Analysts advise caution even as FIIs pare short bets on Nifty 50

Derivative analysts advised investors to remain cautious and nimble-footed in the April derivative series as they warned that the market is “still not out of the woods” despite an over 10 percent rally from the lows of March.

The recovery in the market after the benchmark indices slipped to their multi-month lows in the aftermath of Russia’s invasion of Ukraine was driven by the covering of short positions by foreign institutional investors (FII) in the run-up to the expiry of the March series.

Foreign investors cut their short positions in the futures contract of the Nifty 50 index by 53,495 contracts from the beginning of the March derivative series on February 25 amid signs of a possible resolution between Ukraine and Russia after peace talks held in Turkey.

Also Read: Buy energy, sell growth stocks if Ukraine conflict resolved: Christopher Wood of Jefferies

At the same time, foreign investors have entered the April derivative series with an increase in long positions on the index futures. The FII long-short index futures ratio, a sentiment indicator for FII activity, jumped to 2.8 times at the end of the March series as against the past three months’ average of 1.1 times.

“Any up move in the market should be used to pare long positions. We are still not out of the woods as geopolitical concerns persist,” said Bhavin Mehta of Dolat Capital Markets.

April derivative series has historically proven to be positive for the Indian stock market. However, investors have to still contend with the March quarter earnings season, monetary policy by the Reserve Bank of India, the Russia-Ukraine conflict, and the possibility of aggressive interest rate hikes by the US Federal Reserve.

Analysts suggested that clarity on the market’s direction may emerge after the outcome of the RBI’s Monetary Policy Committee meeting on April 8. With global crude oil prices surging past the $100 per barrel mark in March and retail inflation persisting above the 6 percent mark for the past two consecutive months, investors anticipate a more hawkish statement from the MPC.

Brokerage firm YES Securities has recommended traders to deploy a bear put ratio spread strategy for the April derivative series. The brokerage said traders should buy one lot of 17,500-strike price put option of the Nifty 50 and two lots of 17,200-strike price put option.

“After rallying 12 percent from the recent low, Nifty witnessed mild profit-taking near its 61.8 percent retracement levels. The inability of the index to hold current levels could attract mild throwback till 17300‐17200 zone,” YES Securities said in justification of its strategy in a note on April 1.

Overall, traders rolled over 82 percent of their positions to the April contract of the Nifty 50 on March 31 as against 77 percent in the previous month.

Nifty Bank index likely saw a rollover of hefty short positions by traders suggesting that the pessimism for the sector persists. However, analysts expect banks to do well in the April derivative series because of likely strong earnings in the March quarter, which could force bears to cover their short bets.

Traders rolled over 91.5 percent of their positions in the Nifty Bank futures to the April series as against 76 percent in the previous futures and options series.

Cement stocks saw a higher-than-usual rollover of short positions into the April series suggesting that the outlook for the sector is muted in the backdrop of higher crude oil prices. Earnings of the sector are likely to suffer in the March quarter as higher input costs eat into margins.

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