Shorts, Longs, and Holidays: The real story behind Sensex's 1,300-point jump

The US move to delay new tariffs by 90 days further eased global sentiment, offering a macro tailwind to the rebound.

Benchmark indices surged on Friday, capping off a volatile week with a dramatic rebound that saw the Sensex jump over 1,300 points and Nifty 50 reclaim the 22,700 mark. The rally wasn’t just a reaction to a single data point or news flash but was the culmination of several forces coming together at once.

At the heart of the move was the US administration’s 90-day pause on trade tariffs, that had triggered a 9.5% move on the S&P 500, on April 9. While this was followed by a fall of 3.5% on April 10 owing to fears of a trade war between Trump and Xi Jinping, the US markets were on the net higher by 5.7% over two sessions. As the Indian markets were closed on April 10 due to a holiday, the bullishness had not been digested.

The positive trigger was met with a perfect trade set up that facilitated a rally. Unwinding of short positions by foreign institutional investors (FIIs), coupled with aggressive long bets by domestic institutional investors (DIIs) - catalysed by a truncated trading week ahead - led to a sharp rise in the indices, derivatives analysts explained.

In the run-up to Friday, FIIs had rebuilt a significant chunk of their shorts. From a peak of nearly 200,000 net short contracts before March 4, they had pared down to 30,000 by mid-month. But as the market corrected through late March and early April, FIIs added back around 115,000 contracts, as of April 8. With volatility rising and a long weekend looming, traders rushed to cover these shorts, setting off a powerful rebound.

At the same time, DIIs appear to have gone all-in on a turnaround. Their net long position in index futures hit an all-time high of 79,153 contracts on April 8, signalling a strong belief that the market may be bottoming out. To put this in context, previous DII positioning peaks—March 2023 (52,700), COVID crash (44,035), and the 2019 corporate tax cut rally (53,996)—were all followed by sustained market uptrends.

While DIIs typically use futures for arbitrage, analysts believe this time may be different. Mutual funds are sitting on a sizeable cash pile - thanks to strong inflows and recent profit-taking - may be using futures to maintain market exposure without immediately deploying capital in the cash segment. “It’s a way to not miss out on sharp upmoves, especially in a news-heavy environment,” said one trader.

The US move to delay new tariffs by 90 days further eased global sentiment, offering a macro tailwind to the rebound. “It allowed this kind of retracement to play out,” said a derivatives strategist. “We’ve seen similar technical bounces globally.”

Looking at the April 11 rebound, technical analysts suggest that the next resistance level to watch is 23,070, which is the 61% retracement of the fall from Nifty’s March 25 peak of 23,869 to the April 7 low of 21,743. That’s the key level to watch, and will determine whether the rally has legs or if it fizzles out into another lower top.

Friday’s rally was less about euphoria and more about positioning, timing, and tactical adjustment. The confluence of FII short-covering, DII positioning, and a favourable news backdrop created the perfect conditions for a sharp upside move. What remains to be seen is whether this marks the beginning of a sustainable rally—or just a breather in a still-volatile market.

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