Stocks wilt as Street vigil on polls raises fear factor

Election jitters and uninspiring earnings combined to spook the stock markets on Thursday, sending benchmark indices crashing by the most in more than three months.

Amid steep volatility, expiring weekly index options and foreign investor selling, the bellwether Nifty plunged 1.55% to 21,957.5, its biggest single-day fall since 17 January, while the Sensex fell 1.45% or 1,062 points to 72,404.17, its worst since 23 January.

Nifty's top five losers alone accounted for almost three-fifths of the index’s 345-point fall. Foreign portfolio investors (FPIs) net-sold a provisional ₹6,994.86 crore worth of shares.

Correction time

The correction may not be over yet, either: huge bearish bets on the Nifty and Bank Nifty futures contracts signal that the decline may extend till the end of the month. The nervousness on the Street was reflected by fear gauge India Vix closing at a 20-month high of 18.2.

Also read: Investors take cover ahead of election outcome

The broader markets saw worse: Nifty Smallcap 250 fell 2.65% to 15,006.35, while the Nifty Midcap 150 tumbled 1.74% to 18,245.35.

Domestic institutional investors net-purchased a provisional ₹5,642.53 crore, but selling by retail and high-net-worth investors added to the selling pressure. On BSE, this category net-sold shares worth ₹118.10 crore, while figures on the National Stock Exchange (NSE) were not available. Investors saw their total wealth being eroded by ₹7.28 trillion.

“The pullback is because of creeping uncertainty about the victory margin of the incumbent and in-line results amid lofty valuations across many pockets of the market,” said Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies. Holland expects the pressure to persist until the votes are counted.

However, other analysts expect limited downside for the Nifty, with the index having pulled back 3.7% from its record high of 22,794.7 on 3 May.

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Gaurang Shah, senior vice-president, Geojit Financial Securities expects the market to find support at 21,800. He said short- to medium-term investors should book profits while those in “for the long haul” should use the correction as a buying opportunity .

“A correction before the event is good for the markets. I am bullish power, defence, banks, NBFCs (non-banking financial companies) and autos that are good buys,” he added.

HDFC Bank contributed 60 points of the Nifty’s fall, L&T 57 points, Reliance Industries 37.5 points, ITC 31.98 points and Asian Paints 14 points.

Poll jitters

Ajay Bagga, independent market expert, attributed Thursday's fall to “no perceptible wave in the elections, a mediocre earnings season, overhang on key sectors like IT and financials, as well as sustained FII outflows. All these have contributed to India Vix shooting up over the last 11 days. The price action has been largely domestic-influenced, while global scenario remains mildly positive.”

The fall coincided with weekly Nifty options expiry, which saw put writers (bulls) having to cover their short positions, adding to the downward pressure.

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Active Nifty futures contracts expiring on 30 May saw open interest (outstanding positions of traders) rising by 20% to 516,442 contracts, a signal of bearish sentiment. Bank Nifty futures contract expiring on 29 May saw open interest rise 11.04% to 163,124 contracts. Options expiring next Thursday show the market to trend in an immediate 21,830-22,300 level.

The Vix, according to Kruti Shah, quant analyst at Equirus, could rise to 21-22% levels as the poll outcome date approaches. She expects 21,700 to be a strong support, for now.

FPIs have been selling shares so far this fiscal to the tune of ₹19,084 crore (excluding Thursday's provisional figure ) while DIIs have net bought ₹60,886 crore. DII buying has been a "foil" to FPI selling and would continue, according to Swarup Mohanty, CEO of Mirae Asset MF.