Markets
The derivatives market is flashing signals of a coming decline
Summary
- Retail and high net worth investors (HNIs) have shifted their stance to bearish while foreign investors have turned bullish. Whenever such flips have happened in the past, markets have tended to pull back or dip.
Signals from the derivatives market are pointing at a stock market decline this week, before a likely pre-budget rally gets underway in July.
This comes as retail and high net worth investors (HNIs) shift their stance to bearish while foreign investors turn bullish. Such flipping often results in market dips or pullbacks in the short term.
Retail/HNI, designated ‘Client’ by NSE, who were cumulatively net bullish index futures (Nifty and Bank Nifty) by 333,364 contracts on 4 June, the day of the election results, flipped these to turn net bearish by 57,613 contracts over 12 sessions ending 21 June.
In the same period, foreign institutional investors (FIIs) changed their net bets on index futures from 355,379 bearish contracts to a cumulative 73,991 bullish contracts. Whenever such flips have happened in the past, markets have tended to pull back or dip. A pullback is a dip of 5-10% from a peak, while a correction indicates a 10-20% fall from the peak.
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For instance, on 18 September last year, when Nifty was trading at 20133.3, retail/HNI was net short 84,214 contracts (adjusted for change in Nifty contract size to 25 shares from 50 as 26 April this year) and FII was net long 117,990 contracts. From there, the Nifty tanked 1000 points to close at 19133.25 on 2 November.
By that date, retail/HNI had flipped to a bullish 292,822 contracts and FIIs to a bearish 351,396 contracts, after which Nifty rallied 2100 points over just 34 sessions to 21255.05 on 21 December. While the flip has happened again this time, brokers expect a smaller and shorter pullback of around 2-3% from Nifty’s latest closing of 23501, as markets tend to run up a week or two ahead of a Union Budget.
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“While a pre-budget rally is anticipated, it might be preceded by an immediate, shallow fall of 2–3% to 23,000–22,800," said Dhiraj Relli, managing director and chief executive officer of HDFC Securities. “I believe from that level, we could see the market rally and test re-test today’s (21 June) life high (23667.10)." The Nifty ended down 0.28% at 23501.10 on Friday. Relli said investors were moving out of auto and PSU stocks to defensive sectors like private banks and fast-moving consumer goods, which could spark a pre-budget rally next month. Kruti Shah, quant analyst at Equirus expects the flip to result in a fall to 23000, which she calls a “good level" to enter the market. “I believe that sectoral churn will happen, but midcaps could continue to outperform the large caps," said Shah. She expects markets could run up to 24,200 in a pre-Budget rally after an initial dip.
