Market momentum decoded: Why Nifty rallied past 20,000 despite FII selling

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Despite foreign institutional investors (FII) having sold Rs 8,800 crore worth equities in cash market in this month alone, the Nifty 50 managed to scale past the 20,000-mark on September 11.

While inflows from domestic institutional investors has played its part, some of the bullishness may have spilled over from the F&O markets, believe experts.

The F&O (futures and options) segment derives value from its underlying asset in cash market, but with speculative activity in F&O on the rise, the tail could also be wagging the dog. According to experts, increased activity in Nifty contracts on the first lone weekly expiry (September 7) has had some effect in helping the benchmark cross 20,000 mark.

On September 7 (Thursday), Nifty contracts saw higher action as Bank Nifty weekly contracts expired on Wednesday, per the new routine. On that day, over 32.75 crore Nifty option contacts were traded compared to 17.62 crore contracts on August 31, which was a monthly expiry and generally attracts higher activity.

In Nifty futures, 1.3 lakh contracts were traded, lower in number than the previous monthly expiry but largely in-line with August 24 weekly expiry.

"Once Bank Nifty was settled on Wednesday, people rediverted capital to Nifty. With broader markets breaking out, traders started looking at Nifty too. We have seen this play out several times where participation increases at market tops and bottoms out when markets are at the bottom," Rajesh Baheti of Crosseas Capital said.

Rohit Srivastava, founder of Indiacharts, believes it is too premature to say if Nifty's sole expiry had any significant impact on cash market. However, he does agree that traders can take advantage of the increased volatility in a single contract.

"Expiry day trades are gamma trades. Gamma describes the rate of change of an option's delta. Premium movement was high on September 7 as traders focused more on Nifty," Srivastava said.

For instance, Nifty's 19,700 call option premium swung between Rs 0.75 to Rs 75.3. The 19,700 put option premium swung between Rs 0.05 to Rs 157.65.

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From August 3 to September 4, the Nifty 50 was in a range of 19,200 to 19,600. "Since July 20, Nifty was making a lower high lower low structure. If this had to be negated, a prior lower high had to be taken out," chartered market technician Viraj Vyas of Ashika Institutional Research said.

This key resistance level was 19,650. On September 7, Nifty opened near 19,600, made a low of 19,550 and then rallied higher and took out 19,650.

"This is when short covering started and several stop losses were triggered," Vyas said. On that day, FIIs unwound 8,313 short contracts and added 9,169 long contracts in index futures.

Currently, the net long FII position in index futures stands at 35,066 contracts compared to 7,381 contracts a week back, indicating a 4.7x jump.

Going ahead, the consensus view is optimism on India’s growth prospects in a low-growth world. Despite dollar index hovering near 105-mark and the U.S. 10-year yield at 4.29 percent, FIIs do not want to miss out on the India party - even if it means going long on the index.