astute: What drives the stock market? Noise or facts?

Despite all the global headwinds, talk of inflation and recession, Indian markets have seen renewed energy. The past two months have been encouraging. In the month of July, Sensex gained 9.4%, while in August it posted gains of 1.5%.

The short-term market is mainly influenced by facts or noise. Facts for obvious reasons act as a stronger indicator of a trend’s sustainability. Thus, it becomes important to understand what drives the market.

Here are some of the points that have been discussed far and wide in the market, let’s look at them individually~

1. Economic slowdown in the United States and Europe.

There has been a lot of talk about decoupling India from the West. The view is that India will continue to experience growth despite the underperformance of its Western peers. But if we look through history, the GDP growth rates of India and the United States have been pretty much in line with each other. Represent that any downward movement in the US economy will also impact India.

picture4 (1)Agencies

2. But is the US recession really bad for the Indian market?
Overall, markets move in cycles and tend to be forward-looking. Therefore, good news and bad news are ignored before they actually happen. The news that the West could be entering a recession is no longer ‘NEWS’. It was quite reduced by the market as it had for previous major events.

picture3 (1)Agencies

So when the economy really gets into turmoil, then most of the bad news gets ignored. And markets, when in the midst of chaos, have limited downside potential and strong upside potential.

3.FII returns but will
does it hold up?
One of the main reasons the markets saw a number of sharp moves over the past couple of years was due to the selling off of FII. From January to March 2020, the Nifty fell by 40% over the same period, FII sold INR ~54,000 crore. While from May 2020 to March 2021, the Nifty gained 71% on FII purchase of INR ~272,000 crores. The trend is visible in the graph below.

picture2 (1)Agencies

In the last months of July to August 2022, FII announced their return and invested INR 54,157 crore.

The main reason they were net sellers was rising interest rates. Therefore, their full return depends on the reversal of rate hikes. Interest rates are expected to peak next year. The Fed raised its key rate from 0.25% to 2.5%. In July, inflation eased somewhat in the United States and stood at 8.5% in July compared to 9.1% year-on-year. So, in anticipation of peak rates next year, FIIs could have made a comeback in Indian markets. Which, as we now know, is a healthy sign of an uptrend.

The market has moved from pessimism to cautious optimism. With better expected corporate profits, the return of FIIs and a spike in inflation in India, this optimism seems to be influenced less by noise than by facts.

Technical outlook:


Markets pulled back with decent gains of 1.68% this week after falling for three consecutive weeks. This drop is seen as a healthy correction in a medium-term uptrend. The bulls had a well-deserved break after a strong rally from 15,200. Now that the bulls have regained strength, they will try to remove 18,500 levels over the next few weeks. In the immediate future, 18,000 would act as resisters followed by 18,500. In the immediate future, support is placed around 17,500.

Expectations for the week:

Globally, markets are expected to react to the highly anticipated US inflation figures. US inflation figures released last month fell to 8.5% from 9.2% year-on-year. Global markets will have a keen eye on this figure as it will influence the future course of rate hikes by the Fed. Back home, a host of important events should be released. Indian inflation figures have been on a downward trend since April 22. Whether or not this continues will be eagerly awaited. Moreover, trade balance of payments and export and import figures would keep the market on its toes. Nifty50 closed the week at 17,833.35, up 1.68%.

About Chris McCarter

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