By Anand James
FIIs unfazed by approaching expiry, raise their longs further
FII’s addition to positions in index futures have shown signs of urgency which is usually seen either at reversal points or points from where large uptrend takes off. Friday’s run has an obvious reason, but we need to see how much of it can be discounted, and how much of the momentum can be taken forward into the expiry week.
While retail participants trimmed their long exposure in the index future segment by 2.5% their shorts were boosted by 25%. Even the short to long ratio fell only marginally to 0.5%. Meanwhile, FIIs boosted their longs in this segment by 23% to their highest this year, while reducing the short exposure by 18%, thus taking the long to short ratio of their index future positions to 75.9%.
While this is an extreme, and it is usual to see reversals when FII positions reach extreme, the increase in OI lends a momentum that may weather the concerns of reversals. Rollover picture will get better in the next two days, by which time we will know if the extra positions will lend momentum or capsize the boat. Without doubt, let us brace for large moves in the expiry week in both the key indices.
Brace for large moves ahead of expiry
While we have had 25800 as a floating target for NIfty through the last fortnight, the urgency with which it was achieved on Friday, prompted us to check if the broader market was responding with equal vigour. While we found that Nifty Small cap 100 index rose almost as much Nifty during the run up to 25800 early in the day, with a lag of not more than 10 to 15 basis points
The lag expanded to almost 50 bps after that when Nifty dropped 200 points and recovered almost as much within no time. So, while it could be said that the broader market responded with reasonable vigour to the FTSE rebalancing, the volatility in the closing hours did bring in jitters, which explains the lag pointed out above between the Nifty and small cap indices.
Another aspect we will be closely watching would be how the nifty futures would play in the next week as they had gone into discount, unable to keep up with sustained buying in some of the Nifty heavy weights.
Ideally this is a sign of large demand on the spot, prompting us to consider the possibilities of 26600 on Nifty. That said, how the discount will play out on Monday will guide us if we need to play upside with urgency, or ignore Friday’s turn of events as part of index rebalancing.
Sectoral Cues
Nifty IT Index
The IT index has wiped off almost all of the gains of the previous week, but the doji on Friday as well as exhaustion in bearishness as suggested by oscillators suggest that a recovery is due. Stocks like TCS, Infy, Hcltech, LTIM and TechM, which together form around 86%, could lead the recovery attempt.
Nifty Auto
The auto index has seen an all-time high closing this weekIn August series, during the third week of the contract, we saw 31% stocks on the gainer side but during the same time this series, we have 80% of the Auto stocks on the gainers list which is painting a rosy picture for the sector as we move into the expiry week. Four-wheeler and heavy vehicle makers like Maruti, Tatamotors, M&M, Eichermotor, which together form more than 50% of Nifty Auto index, looks strong and could push the index higher initially, but expect to slow down as the week winds up.
(About The Author: Anand James is the Chief Market Strategist at Geojit Financial Services.)
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