Elevated FII positions suggest strong bullish sentiment; experts urge caution as a bearish phase may loom

Despite high positioning levels, stock rotation has prevented a broad market decline. Nevertheless, the Nifty index may cool off, echoing the July scenario where market corrections followed a similar peak due to external factors like the yen carry trade.

Foreign institutional investors (FIIs) are back in the spotlight, holding over Rs 10 trillion in futures and options (F&O) on equity indices and single stocks listed on the National Stock Exchange (NSE). This comes as the Indian stock market prepares for the upcoming earnings season and the U.S. election period.

Their bullish sentiment is underscored by a significant increase in bullish bets on index futures, particularly those linked to the NSE Nifty 50. Notably, Indian equity indices achieved fresh record highs in the previous session, with the Sensex crossing 85,000 and the Nifty surpassing 26,000 intraday.

However, experts caution that while FIIs remain aggressively optimistic, the impending volatility and potential corrections may require strategic adjustments among investors, making the next few weeks critical for market trajectories amid unfolding economic factors.

Dinesh Nagpal, a seasoned derivatives trader, noted that for every 1 put option long, FIIs have 1.11 call option longs. This is normally seen as an extreme leg of their short-term bullish stand. "If we see a sharp reversal in this ratio of PE versus CE then we should be careful on longs else keep trailing longs," he told Moneycontrol.

In contrast, retail clients have been extremely bearish since the last 10 days, which means they are in big notional mark-to-market (m2m) losses against FIIs who have been aggressively bullish for over a month and are adding more longs.

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"It's a tight squeeze scenario with advantage in favour of FIIs. Wait for one side to raise the chequered flag with either FIIs booking profits or clients accepting losses and covering shorts and not rolling them," said Nagpal, adding that he awaits signals by Wednesday’s close regarding rollover percentages. "So far, there is no letdown in rolling longs into October," he highlighted.

Rohit Srivastava, founder of Indiacharts.com, highlighted that FII positioning stands at 3.6 lakh contracts, nearing the high of approximately 3.92 lakh contracts recorded on July 4 this year. This level is the highest since 2016, a period marked by significant economic shifts in India.

Historically, market tops have been around 1.9 lakh contracts, signifying that current FII positioning is notably elevated, he said.

“This excessive bullish sentiment suggests high optimism among FIIs regarding the Indian market. However, such widespread bullishness often calls for caution. A bearish phase could be on the horizon from a Nifty perspective,” Srivastava explained.

Despite high positioning levels, stock rotation has prevented a broad market decline. Nevertheless, the Nifty index may cool off, echoing the July scenario where market corrections followed a similar peak due to external factors like the yen carry trade.

As we approach the end of the month, clarity on the actual positioning of futures and options will emerge, particularly after Thursday’s market close as it is the monthly F&O expiry. This will indicate whether investors are rolling over their positions into the following month or liquidating long positions. If longs are rolled over, market pressure may increase, Srivastava told Moneycontrol.

Moreover, October typically coincides with earnings season and the U.S. elections, historically associated with market weakness as major events loom.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.