US Debt Ceiling is a Pie in the Sky

USA on the verge of a Debt Crisis…A Global Economic Catastrophe awaits us…Global Markets to Crash these are few of the headlines that has become the talk of the town. These events give me a strong sense of Déjà vu. It feels like a movie I have seen before and therefore know how it ends. The topic of the American Debt Ceiling is back and so is the fear mongering by the USA politicians and Western media.

So, what is this USA Debt Ceiling and what impact will it have on Global Financial markets? The USA government spends more money than it earns and therefore it needs to borrow money to pay its bills. In an attempt to control the level of debt, it can only borrow up to a certain limit and that certain limit is called the Debt Ceiling.

The USA debt currently stands at around US$ 31 trillion and is on the verge of surpassing its debt ceiling of US$ 31.4 trillion. Once it reaches the debt ceiling it would no longer be able to borrow more money. Therefore, in order to not default on its existing interest payments, it would have to cut its spending and increase tax rates. This would have a cascading effect on the USA credit rating, interest rates, financial markets and all things bad.

But this isn’t the first time USA is in this situation. Since 1960 it has been in such a similar situation 78 times and has come out fine all the time. How? Just by increasing its Debt Ceiling. The Debt Ceiling was last raised on August 1, 2021 to USD 31.4 trillion from USD 28.4 trillion. If the decision is to be made between two options – A Debt crisis and increasing the debt Ceiling – the latter would be selected all the time. Thus, debt ceiling is nothing but a must pass piece of legislation to save the country from the crisis. The USA has never defaulted on its debt obligation. The government has always been able to reach a deal with the congress to raise the debt ceiling.

The Investors are therefore advised to not panic and make irrational decisions based upon the exaggerated media headlines. The debt ceiling is nothing like its name suggest. It is like the sky which keeps on going farther away as we build high rise buildings.

Technical Outlook

Nifty rose by 295.95 points, gaining 1.63% in this week. It has formed a strong candle on the weekly chart, closing above the previous week high of 18458.90. Nifty was consolidating between the 18050-18400 zones since last three weeks. It finally managed to break the 18400 resistance on Friday and closed at 18499.35.

On the daily chart, the 13 Day Exponential Moving Average (DEMA) continued to act as a strong support for Nifty. The support of 18200 seemed to be in trouble on Thursday this week before a sharp recovery in the last hour, pushed Nifty higher.

The Index has taken support from the 23.6% retracement level of 18,076 on 19th May, drawn from 20th March low of 16,828 to 15th May high of 18458, signaling that the correction from 18458 to 18060 from 16th to 19th May was on account of profit booking and not a change of trend.

However, the Relative Strength Index (RSI), a leading momentum indicator, is yet to break its previous high and traders are advised to be cautious as we step into the June series expiry.

The India VIX, also known as the fear index, fell by 3.27% during the week, from 12.30 to 11.90, gave major relief to the bulls.

Nifty is now just 2.10% away from its all-time high of 18887.60 made on 1st December, 2022. A follow up buying from here can take Nifty to 18700-18800 zones while the lower end support now shifts to 18300 from 18200 zones.


The Importance of Rule-Based Trading

In the realm of stock market trading, every aspect of the process, including determining when to buy or sell an asset, placing new orders, closing positions, and liquidating holdings, is under your control. All trading decisions are made by you, relying on the information at hand and your own discretion.

However, here lies a notable predicament. As humans, we tend to have behavioral biases and be susceptible to emotional inclinations. This more often than not clouds our judgments, leading to poor trading decisions.

For example, how many times have we traded in the fear of missing out (FOMO) or traded the same share in order to take revenge and make a profit from the same? Don’t we sell a stock when we see handsome gains and then regret it the moment the scrip subsequently touches a new high?

If your answer to the above is yes, what can you do?

The solution is Rule-based trading. This is a way to overcome these emotional and behavioral biases. Rule-based trading is a mechanism where you have a written set of rules for everything from start to end. Traders precisely define the rules regarding which stocks to enter, when to enter, how much money will be placed on it, and when they will exit. These rules could be based on technical analysis, fundamental analysis, or a combination of both. These conditions should be simple enough that they can easily be executable by anyone.

