Markets
F&O signals more rally in markets while analysts expect a pullback
Summary
- Whenever retail and high networth investors turn long and FIIs turn net short, markets tend to rise as FIIs cover their short positions. As of 14 August, FIIs turned net bearish index futures by cumulatively having shorted 30,547 contracts.
Mumbai: Even as most analysts expect the stock market to consolidate at current levels or weaken slightly, a derivatives indicator suggests that benchmark indices are headed higher instead of pulling back in the coming week.
The market movement will be closely tracked by stakeholders as it coincides with the Jackson Hole Economic Policy Symposium, an annual event of global central bankers hosted by Federal Reserve Bank of Kansas City, during 22-24 August this year.
Retail and high networth investors (designated 'client' by NSE), who tend to trump foreign institutional investors (FIIs) in terms of gauging market sentiment and direction, have turned cumulatively net bullish index futures (Nifty and Bank Nifty) while FIIs have turned bearish recently.
Whenever client turns long and FIIs turn net short, markets tend to rise as FIIs cover their short positions. When markets rally from such points, the direction reverses with clients booking profits and turning short while FIIs turn long.
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As of 14 August , FIIs turned net bearish index futures by cumulatively having shorted 30,547 contracts from being net long 283,153 contracts on 23 July , the day the Union budget was presented.
Clients, on the other hand, have turned cumulatively long 89,641 contracts on 14 August from being net short 120,149 contracts on 23 July.
From 23 July through 14 August , the Nifty corrected 1.4% to 24,143.75, reinforcing the negative bets of clients while FIIs were forced to liquidate their longs. If the comparison is taken from the election day result on 4 June to 23 July, the client bets once again proved right.
On 4 June, FIIs were net short 355,379 contracts and client was long 333,364 contracts. The Nifty surged from 21,884.5 on that date to 24,479.05 on 23 July, a 12% rally, driven by FII short covering along with cash market buying. Client, on the other hand, kept booking profits as FIIs bought contracts from them at higher levels to close out their shorts.
"Client tends to top FIIs in gauging market direction," said Rohit Srivastava, founder, IndiaCharts. "It will be interesting to see how things play out ahead of the Jackson Hole event where Fed chair could provide cues on the extent of rate cuts."
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The symposium comes on the heels of consumer inflation in US increasing by the slowest pace since 2021 at 2.9% last month. This has spurred expectations of sharper rate cuts and weaker dollar, which bodes well for emerging markets like India.
However, with a stupendous rally in broader markets and benchmarks, market veterans like Gaurav Dua, head of capital markets at Sharekhan By BNP Paribas, expect some consolidation and relatively more pain in smalls and microcap stocks.
"The base case is for consolidation in Nifty and Sensex and more pain in small and micro caps," Dua said .
On a trailing price to earnings multiple basis, he explained that the BSE Smallcap 250 index trades at a 44% premium to BSE Sensex, which is on the higher side based on his study of the past seven market rallies.
Indeed, as of 14 August, BSE 250 Smallcap trailing P/E was 32X while that of Sensex was 23X , per BSE data.
Chandan Taparia, SVP, head of technical and derivatives at Motilal Oswal Financial Services, also expects consolidation after the latest leg of the rally from 4 June to date.
"I expect some consolidation in the market, with Bank Nifty likely to underperform," Taparia added.
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