D-street ended the week in red as FPIs pressed sell button. What lies ahead?

The equity markets ended the week with a significant decline of over 1.5 percent amid sharp selling by foreign portfolio investors (FPIs). The market also discounted several positives and lacks fresh triggers to sustain gains and move higher.

The BSE Sensex declined by 1,214 points, or 1.64 percent, at 72,664.47 during the week ended on May 10. While Nifty lost 421 points, or 1.87 percent, to 22,055.2. Sector-wise, the BSE Fast Moving Consumer Goods index and BSE Auto index gained 1.3 percent each during the week. On the other hand, the BSE Oil & Gas index registered a decline of 4.5 percent followed by the BSE Metal index, which slipped 3.3 percent.

Only 13 stocks in the Nifty 50 index delivered positive returns for investors during the week. 

Hero MotoCorp emerged as the top gainer in the index with a weekly gain of 7.3 percent. It was followed by Britannia Industries (up 6.8 percent), Hindustan Unilever (up 6.4 percent), and Kotak Mahindra Bank (gain of 5.4 percent). Tata Motors and Nestle India also advanced by over 3 percent for the week. 

Meanwhile, Titan Company, Dr Reddy's Laboratories, and Larsen & Toubro ended lower for the week at 6.9 percent, 6.8 percent, and 6.5 percent, respectively. 

FII flows

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said that FPIs and FIIs have turned sellers in May. "There is aggressive selling by FPIs. According to NSDL data, FPI selling in May so far stands at Rs 17,082 crore. The selling by FIIs in the cash market is much higher at Rs 24,975 crore”. 

The divergence in institutional activity has become stark this month. FIIs have turned sustained sellers and DIIs have turned sustained buyers on all trading days of this month. The cumulative FII selling stood at Rs 24,975 crore, while cumulative DII buying was recorded at Rs 19,410 crore.

The data showed a sharper decline in the broader market, it appears that HNIs and retail investors have booked some profits and are in a wait-and-watch mode, perhaps responding to the noise relating to uncertainty regarding the election results, he added. 

An important point to note is that FIIs are selling not because of concerns relating to elections but because India is underperforming (Nifty is down by 2.06 percent in the past month) while China and Hong Kong are outperforming (Shanghai Composite and Hang Seng up by 3.96 percent and 10.93 percent, respectively in the last one month). The FPI strategy is to sell India (which is expensive) and buy China (which is very cheap) mainly through Hong Kong. The PE ratio in India is more than double the PE ratio in Hong Kong.

“So long as this ‘Sell India, Buy China’ trade sustains FII selling will weigh on the markets. The situation can change dramatically when clarity emerges on the election outcome. If the election results turn out to be favourable from the market perspective, aggressive buying by DIIs, retail and HNIs can push the market sharply up." Vijayakumar said.

Nifty outlook

According to Rupak De, Senior Technical Analyst at LKP Securities, on the daily chart, the index has broken down from the rising channel indicating a rise in bearish sentiment. The trend is likely to remain weak in the near term with resistance noted at 22,200. “As long as the Nifty remains below this level, a strategy of selling on rallies may be favourable for traders. Support at the lower end is situated at 21,950 on a sustained basis; a decisive drop below this level could trigger panic in the market”, De said. 

Bank Nifty

The Bank Nifty opened on a positive note on May 10 and registered a high of 47,868 but it ended on a flat to negative at 47,421 due to severe selling pressure, Neeraj Sharma, AVP Technical and Derivatives Research at Asit C Mehta Investment Intermediates said. Technically on a weekly scale, last week the index formed a shooting star candlestick pattern, which was followed by bearish engulfing this week, indicating weakness, he added.

“As long as the index remains below 48,000 ongoing weakness will continue. On the downside, the next key support for the index is placed near the 47,055 level where the 100-Day Exponential Moving Average (DEMA) is positioned. On the flip side, if Bank Nifty sustains above 48,000, then a relief rally to 48,300-48,500 is possible," Sharma said.