Stocks snap four-day losing streak, rise 1%

A short squeeze refers to bears being forced to cover their negative bets at higher prices, causing the market to rise more than usual.

The Nifty and Sensex rose 1.2% each to close at 18,014.6 and 60,566.42, reclaiming the psychologically important levels of 18,000 and 60,000.

In absolute terms, the 207.8-point rise in the Nifty and the 721-point bounce in the Sensex were the highest since 24 November. The past week had seen the Nifty shed 2.8% and the Sensex decline 2.4% as fears of a fresh covid wave resurfaced in China. However, these fears eased over the weekend as Beijing refuted claims of fatalities.

Financials led the gains, with IndusInd Bank and State Bank of India gaining over 4% each to ₹1,196 and ₹597. Commodity stocks such as Hindalco, Tata Steel and Coal India rose between 2.6% and 3%. Top losers included defensives such as Cipla, Divi’s Labs, Dr Reddy’s and Nestle India as risks abated.

One of the session highlights was the rally in PSU banks, reflected by the 7.29% jump in the Nifty PSU Bank Index to 4,171.9. In percentage terms, this was the highest since 1 February 2021, when the index rose 7.83% amid the Union budget.

FIIs sold shares worth a provisional ₹498 crore, while DIIs purchased shares worth a provisional ₹1,286 crore. The DII purchases at lower levels lifted the market, following which short sellers in options and futures covered their bearish bets, resulting in a sharper move in the second half. “Value buying in the first half and short covering in the second half exaggerated the market bounce," said Shrikant Chouhan, head of research (retail) at Kotak Securities. Monday’s bounce notwithstanding, Chouhan expects markets to remain choppy ahead of fiscal third-quarter earnings announcements and the Union budget.

The market may trade between Monday’s low of 17,774 and the record high of 18,887.6 on 1 December, said Siddhartha Khemka, head of research (retail) at Motilal Oswal Financial Services.

“I expect a sideways move with a positive bias, going by today’s heavy short covering amid easing fears of a resurgence of covid," he added.

As domestic institutional investors increased buying, traders who sold call options on Nifty and Bank Nifty, seeking to profit from the premiums paid by buyers, were forced to cover short positions at higher levels. This caused the market to rise more significantly in the last half hour of trading.

To cover the short positions, the call seller has to buy the option back, which raises its price. Similarly, traders who sold Nifty futures were forced to buy these back at a higher price, resulting in the Nifty recapturing the 18,000 level.

The active Nifty futures contract rose by 154 points, or almost 1%, as bears covered shorts, reflected by the open interest (traders’ outstanding positions) falling by a whopping 20%. A fall in open interest, along with the rise in the price of a futures contract, implies bears closing out short positions.

Monday’s cash market turnover stood at ₹46,487 crore against the average daily turnover of ₹54,488 crore so far this month, as most foreign institutional investors remained light amid the customary Christmas and New Year Holidays.

“The Nifty saw a sharp decline last week that had pushed the intraday momentum indicators into the oversold zone," said Gaurav Ratnaparkhi, head of technical research, Sharekhan by BNP Paribas. “In terms of the Fibonacci retracement, the index reached 50% retracement of the rally from September to December. Consequently, the index had a swift bounce on 26 December. It has moved up to retest a trend line, which was broken on the downside on Friday. Thus 18,100-18,200 will be the near-term hurdle zone. Overall structure shows that the Nifty is likely to witness short-term consolidation with key support at 17,800."