As most exit polls predicted a landslide victory for the BJP-led NDA, projecting over 350 seats for the coalition, markets are also rejoicing in hopes of the Street's 'bull case' election scenario coming to life. The bullishness that spread over the Street in the hopes of BJP's return to power for a third term has pushed Indian benchmarks, the Nifty 50 and Sensex to scale new record highs, with both surging over 2.5 percent.
Building on the bullishness, Rohit Srivastava, founder and market strategist at Indiacharts.com believes that the market is set for a multi-week rally, which is likely to be driven by huge short covering from Foreign Institutional Investors (FIIs).
FIIs significantly increased their short positioning in the Indian derivatives markets between May 30-31, which pushed the long-short ratio to its lowest level since October 2023. This sharp action led to the FII long-short ratio plummeting from 50 percent to just 13 percent, implying the dominance of short positions.
According to Srivastava, it is this sharp spike in short positions that has created the perfect technical setup for a multi-week uptrend. "Such a huge short positioning from FIIs may take some time to liquidate, which will trigger a multi-week rally in the market," Srivastava said in an interaction with Moneycontrol.
However, after the sharp gains seen in today's session, Srivastava also sees scope for a rather flat trade on June 4, on the day when election results are slated to be announced.
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"If we see a significant surge in the current session, there is a possibility that tomorrow could also be a day of flat trade as the market would factor in all the gains likely to be made by the BJP today itself. In the event of a sharp surge, the market may already discount the BJP winning around 350 seats," Srivastava added.
As of 09.57 am, the Sensex was up 2,015.53 points or 2.73 percent at 75,976.84, and the Nifty was up 629.20 points or 2.79 percent at 23,159.90. Both the indices scaled their record highs of 76,738.89 and 23,338.70, respectively. Market breadth also tilted heavily in favour of gainers as over four stocks rose for each one that fell.
Aside from the benchmarks, Srivastava also sees a case for some level of sector rotation happening. He sees relative strength in banking stocks, and also information technology names, largely due to their underperformance in recent times.
Aligned with his expectations, the Nifty Bank index surged close to 4 percent to top the 50,000-mark for the first time on June 3. Within the banking pack, Srivastava also feels that private sector banks will outperform their public sector peers this week.
This sectoral rotation will likely be triggered by the fact that most sectors that stood to benefit from the BJP's return to power have already slipped into overbought zone. "The relative strength index (RSI) for most PSU names have already surged above 90 which makes us believe that these sectors need to cool off a bit. It is not going to be a long-term trend but definitely a short term cool off in sectors that were leaders in the market previously," he said.
Profit booking may sweep in
If results of the general election do deliver on the Street's expectations, Srivastava feels that it might trigger a bout of profit booking this week, initiated by investors who were betting for the BJP's win.
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"Investors betting on the BJP's return to power will take home some profit after results come in. The kind of upmove that we've seen today is unlikely to be seen tomorrow as well when actual numbers finally come in. Hence, on a one-to-two day basis there is a likelihood of trade going on the downside, as opposed to our medium term expectations of a rally," Srivastava said.
Post the gap-up open, Srivastava does not see the market extending its gains and said that he wouldn't be surprised to see the Nifty 50 closing in the session around the 23,000 mark.
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.
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