The market is seeing a rebound, but will it last?

However, market participants warned that the rally driven by short covering could prompt investors hit by the recent correction to cut losses, potentially limiting the duration of the recovery. For now, they do not expect any significant impact from the indictment of Gautam Adani and other senior officials of the group in the United States on charges that the conglomerate has called baseless.

“The market will continue after the impressive victory of the BJP-led alliance in Maharashtra,” said Madhusudan Kela, founder of financial services firm MK Ventures, adding that the recent correction has opened up buying opportunities for underperforming PSU stocks in Maharashtra. capital goods, defense and railways.

Nifty and Sensex shares gained about 2.5% each on Friday as foreign investors covered some of their bearish bets ahead of the state election results over the weekend. Of course, the market was near a severely oversold zone, indicating that a rebound was overdue.

Leader Nifty alone corrected 11.5%, or over 3,000 points, from its record high of 26277.35 on September 27 to Thursday’s low of 23263.15. A fall of 10-20% from the peak is called a correction, while a fall of more than 20% signals the start of a bear market.

The recent decline was driven by net selling by foreign investors ₹1.2 trillion worth of shares since October. While domestic institutions, led by mutual funds, pumped up net ₹To counter them, their purchases failed to absorb the flow of shares of companies going public and private equity funds selling shares. For example, only two major IPOs – Hyundai Motor India Ltd and Swiggy Ltd – have a total of ₹Shares worth Rs 39,198 crore were issued during this period, mitigating the effect of domestic institutional purchases.

The market correction took root after poor quarterly earnings and uncertainty over the US election outcome, sending the Nifty index down to an annual forward price multiple of 19.6 times. That compares to 20.55 when the market hit its all-time high on Sept. 27 and the two-year average of 19.3.

Apart from selling ₹Since October 1, FIIs worth 1.2 trillion shares have taken a cumulative net short position in Nifty and Bank Nifty index futures of 154,349 contracts on Friday. That leaves room for “further short covering,” said Ambarish Baliga, an independent market analyst.

Also read | Record FII exodus rocks Indian stock markets despite surge in domestic funds

“The Maharashtra state election victory was more than a narrow victory as most polls had predicted and markets are likely to approve on Monday,” Baliga said.

While Chanakya had projected 152-160 seats for Mahayuti, the BJP-led alliance, it won 230 of the 288 assembly seats.

Baliga added that the rise, although sharp, could be sold as most investors stuck at various levels of Nifty’s 3,014-point fall from September 27 to date will exit their positions with less loss or little gain.

“These are mainly investors who have not seen a decline in the last two or three years and will sell on the rise,” he explained.

Neither Kela nor Baliga expects the Adani group’s latest troubles to damage markets for now, with the former expecting the group’s “resilience” to allow it to weather the “current storm”.

However, prior to this, short covering by FIIs could have driven up equity futures and thus encouraged cash buying by arbitrage funds that exploit the difference in spot futures prices to make risk-free profits – buying in cash and selling futures to capture the spread. at the expiration of the futures contract, when the spot and futures prices are the same.

The recovery is also likely to be supported by global index provider MSCI rebalancing its emerging markets index on Monday. According to Nuvama Wealth, the rebalancing will result in about $2.5 billion of passive foreign investment inflows into India, of which about $1.9 billion into HDFC Bank alone, whose weighting in the index will increase.

Neither Kela nor Baliga expect the Adani group’s latest troubles to damage markets for now, with the former expecting the group’s “resilience” to allow it to weather the “current storm”.

Baliga, however, expects the US court’s indictment to have a “negative overhang” on the group’s shares until there is clarity in the court case.

Short coverage

While FIIs were selling temporary ₹On Friday, they covered 46,712 short positions in index futures worth Rs 1,278.37 crore, buying them back for ₹On Friday, stock exchange data showed 3,018 crore. As a result, their cumulative net short positions dropped to 154,349. Apart from FIIs, DIIs (25,525 contracts) and retail traders (58,011 contracts) were holding net short positions as hedges. The counterparty to these investors was the retail client/HNI nominated by the NSE, which had 237,885 net long contracts as of Friday, according to NSE data.

“The bounce we saw on Friday may continue until Nifty recoups 50% of the fall from its September 27 high to Thursday’s low,” said Rohit Srivastava, founder of IndiaCharts.

The 50% retracement of the decline from 26277.35 to 23263.15 is at 24770, 863 points or 3.6% above Friday’s close at 23907.25.

Also read | Adani’s indictment rocks both stocks and bonds

Excluding futures, the market’s put-call ratio (PCR) was 0.73 on Friday, meaning that for every 100 index and options calls sold, only 73 equity and index calls were sold, holding the market near oversold territory. The bounce is based on the closing of short or bearish call option contracts, which will increase the PCR.

According to Srivastava, the latest two-year PCR range is 0.7-1.04, with a reading below 0.7 indicating a severely oversold condition and a reading above 1.04 signaling overbought markets.