In a market segment with its ear to the ground, apprehension is rising

On Wednesday, the Sensex and Nifty fell nearly 1% each, continuing their losing streak for the fourth day running. (Photo: Mint)
On Wednesday, the Sensex and Nifty fell nearly 1% each, continuing their losing streak for the fourth day running. (Photo: Mint)

Summary

  • The Client category's bullish bets on Nifty and Bank Nifty futures contracts are down to a sixth in just a fortnight, while FPIs have taken an opposing view.
  • In the recent past, whenever Client swung to extreme shorts from longs and FPIs to extreme longs from shorts, the markets have topped out.

In sections of the stock market known to read the tea leaves correctly, fear has set in just days ahead of the last leg of voting and exit polls.

Retail and wealthy investors have voted with their feet in the last couple of months, snapping up Nifty and Bank Nifty futures contracts as they bet on a solid victory for the Narendra Modi government. But in just a fortnight, they have got rid of most of these contracts, likely anticipating a different outcome.

The action of retail and high networth investors (HNIs)—called Client by NSE— is closely tracked in market circles, as they tend to be on top of foreign investors in anticipating market movements. The seventh and last phase of Lok Sabha election will be held on Saturday, and exit poll results are expected later in the same day. Votes will be counted and results announced on Tuesday, 4 June.

Bullish bets down to a sixth

The Client category's bullish bets on Nifty and Bank Nifty futures contracts are down to a sixth, exchange data showed. From a cumulative net bullish position of 283,565 contracts on 15 May, they held just 45,795 bullish contracts on 28 May. Interestingly, FIIs who held cumulative net bearish bets of 25,9616 contracts on 16 May, turned net bullish by 47,459 contracts.

Also read: Mint Explainer: Why the national election is making the market swing wildly

“While the market body language has been very strong, as we still trade near record highs, a bit of apprehension seems to have set in ahead of the big day," said Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services, defining the market mood. “It’s like an IPL or an Indo-Pak match. Nobody knows who will win until the last ball is bowled."

On Wednesday, the Sensex and Nifty fell nearly 1% each, continuing their losing streak for the fourth day running. The BSE midcap index declined 0.38%, while the smallcap index climbed 0.23%.

‘Markets on a pivot’

“Markets, you could say, are on a pivot and, I think once the exit poll results start coming out, there could be reactions, but the major one will be on the day of the verdict (4 June). We are all waiting for this event to be behind us and then, we will be sorted," Agrawal of Motilal added.

In the recent past, whenever Client swung to extreme shorts from longs and FIIs to extreme longs from shorts, the markets have topped out. For instance, on 18 September last year, Client was net bearish cumulatively by 84,214 contracts and FIIs net bullish 11,7990 contracts when Nifty hit 20,133.3. From there, Nifty fell 1,000 points to 19,133.25 on 2 November.

Also read: In final stretch of polls, markets raise a vote of confidence

At that point, Client was net long 29,2822 contracts and FII net short 35,1396 contracts and the Nifty rallied by over 2,100 points, from 19,133.25 to 21,255.05 on 21 December (all figures adjusted after Nifty lot size was halved to 25 shares from 26 April).

A force to reckon with

“It’s true that Client has become a force to reckon with, and their actions will be closely watched by analysts," said Rajesh Palviya, SVP (head – derivatives & technical research), Axis Securities. “My take is they are cutting positions ahead of the exit polls and D-Day, after which clarity will emerge. Those sitting on profit are taking them off the table."

Thanks to the Client bullishness, Nifty rose from a low of 21,821.05 on 13 May to a record high of 23,110.8 on 27 May. However, now they are unwinding longs, with Nifty falling 1.74% to 22,708.75 on Wednesday.

Fear gauge India Vix has risen from 21.38 to 24.17 over the last four days, as the market fell. Vix tends to rise in the run-up to an important event as investors and traders pile up on call and put options. The index is computed from bid-ask spreads of options.

Also read: Triumph over $5 trillion as dividend whopper cheers market

Another indicator of jitters is the put-call ratio for the weekly expiry of option on 6 June, close to election outcome on 4 June. The ratio stands at 0.88, signalling more calls have been sold than puts—a slightly bearish sign with relatively more calls being sold by option writers in the belief the market will not rise above the level sold, plus premium collected from the call option buyer. Other less important events are the Thursday monthly derivatives expiry and the MSCI index rebalancing on Friday, which is expected to see $2 billion inflows.

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