Short Call | Smallcaps make big leaps, IEX in short squeeze, Tata Chem bulls charge, HDFC AMC in pressure

Too much of anything is not a good thing, warn some of the old hands on Dalal Street.

All the action right now is happening in the small-cap space. And, too much of anything is not a good thing, warn some of the old hands on Dalal Street. Fuelling the rally is the money flows coming through the mutual SIP route, a big chunk of which is now going into mid- and small-cap funds which have fared the best over the last couple of months.

Bears are having to cover up their short positions as the stock continues to remain on the F&O ban list. When a stock is on the ban list, only existing

positions can be squared off, no fresh positions can be taken up. On June 9, when the stock was being hammered, there was huge activity in calls of Rs 140 and Rs 150 strike, which is a bit counterintuitive.

When a stock is falling rapidly, demand for puts usually go up. But it is possible to buy deep out of the money options cheaply to hit the market wide position limit and ensure that a stock is not exposed to further attack from short sellers.

Despite a weak outlook on soda ash prices, bears are unable to have a go at the Tata Chemicals stock. That is because the stock is now part of the F&O ban list on the NSE. Typically, a security moves into the ban list where there is too much activity either on the buy or sell side. Tata Chemicals has managed to get there without either.

The stock closed 5 percent higher after private equity investor TPG sold its entire stake in the company, and the lot was picked up by a bunch of foreign investors and domestic institutions. Open interest in futures has gone up sharply, indicating a bullish outlook on the stock among traders. Chatter is that a big up-move is likely only after the Piramal group too sells out. The Pirmal group holds 8.3 percent stake in the company. Both TPG and the Piramal group came by the Shriram Finance shares as a result of the recent merger of the Shriram arms.

The stock could be under pressure today on reports that co-promoter Abrdn Investment will be selling its entire 2.18 crore shares (10.2 percent stake) in the asset management company at a discount to market price. At the same time, it also removes a supply overhang on the stock, which had been keeping the stock price in check. The stock rallied from sub-Rs 1,700 levels in late May but once again ran into resistance around Rs 2,000 levels and had been drifting lower for almost a week. Possibly some clued-in traders knew that this big trade was coming.

Both stocks surged on heavy volumes in Monday’s bearish session. Sentiment for both stocks appears to have improved somewhat over the last month, with the price up around 10 percent. Derivatives data shows build up of long positions in futures. The sudden interest is a bit surprising considering that nothing much has changed in the diagnostics space of late. The price war has abated somewhat, but investments in expanding chain of labs means that margins are unlikely to surprise near term. But then expectations are low as well, and the stock is not ‘over owned’ by institutions and HNIs the way it was during the peak of the Covid wave.

The stock increased 2 percent despite a Sebi order banning the broker from taking on new clients for two years. The regulator found that between 2011-2017, IIFL Securities was misusing funds of some clients to meet its own proprietary trading obligations, and that of its preferred clients. IIFL Securities has said that it will appeal the Sebi order. Market chatter is that at the group level, the move may not hurt IIFL much because it will continue to acquire clients through its discount broking arm 5 Paisa Capital, which it has been promoting aggressively. Its net profit for FY23 jumped three-fold, while that of IIFL Securities was down around 18 percent.

Is this time really different? Hype around artificial intelligence has propelled shares of technology companies to record highs in the US. Options bets have exploded in tandem, causing some of the old hands to warn that this rally is beginning to smell like the dotcom bubble way back in 2000. But as any investor who has seen a few market cycles knows, bubbles can be identified only after the event. This brings to mind the words of former Citigroup CEO Chuck Prince who in 2008 had said of the exuberance in the subprime mortgage bonds: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”

UK borrowers are facing a cliff edge that could damage the economy as rising mortgage costs hit deal renewals and the number of products available shrinks, said a CNBC report. Yields on two-year UK Treasury bonds climbed to a 15-year high as markets are pricing in peak interest rates of almost 6 percent, up from the current 4.5 percent, amid a buoyant labour market.

“I think the worst of the mortgage crunch is ahead of us,” said Viraj Patel, senior strategist at Vanda Research. He noted that more than 50 percent of households are still to remortgage at higher rates and this will add stress to the housing market and wider economy.

Chinese homeowners are losing conviction in their decades-long belief that property is a reliable store of wealth, undermining even coveted markets like Shanghai, says a Bloomberg report. Transactions in Shanghai were down 33 percent in May, compared with March.

“Selling pressure is really piling up here” in Shanghai, said Jun Li, chief investment officer at Power Sustainable (Shanghai) Investment Management, a Canadian financial firm. “It seems homeowners have reached a consensus that the market has peaked.”

Warren Buffett is clearly seeing something in Japan many global fund managers are missing. Berkshire Hathaway said on Monday it added to holdings in Japan's five biggest trading houses Itochu, Marubeni, Mitsubishi Corp, Mitsui & Co and Sumitomo, which now average more than 8.5 percent. The aggregate value of these stakes surpasses that of Berkshire-held stock in any country outside of the US. Buffett’s investments and his optimism about Japan’s prospects have drawn attention to the country’s improving economic conditions and shareholder-friendly corporate governance reforms that have helped underpin a sparkling rally in the Nikkei index.