Investors turn bullish with caution amid growing optimism of BJP winning election; here’s what F&O data show

The Nifty futures are trading above the short and long-term moving averages -- a bullish signal.

As India paces closer to the election results due next week, the D-Street has turned bullish, albeit with a blend of caution, as is seen from short covering and significant long buildup in index futures, coupled with heightened volatility.

The NSE Nifty 50 index has witnessed heavy short covering in the futures space, followed by long additions, said derivatives expert Arun Mantri of Mantri Finmart. “Foreign Institutional Investors (FIIs) were net short in mid-May, but have now turned net long,” he said, adding that the bias has turned bullish for the short term.

The benchmark indices have shown rapid gains of late, with both Sensex and Nifty hitting new all-time highs above 76,000 and 23,000 in the previous two sessions, as investors have grown more confident about Prime Minister Narendra Modi’s BJP-NDA winning a comfortable majority in the ongoing general elections.

Markets shun concern, turn confident of BJP win; FIIs now net long

While the markets had turned cautious earlier during the month of May, hit by the concerns of low voter turnout and uncertainty over the election results -- Nifty hit a swing low of 21,821 on May 13, the sentiment seems to have reversed as the voting has progressed into the final phases.

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Earlier, on May 15, the net long/short ratio of index futures for Foreign Institutional Investors (FIIs) had dropped to 26.23 percent. It rebounded to 51 percent over the next eight trading sessions, said Sudeep Shah, Head - Technical & Derivative Research Desk - SBICAP Securities. “This indicates that FIIs have covered their short positions,” he said.

This short-covering was majorly led by large cap stocks like, Reliance Industries, HDFC Bank, Axis Bank and Hindustan Unilever, added Shah.

Technical indicators support positive market sentiment

Other technical indicators also support the positive sentiment. The Nifty futures are trading above the short and long-term moving averages -- a bullish signal. Since May 15, the Nifty future has gained by over 3 percent. Further, the cumulative open interest (OI) for the current, next, and far series has increased by 13 percent. This overall long buildup indicates a positive market stance in recent sessions, said Shah.

Also Read: Will the Bank Nifty continue to outperform benchmark Nifty 50 in near term?

On the other hand, the open interest data reveals critical levels to watch. Significant call options open interest is concentrated at the 23,000 and 23,200 strikes, while put options open interest is notable at the 22,900 and 22,800 strikes. "This suggests immediate support for the index at the 22,700-22,600 range, with a crucial hurdle at the 23,200-23,300 range," said Shah.

But the euphoria is not without a blend of caution

Despite the bullish signals, caution prevails due to the elevated volatility index (India VIX), which is trading above the 25 mark. Both Mantri and Shah said that the high IVs reflect market uncertainty.

“The IVs (implied volatility) are definitely highs in the options space given the rise in the India Vix, which is also trading above 25 mark,” said Mantri.

Shah added that the elevated levels of the volatility index suggest continued upward momentum, “potentially reaching 27 or even 29 in the coming sessions”.

Given the highly volatile environment, Shah recommends a conservative approach. "We advise avoiding excessive leverage and emphasise the importance of maintaining strict stop-loss orders," he said.

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