-DMA is generally a good indicator of a long-term trend. A market running above 200-DMA is considered to be in a long-term uptrend and vice versa for a market running below 200-DMA. A market that’s hovering around 200-DMA - as the Nifty is in right now - is hard to interpret in terms of trend.

Global market indices are down. The foreign portfolio investor (FPI) attitude is negative. FPIs became net-sellers last October (when the market uptrend reversed). They have been net-sellers of Rs 1.9 trillion in the past 12 months. They have been net-buyers only in July-August 2022, giving fresh impetus to the rally referenced earlier.

Domestic institutional investors, including mutual funds (MFs), have, however, pumped in over Rs 3 trillion into the markets in 12 months. MFs continue to see net inflows into equity schemes, but the volume of inflows has reduced noticeably.The mutual equity segment is driven by retail investors, and specifically by systematic investment plans (SIPs). One guess would be, as SIPs hit expiry, some of these plans are not being renewed. Direct retail equity selling has also been high.

Trends following traders set various benchmarks. One rule of thumb: it is a bear market if there is a successive pattern of lower lows, and a bull market if there are successively higher peaks.  We have seen lower peaks, but not lower lows.

The Nifty would have to fall below 15,100 to break the June 22 low. It would have to rise above 18,605 to hit new highs. If it does either, we would consider it a long-term trend, which could move another 12-15 per cent more in the direction of the breakout. If it does neither, the index would trend sideways within a rather narrow range of 16,500-18,500.

A first signal would be a rise above 17,700 (tentatively bullish and a breakout beyond 21-DMA, which many traders track), or a fall below 16,500 (likely bearish since significantly below 200-DMA).

There are several data series worth watching. One is investor attitude. If FPIs continue to sell and retail continues to cut exposure, domestic institutions will not be able to prop up the market. MF inflows are also a useful indicator – if equity mutual inflows dry up or become outflows, we will assume retail attitude is breaking down.

Look at valuations: the Nifty price-to-earnings (P/E) ratio has dropped from 28-29x in October 2021 to around 20-21x now. It would look more sustainable if it falls further within the 15-16 P/E range. This could occur through time correction – the index trades sideways, while earnings per share grows. Or it could occur due to a bearish price move.

Another data series that is more difficult to infer is the lagged correlation of the Standard and Poor’s 500 (S&P 500) with the Nifty. There are few extended periods when the Nifty has sustained an outperformance, while the S&P 500 is moving down. However, it is doing better than the US at the moment. If US markets do not stabilise, the Nifty is also likely to slide further.