Street split between short covering and long buildup; cautious optimism ahead of June 4

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Stock market investors are riding a mix of short covering as well as long buildup - a trend that captures cautious optimism - in the runup to the election results due next week, data available till Tuesday, May 28 showed.

Bullish Trends in Stocks

Sudeep Shah, Head of Technical & Derivative Research at SBICAP Securities told Moneycontrol that several stocks have seen significant long buildup since May 15. "Balkrishna Industries, Hindustan Aeronautics, Oberoi Realty, Dixon Technology, Samvardhana Motherson, Glenmark Pharma, and Mahindra and Mahindra have all witnessed long buildup," Shah said. This suggests investors are positioning themselves positively in these stocks ahead of counting of votes.

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Arun Mantri of Mantri Finmart too highlights a similar trend in the banking sector. "Short covering was clearly witnessed in HDFC Bank, followed by other private banking stocks," Mantri said. This indicates a rising expectation of outperformance in the financial sector shares, in the near term.

IT and Pharma - Defensive Bets

Mantri also points out that IT and Pharma names have witnessed long additions - a sign of hedging of positions -ahead of the election results. "This indicates that some defensive bets have also been created," he explained. Investors often turn to these sectors for stability during periods of uncertainty, reflecting a sense of caution despite bullishness in overall sentiment.

Short-covering Rallies

The market has also seen a short-covering rally in several stocks in recent days. SBICAP's Sudeep Shah points out that "BEL, PFC, Coforge, Ashok Leyland, Voltas, Persistent, and LT have all experienced significant short-covering rallies." This trend often signals that traders are getting cautious and closing their bearish bets, thus leading to higher stock prices as demand increases.

Persistent Shorts in Key Stocks

In a bullish setup near record highs on index, some stocks continue to exhibit weakness. "Deepak Nitrite, Sun Pharma, and Petronet LNG are still looking weak on both technical and derivative fronts," Sudeep Shah mentioned, adding that these stocks run the risk of further selling pressure.

Arun Mantri of Mantri Finmart also observed ongoing short interest in major index names like Reliance Industries and TCS. "Shorts are still holding in Reliance Industries and TCS, which is dragging the index lower," he explained. This suggests that not all market participants are convinced of an imminent positive upmove after elections.

Potential Outperformers 

Arun Mantri said he can identify several stocks that could outperform if the market momentum picks up. "We see a bullish breakout in Divi's Lab, Ultratech Cement, and SBI, which are coming out from their consolidation breakouts. If the market gathers momentum, these three stocks are expected to outperform in the near term," he said. These stocks have shown strong technical patterns, he added.

Short Covering in Index Derivatives Shows Bullish Bias

The broader market sentiment has been characterised by cautious optimism as investors anticipate the election results. The NSE Nifty 50 index has seen heavy short covering followed by long additions, with Foreign Institutional Investors (FIIs) turning net long from a net short position in mid-May. This shift indicates a short-term bullish bias, although elevated volatility levels reflect underlying uncertainty.

While the market displays signs of bullishness, investors remain cautious, balancing their positions with both defensive and speculative bets.

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