Once the pre-defined rules for entry and exit are set, the trader does not have to do anything. If the trade signal occurs, you execute the trade. You place the stop loss and targets simultaneously as per the pre-defined rules and conditions. After the initiation of the trade, the trader just has to wait until the target has been achieved or the stop loss is hit.

Rule-based trading is not just for intraday traders or short-term traders. Regardless of whether you are an intraday or short-term trader or a long-term investor, a rule-based strategy could help you to achieve your goals without heartburn.

The key is to identify the appropriate set of rules and conditions which would yield good returns for you. The selection of these rule-based strategies will depend greatly on your experience and temperament.

A smart investor needs to clearly understand the risks and challenges before beginning trading based on the rules. It is important to back-test your strategy before you actually start to trade.

Due to the inherent efficiency of markets, discovering a sustained trading advantage can be a challenging endeavor. Thus, by trading based on pre-defined rules, traders are more likely to Ace the Index.

Technical Outlook


The frontline index started the week with a bullish candle and made a high of 18,459 levels, post that the index continued to drift lower throughout the week. Prices on the daily chart formed a bearish engulfing candle stick pattern on the 16th of May and prices remained below the low of the pattern for the rest of the week.

The divergence was spotted between the price and the momentum oscillator RSI (14) where prices made a new intermediate high and the oscillator found resistance at the overbought zone along with negative divergence. The index eventually closed 111 points lower at 18,203 levels with a 0.61% fall on the weekly closing basis.

The index has retraced by 38.20% Fibonacci level from the low of 17,553 to the high of 18,458 at 18,115 levels. The index is approaching closer to its 21–day exponential moving average on the daily chart which is placed at 18,080 levels.

Technically, the view on the broader time frame remains bullish but due to an overbought technical structure on the daily chart, profit booking at the current level cannot be ruled out. For bulls, 18,450-18,500 would act as immediate resistance zones, while 18,000-17,900 would act as key support zones. Fresh buying momentum could be seen only above the level of 18,450.


How to Defend Your Portfolio from Losses

Today I bring to you the sector which works as an insurance and assurance to your portfolio. The FMCG segment, a defensive play is often neglected by investors during good times not realizing that this is the sector which stays resilient during turbulent times. .

The sector had recently been affected by the high inflation the economy faced and the investors were sceptical about the growth of the companies. The soaring input costs ultimately caused the margins to come under pressure and the volume growth to slow down due to the price hikes taken.

To battle inflation, the FMCG players resorted to two ways for margin sustenance. Price hikes and Reduction in grammage which means the company will sell a lesser quantity for the same price.

The firms were facing a double whammy of value and volume de-growth. While both the above methods preserve the value, it has affected the volume growth.

Disinflation has given an opportunity for companies to pause their price hikes which will support sales. This coupled with cheaper raw materials has normalised the margins which will aid the players to give out better deals and sustain volume growth.

Furthermore, rural demand, which is a key growth factor remained negative during the previous quarters. Green shoots have started to spike, indicating a revival of demand. Q4FY23 saw the companies report not only revenue growth but also volume growth and the management of the companies expect the trend to pick up.

Therefore, we can say the tides are changing in favour of FMCG companies. The above measures along with the cost optimisation steps taken during the bad time have helped the firms to control margins. These cost-control measures are going to stay on the roll and the decreasing raw material prices are further set to strengthen the margins.

If we have a look at the valuations, a lot of FMCG companies are currently trading at their 5-year average PE. This makes the sector more appealing. The sector index, Nifty FMCG recently touched record highs, which displays optimism amongst investors. However, an investor should be watchful of the company’s growth and strategies adopted by the management to expand the product mix and market share instead of getting carried away with optimism.

Technical Outlook


The Benchmark has continued its upward momentum post the bullish pole flag pattern breakout on the weekly chart. Prices just shown a single candle retracement and trend resumption candle signal the bulls are in control of the momentum and this may prolong towards higher levels.

Nifty started the week with a bullish candle and buying momentum with muted pace for the most part of the week has been witnessed and eventually closed higher by 1.36% or 256 points at 18,315 levels. The weekly strength indicator RSI and momentum oscillator Stochastic have both turned positive and are sustaining above their respective reference lines.

