Moneycontrol Pro Market Outlook | Can India’s market momentum survive global uncertainty?

Strong buying in IT stocks, upbeat second-quarter earnings, a firmer rupee, and steady support from domestic institutional investors were the main reasons for the strong performance of frontline stocks. The Nifty Midcap 100 index added 0.6 percent, while the Nifty Smallcap 100 index ended the week largely flat. Market capitalisation of BSE-listed companies swelled by more than Rs 7 lakh crore. Information technology stocks led the rally, with a 11.7 percent gain, the biggest weekly gain in 18 years.

Sentiment got a further push when Infosys CEO Salil Parekh said AI services accounted for over 8 per cent of the company's second-quarter revenue and were growing at a double-digit rate sequentially. The contrasting strength of Indian IT stocks versus global peers is sparking debate about whether Indian companies could serve as a hedge against global AI-driven sell-offs. Besides IT, the Nifty Media index jumped more than 6 percent, and the Nifty Auto index gained 3 percent.

The Nifty Realty and Nifty Defence indices advanced 2.7 percent and 2.2 percent, respectively. Defensive sectors lagged as money rotated toward growth and cyclicals. The Nifty Healthcare index slipped 1 percent, while the Nifty Pharma and Nifty FMCG indices fell 0.7 percent and 0.55 percent, respectively. The rupee snapped a two-week losing streak and recovered 178 paise to close at 94.95 per dollar on October 16, compared with 96.73 on October 9.

Measures from the Reserve Bank of India to support the currency helped, and the delay in implementing UPI MDR fees added to the positive mood. FPIs continue to sell, extending their selling streak to an eighth consecutive week and offloading equities worth Rs 8,990.50 crore, taking the month’s total sales to Rs 48769.01 crore. Crude oil prices continued to rise as the war in the Middle East raged.

Brent began the week at $ 104.95 per barrel on Monday and reached a high of $ 110 per barrel on Friday. However, Wall Street ended the week on a weaker note, in sharp contrast to the rally at home. A heavy sell-off in artificial intelligence stocks, higher than expected inflation data and the start of third quarter earnings season pushed investors out of large-cap growth names and into value and defensive pockets of the market.

The tech-heavy Nasdaq Composite fared the worst, falling 4.48 per cent, while the small-cap Russell 2000 Index lost 3.05 percent. The Dow Jones Industrial Average bucked the trend and added 0.67 percent. Looking ahead, the market enters the coming week with momentum on its side. After a double-digit surge in IT, some profit booking in the sector would not be surprising, and the pace of gains in the broader market could cool.

Traders will watch the remaining second-quarter earnings closely. The direction of crude oil will be a key variable, as will FPI flows. On the weekly chart, the Nifty closed at 23,146.15, up 2.78 percent for the week. The yellow trendline has acted as strong support over the past few sessions. A Doji had formed near this support the week before, and this week's strong green candle confirmed that Doji reversal pattern, which points to the possibility of a recovery.

Even so, prices still sit below the 40-week EMA, and the RMI continues to signal bearish momentum. That calls for caution, despite the improving price action. The FII Net Index Position indicator currently stands at -1,067,911 and shows signs of improvement from historically bearish levels. This suggests that FIIs are gradually covering their short positions and squaring off existing positions. The indicator is rising alongside prices, indicating a positive divergence in positioning dynamics and confirming an improvement in market sentiment.

If this trend continues, further short covering could provide additional support to the ongoing market recovery. The Advanced Diffusion Indicator, which tracks the share of Nifty 50 stocks with a daily RSI at or above 50, approached the oversold zone and is now showing signs of recovery. The indicator has also broken above its trendline, which suggests an improvement in market breadth and stronger underlying momentum across Nifty 50 stocks.

This recovery points to a potential improvement in the broader market trend. The Net New 1-Month Highs Indicator for the Nifty 50 has begun to rise, confirming an improvement in price action and overall market breadth. This suggests that more Nifty 50 stocks are beginning to make new 1-month highs, a sign of better participation across the market. The indicator currently stands at 3.11, which supports the signs of a gradual recovery in market breadth.

Nifty 50 – The Benchmark Index ended higher by 2.78% this week, closing at 23,146.15. Leading Quadrant: Nifty Media has recently entered from the weakening quadrant, showing signs of improving relative strength and potential outperformance. Nifty Bank and Nifty Private Bank continue to show increasing momentum, indicating sustained relative outperformance. Nifty PSU Banks remains in the leading quadrant, although momentum is slowing slightly; continued relative strength is still possible.

Nifty Metals has witnessed a sharp decline in momentum this week and is moving toward the weakening quadrant. If this trend continues, we could see a slowdown in its relative outperformance. Lastly, Nifty IT remains in the leading quadrant, but momentum has declined sharply over the past couple of weeks, indicating a slowdown in its relative outperformance. However, as long as it remains in the leading quadrant, relative outperformance may continue at a slower pace.

Weakening Quadrant: Nifty Pharma has re-entered the leading quadrant after spending last week in the trailing quadrant, indicating a slowdown in relative performance. Nifty Financial Services is showing a sharp improvement in momentum and could move into the leading quadrant by next week if this trend continues. Meanwhile, Nifty Realty, Nifty Consumer Durables, Nifty Auto, and Nifty MNC remain in the weakening quadrant, with declining momentum indicating continued moderation in relative performance.

Lagging Quadrant: Nifty Infrastructure and Nifty FMCG continue to show weak relative performance, with momentum remaining largely flat, indicating continued underperformance. Meanwhile, Nifty Energy remains in the lagging quadrant but shows steady momentum improvement, suggesting a short-term bounce despite continued relative weakness. Improving Quadrant: Nifty PSU Banks has recently entered with steadily increasing momentum, indicating a potential recovery despite continued relative underperformance.

Nifty Oil & Gas has remained in the improving quadrant for the past few weeks. Although momentum has eased slightly this week, the overall trend remains positive. If this improvement continues, the index could soon move into the leading quadrant. Among the stocks expected to perform better during the week are Divi’s Lab, Aurobindo Pharma, SonaComs, Laurus Lab, and Nykaa.