IT sector should outperform Nifty50, materials to resume up-move in June series, says Deepak Gupta of Emkay

Nifty ended the May series with a gain of 3 percent while Bank Nifty ended with a gain of 4 percent. This was despite the fact that FIIs sold more than Rs 9,000 crore in cash equities in May and DIIs bought only around Rs 600 crore. It shows that the retail category has been able to absorb the selling from the FIIs. Based on the charts and the fact that the selling was absorbed despite negative sentiments prevailing due to the second wave of COVID, we believe that the uptrend in the markets should continue.

The stock futures Open Interest (OI) is up 13.8 percent MoM in value terms. The participant wise and the sectoral composition of this OI has changed considerably.

The exchange gives participant wise OI data and it divides the participants into Clients, FIIs, DIIs and Proprietary books. The Clients which are predominantly directional investors have a net long OI which is the highest in the last three years and a half. Their net long OI has increased by 55 percent in this series. The chart below depicts the change in OI positioning of the various participants. The net-short by DIIs is not a directional bet, but is the short futures held by the arbitrage funds.

Source: NSE, Bloomberg, Emkay Alternate and Quantitative Research

Amongst the sectors, Banking, NBFCs and consumer staples have seen the highest increase in OI.

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Deepak Gupta

VP - Derivative Sales|Emkay Global Financial Services

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  'High rolls in banking sector indicate Bank Nifty could outperform Nifty in July series'

*Spot Change is for the May expiry series

The materials sector despite seeing a sharp correction has not seen a reduction in OI which means the longs have retained their faith in the sector. The cost of carry also continued to remain rich in this sector. Hence, we believe that this sector should resume its up-move in the June series.

The huge OI addition in BFSI indicates that even this sector should start outperforming Nifty. But, since there is still some disbelief on the NPAs front, we don't think it will be a runaway outperformer.

The IT sector also should outperform in the June series as it has seasonality backing it. In the last 3 quarters, the sector has outperformed for 1-1.5 months preceding the quarterly results and then given up the gains post the results. The ratio chart of IT Index over Nifty is produced below and shows the seasonality in outperformance.

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