Derivatives data signals relief rally for Indian stocks, brokerages say
The Nifty has tumbled 11.3% over the last four monthly derivatives series, each of which spans between the last Thursdays of a month, with the most recent one ending on Jan. 30.
However, about 81% of the total Nifty futures at the end of the January series was rolled over into the February series, based on National Stock Exchange data, higher than the average of 77% in the previous three series.
That indicates traders' willingness to build on their current positions, leading to likely stability in the markets.
The Nifty has dropped about 0.8% so far in January, poised to finish lower for the fourth month in a row in its longest monthly losing streak in 23 years. It has tumbled 9.2% in the past four months, a drop that derivatives data had indicated was possible.
This time around, the data is more encouraging.
At the end of the January series, the addition in open interest (OI), or the total number of active unsettled futures contracts, was the highest in the financial services and information technology index futures, according to Nuvama Alternative and Quantitative Research.
This implies potential higher activity in their underlying securities due to the availability of more buyers and sellers and is crucial since these two sectors have a combined weightage of about 50% among the 13 major indexes.
Another encouraging sign was the positioning of foreign portfolio investors (FPIs), whose total outflows of $20.5 billion in the past four months have been instrumental in the Nifty's decline.
While FPIs added Nifty index shorts in the January series, they reduced short positions in index futures in the last six sessions, raising expectations that their outflows might slow down.
Overall, investors' positioning in derivatives markets at the start of the February series signals the scope for a relief rally, according to Nuvama and IIFL Securities.
However, there are two important events that could help decide the market's path -- the annual budget on Saturday, Feb. 1 and the Reserve Bank of India's policy decision next Friday.
The RBI's mega liquidity infusion package that kicked off on Thursday has raised hopes of an interest rate cut.
"Any budgetary support to complement the central bank's measures to inject liquidity in the banking system is likely to cheer the markets," said Sriram Velayudhan of IIFL Securities.
Nuvama said that a growth-focussed budget could trigger FPI short-covering in derivatives contracts in financials, leading to an immediate market rally.
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