Overall, it is an optimistic month so far as Nifty Bulls enjoying a rally from their lower levels of 17,600. Prices have shown a strong breakout from the prior resistance zones and gained close to 4% in just three weeks.

Having moved above the hurdle and the overall positive chart pattern indicates the next upside for Nifty between 18,500 - 18,600 levels in the May expiry. Immediate support is at 18,000 levels. On the flip side if the 18,000 level is getting breached then 17,850 will be the level to watch out for.


How Long Will the Cinderella Times Last for Banks?

The Cinderella times for the Indian banking sector continued in Q4FY23 as well. The Bank’s quarterly results were stellar nearly on all fronts. The credit growth has remained strong, the asset quality is pristine and the margins have remained at higher levels. The market has acknowledged this improving macro environment. In the past year, the Bank Nifty has appreciated by 21.1%, whereas in the same period, the Nifty 50 has gone up by only 8.3%.

The Stock prices reflect expectations for future financial performance. Thus, as an investor, it becomes very important to anticipate revisions in those expectations. Banking Index has performed well, but it is now the past and thus what lies ahead is the big question.

One of the biggest headwinds the banks would be facing in the near term is the pressure on their Net Interest Margins (NIMs). The Banks have enjoyed high margins in the past few quarters, however, this would be coming under pressure because of two reasons –
a) Slower Deposits Growth
b) Pause in Repo rate hikes


As can be seen from the below graph, the credit growth of the banks has been strong but on the flip side, the deposits have been lagging behind. To counter this, the bank has already started to increase its deposit rates. This would thus lead to a higher cost of funds directly dragging the NIM.


Secondly, after hiking the repo rates by 250 bps since May 2020, the RBI decided to pause the rate hike in its latest meeting. As banks now have a large share of their loans linked to repo rates, with no rise in repo rates the increasing rates on their loans would also come to a halt.

The market seems to have realized that the Net Interest Margins are now peaking out. Thus, when we look at the YTD performance, the Bank Nifty has fallen by 0.8% vs a -0.2% of Nifty 50. However, there is one interesting takeaway from the Q4FY23 results that might help the margins to remain at higher levels for longer than expected. That takeaway is the significant rise in "Unsecured Loans".

Owning to improving macro environment and stable asset quality the leading banks are aggressively growing their unsecured book. ICICI Bank for instance grew its unsecured retail loan by 35% YoY in Q4FY23, while in the same period, it grew its retail book by 23%. The overall share of unsecured loans on average across banks has increased by 300 basis points since June 2020. Whether this increased exposure towards the unsecured segment would be beneficial or lethal is a topic for another day but this would certainly aid the margins of the bank in the near term.

Despite a strong run for the Bank Nifty in the past year, it was the PSU banks that have enjoyed the gains whereas the leading private banks still trade at their historically low valuations. The average P/B of PSU banks currently stands at ~1.11x which is 93% higher than its 5-year median P/B of 0.58x. The P/B of private banks on the other hand currently stands at 2.21x which is around 6% lower than its 5-year Median P/B.

They say extraordinary times demand above-average valuations. Despite the banking sector being in one of its best shapes in a decade the valuations of private banks still trade near their historically low valuations. All in all, the macro environment for the banks is expected to remain robust, with some pressure on margins which would be partially offset by a higher share of unsecured loans. The Cinderella times for banking seem to have no antagonist at least in the medium term.

Technical Outlook

The benchmark index closed flat by 0.02% or 4 points at 18,069 levels on the weekly chart but volatility played a very crucial role and always keep traders on the edge of their seats.The index corrected on Friday session after the sharp rally seen on Thursday. Nifty closed near its previous week's candles close and formed a shooting star candle stick pattern on the weekly time

The momentum oscillator RSI (14) has shown resistance near 73 zones which is an overbought level for an oscillator. Previously at similar levels, prices have reacted strongly at resistance zones and slipped lower.The weekly momentum indicator still has a positive crossover, a buy signal. We believe that the uptrend is still intact, and this dip should be used as a buying opportunity.Nifty stands at strong support near 21 EMA at 17,800 levels on the daily chart. If prices fail to hold at a given level, then it's likely to see a further correction toward 17,600 levels, and the upper band of the index is capped at 18,350 – 18,400 levels.