Congratulations! They have done it again. Investors appetite for risk allowed the KSE-100 to close above 9000 as it jumped 142 points on Friday, leaving many wondering about the direction of its move.
Apparently, bouncing back above 9k level, within a short span of five sessions signals strength - especially considering that last weeks close of 9067 points is in essence a tad above its 400-day moving average, something which chartists ordinarily term as a key point.
Although, foreign investors, who were quite active last month, seem to have a change of heart of late, local funds have become buyers. As foreigners sold equities worth $6.9 million in the regular market last week local individual investors also sold out some $4.05 million. But most of this selling was absorbed by domestic fund managers, who invested $8.3 million in the regular market last week, with the remaining $2.6 million worth of stocks cumulatively purchased by domestic companies and banks.
The re-entry of funds points to the idea that big money thinks the market is attractive. But here is a bit of a dampener. Throughout this month, including last week, trading volumes have been depressing. Average turnover has dropped to 107 million in the month to date, from an average 170 million in October and about 205 million in the month before. So, clearly, the momentum isn strong just yet.
In addition to dicey politics in the wake of NRO and growing complications in the aftermath of Gilgit-Baltistan elections, there could be another factor troubling the market: the rise in benchmark PIB yields.
Despite knowing that discount rate is on a downward trajectory amid expectations of a 50-100 bps cut in the central banks policy review later this month, secondary market yields of 10-year PIB have risen about 70-100 bps since early July. And quite possibly thats what keeping equity investors jittery.
Historically, every time the 90-day moving average of 10-year PIB yield bottoms out, it gives a sort of a confirmation that yields will rise at least in the short term, generating bearish trigger for stocks. On the flipside, when 90-DMA peaks out - confirming the downward path in yields - the stocks start rising.
Take a close look at the graph: every time the 90-dma turns either direction, it generates an inverse trigger for equities. Its like collective wisdom of the crowd.
In short, the answer to how will stocks fare in the immediate term, may depend on the perception of money market pundits as they price-in the intricacies of discount rate, inflation and broader economic outlook. At the moment, however, stocks look uninspiring with the downside limited to 8400~8700 points and the upside restricted to its 30-dma of around 9330 levels.