Nifty looks poised for a bullish run next month. Here’s why

Foreign Institutional Investors (FIIs) have been consistently selling in the Indian markets, withdrawing their funds for 11 consecutive days. In fact, in May 2024 alone, they have pulled out Rs.27,938 crore, marking the highest monthly outflow since January 2023.

But, how are Indian markets affected by this?

Historically, it has been observed that whenever FIIs have net withdrawn for 10 or more consecutive days, the Indian markets tend to fall. Since 2010, there have been 24 instances where FIIs have pulled out money for 10 or more successive days during which the Nifty50 index has fallen 17 times. However, the markets have held the ground considerably this time, falling only 0.80%.

Among these 24 instances, there are 13 instances where the Nifty50 index remained stable, i.e. delivering a positive return or falling not more than 2% despite the relentless FII selling. The table below enumerates these instances, consecutive days of outflows, total outflow, and the Nifty returns during this period.

On further analysis, we find that whenever FIIs have withdrawn for 10 or more days and the Nifty50 index has remained stable, it has delivered an average one month forward return of 2.53%.Furthermore, since the beginning of the 21st century, there have been four Lok Sabha general elections in India, occurring in the years 2004, 2009, 2014, and 2019. An analysis of the Nifty50 index’s performance following the announcement of election results reveals a noteworthy trend. The data, summarized in the table below, indicates that the Nifty50 generally experiences a rally after election results are announced, with a notable exception in the year 2004.

On average, the Nifty50 has delivered 1-week and 2-week forward returns of 2.7% and 4.6%, respectively. This period also coincides with our analysis of the Nifty50 rising after a period of relentless FII selling. It remains to be seen how much the Nifty50 rallies this time around.

The Nifty50 reached an all-time high of 23,026, marking a positive week as it surpassed the major hurdle of 22,800 to end the session at 22,957, gaining nearly 2% for the week. The robust performance of US and European markets acted as a catalyst for the domestic market’s surge.

The India VIX, known as the fear gauge, ended at 21.79, a 6.16% increase over the week, marking the fourth consecutive week of rising VIX levels. Nifty CPSE emerged as the best-performing sector with a gain of 4.83%.

Nifty formed a bullish candle with an open-low same pattern on the weekly chart. Looking ahead, Nifty has strong support at the 22,600 level, and any minor pullback could present a buying opportunity around the 22,700-22,800 levels.