Flying on short recovery- FII flows

l Market enacts its biggest rebound ever
l Recovers by 1040 points in a day
l Money momentum pummels tech levels

If you look at the future, the future changes, because you looked at it and that changes everything else.
— Magician/ future teller Frank Cadillac a.k.a Chrys Johnson, in Next, the Nicholas Cage thriller.

 
MUMBAI: Some time on Tuesday afternoon, the powers-that-be in the government saw their future — while some envisioned N-power was better than No-power, others saw the exact opposite.

When a “cooling period” was ordered in the political sphere uptill October 22, tonnes of foreign money waiting in the wings gushed in, and the sheer momentum yanked the market up.

Panic buying by short-sellers rushing to cut losses lifted shares to new highs.

It was such a different story at 9.58 a.m!

The Sensex opened with a 90-point negative gap, was soon hurtling past 200 points southwards.
The bears started to lick lips.
But they were so dead wrong.

What followed was way beyond Frank Cadillac’s acutest prescience: in little over five hours and a half, investors made Rs 2,12,656 crore - or Rs 10.6 crore every second, leading to the highest-ever gain on a single day in the history of Indian stock markets.

“Some short-only hedge funds were caught on the wrong-foot, but they have the investment strategies to tide over such an event. But the smaller players who shorted found themselves in a buying tsunami,” said an analyst with a foreign brokerage, who did not wish to be named due to compliance reasons.

The Sensex unsurprisingly, was the biggest gainer in the world on Tuesday, rising  4.5% or 788 points to close at an all-time high of 18280.

It took 8 sessions for the 17k to 18k leap, statistically. But, from the low of 17287 touched in early trade, the index shot up an incredible 1040 points to 18327 before shedding 47 points on Tuesday alone.

Are we moving into 1000-point rally days from here?

Ajay Parmar, head of research, Emkay Shares, says it’s too early to call.

“Tuesday’s takeoff was largely due to short-covering triggered by political cues,” he said.

The flood of liquidity is blasting past many barriers.

In the last eight sessions, since the Sensex touched the 17000-mark, foreign institutional investors have brought in $3.4 billion to the Indian markets.

There are negative indicators such as high implied volatility (IV) and a high open interest build-up in stock futures in the derivatives market.

But these resistances were bulldozed by the dollar torrent.

“In terms of percentage, a 1000-point rally is not what it used to be. But a 5% rally is significant. Volatility with extreme up and down moves has become the order of the day. One has to live with it while it lasts. There is no logic. It’s not growth story or fundamentals. Not that these are not there. But the rally we are witnessing is pure liquidity-driven,” Deepak Mohoni, CEO, trendwatchindia.com.

The market-wide IV dipped from Monday’s highs of 36% to 31%. Even at these levels, they are a bit high, feel experts.

“IVs have come down a bit from the slightly higher levels to 31-31.5% levels. Even this is high. But in this kind of liquidity-driven market, one cannot complain about high IVs. People who had expected the 5200 on the Nifty to act as resistance jumped into the market once this levels were breached,” says Siddarth Bhamre, fund manager, derivatives,

Angel Broking.

Vivek Jain, derivatives analyst at Edelweis Capital, points out that the high ratio of single-stock open interest positions to the total futures open interest is also a cause for concern.

He warns that if liquidity dries out, then these leveraged positions may begin to unwind.

Open interest on single-stock futures accounted for 70% of total F&O open interest at Rs 46,540 crore against the index futures open interest of Rs 20,199 crore.

Marketwide open interest was already flirting with Rs 1 lakh crore mark at Rs 90,618 crore, though expiry is still three weeks away.

“Till yesterday, we were very bearish on the market as all indicators indicated weakness in the market, especially IV at 36-37% levels. But today’s rally defied all these indicators. There was weakness initially. Nifty open interest remained low. I don’t think there were any shorts in the market. There were tremendous long build-ups.

One cannot afford to go short in this market. You should remain long and hedged.

Also leverage is getting a bit heavier on the single-stock futures. Liquidity is the factor.

“If that dries out, people may start booking profits,” Vivek Jain of Edelweiss capital said.