Dear Reader,
As the nation awaits the general election results, traders have strategically positioned themselves in anticipation. Typically, traders reduce their futures positions ahead of such significant events, opting instead for the options market to capitalize on increased volatility. However, this time, traders appear more confident in the outcome, choosing to maintain their future positions.
The rollover data is telling: 71.76 percent of futures positions were carried forward to June, a notable increase from the 65.12 percent rollover between April and May. This strong rollover activity persists despite the India Vix, a key measure of market volatility, reaching a two-year high of 26.2 percent.
A significant portion of the high rollover can be attributed to the substantial short positions maintained by Foreign Institutional Investors (FIIs). These positions are notably larger than those carried forward in the previous two elections. This trend suggests that FIIs are either hedging their bets or anticipating a negative outcome from the upcoming results.
Nevertheless, the broader indices faced pressure during the expiry week, resulting in a loss of around 2 percent.
Cautious optimism
In anticipation of the national election results and exit polls, the Nifty surrendered all its gains and closed lower for the week. Last week's breakout has faltered for now, with the final line of support at the 20-week average, around 22,212. Sentiment has quickly turned bearish ahead of these events, a stark contrast to the optimism seen before the previous two elections, suggesting a potential surprise this time around.
The short-term market trend is beginning to show oversold conditions (see chart Daily Swing Index), but it is likely wise to wait until after the election results to make any moves. The daily swing index returned to 12 this week, marking the third occurrence in two months, even at a higher Nifty level. Despite this, I prefer to wait for a clear trend reversal signal, as markets can sometimes continue to decline in oversold conditions. This is not the time for negative surprises.
Daily Swing Index
Source: web.strike.money
The indicator features two red lines at the top and bottom to signify minor and major extremes in the data. The Nifty rebounded twice when the data reached the first red line, indicating that when FIIs were excessively short, the market was primed to rise. Following the expiration of monthly futures this week, FIIs have carried forward an even larger short position than during the previous two occasions when the market rebounded just before major events. This suggests they are either hedging against uncertainty or expecting a negative outcome.
Regardless, the data has entered the range of major extremes (see chart FII Net Index Futures), similar to the levels seen at the market bottoms in November 2023 and March 2023. It's prudent to wait for the data to bottom out before taking action. However, this situation is on the verge of becoming historically significant.
In the cash market, FIIs continue to sell, taking the sales for May at Rs 43,651 crore.
FII Net Index Futures
Source: web.strike.money
The 20-day advance-decline ratio has returned to the first red line (see chart 20-Day Advance Decline Ratio), a level last seen on May 9, despite the market being much higher now. Interestingly, the recent new high in the Nifty was not matched by a corresponding high in the advance-decline ratio, resulting in a negative divergence. This indicates that midcaps did not perform as well as the Nifty this time around. We now need to observe whether this oversold reading will hold or if the ratio will drop to the second red line below. A clear improvement in market breadth would be a more positive indicator for the next rally.
20-Day Advance Decline Ratio
Source: web.strike.money
Options data shows increased call writing during the week (see chart Open Interest). If the market opens sharply higher after the Exit polls, one can expect short covering that can push the market even more.
Open Interest
Source: web.strike.money
Indices and Market Breadth
The expiry week saw the benchmark Nifty fall 1.85 percent and Sensex lose 1.92 percent. The smaller indices, mid-cap and small-cap, fell by around 1.50 percent. The Nifty Midcap 100 hit a new high during the week.
Only two indices, Nifty PSU Bank and Nifty Bank, closed in the green, gaining 0.37 percent and 0.03 percent. The top losers were stocks in the Nifty IT, which fell 4.25 percent. Nifty Energy dropped by 3.31 percent, and Nifty Commodities by 2.80 percent.
Among the top gainers during the week are Krishna Defence, which rose 48.61 percent; Ameya Laboratories, which gained 40.55 percent; and Excel, closing 33.33 percent. Stocks that lost ground during the week were Davangere Sugar, which lost 89.72 percent, Aatmaj Healthcare, which fell 28.29 percent, and Trust Fintech, which closed 27.07 percent.
Global Markets
Global markets also saw some selling pressure during the week, with the MSCI World index falling 0.49 percent. In the US markets, Dow Jones fell 0.98 percent, and Nasdaq was down 1.1 percent. The Nasdaq had the biggest decline at 1.1 percent, snapping a five-week winning streak.
Higher-than-expected inflation data saw European markets fall during the week. Markets were expecting the European Central Bank to cut interest rates at its June 6 meeting. Euro Stoxx 600 corrected marginally during the week. The DAX and CAC 40 fell by around 1.20 percent, while the FTSE dropped by 0.51 percent.
Asian markets also closed marginally lower, with Hang Seng leading the fall, losing 2.84 percent in a week. Nikkei and Shanghai closed the week marginally lower.
Stocks to watch
Among the stocks expected to perform better during the week are Dixon, SBI, Adani Enterprise, Adani Ports, HUDCO, Union Bank, Bikaji, Glenmark, and HeroMotoCorp.
Among the weaker stocks are IndiaMart, SBICard, Renuka, HDFC Life, GMM Pfaudler, Tata Tech, LTIM, Syngene and PEL.
Cheers,
Shishir Asthana
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