Stocks are back in fashion, rallying in the face of a trillion-dollar package by the Obama administration in the US and positive global cues.
Aiding the climb is short covering by some “big” shorters.
Some big bears have begun to cover their huge short positions, said a broker, requesting anonymity. “People say these shorts, which run into thousands of crores, will take one to two months to cover. These players are now convinced that whatever combination the election throws up, the fiscal action that will resume will be positive for the markets.”
As if to reassert this, billionaire investor Rakesh Jhunjhunwala told a seminar organised at the Bombay Stock Exchange recently that while the economy itself has not bottomed out, the perception certainly has.
Jhunjhunwala said the fears of some big institution failing in the US, so prominent just a few weeks ago, are no longer there. Also, banks have begun to make operational profits, “which is a great sign.”
The buzz in market circles is that Jhunjhunwala himself is sitting on huge shorts, which he has begun to cover, which makes his comments all the more significant.
The Sensex on Monday gained 457 points, or 5.1%, its best performance in three and a half months.
The volumes came in at Rs 14,000 crore in the cash market. It was a broad-based rally with all the sectors ending in the green.
Banking, Oil & Gas and Metal sectors led the upmove, gaining between 6.3% and 6.66%.
The rally is attributed to an announcement by the US Treasury about a package to clean up the clogged financial system there, which lifted global sentiments.
“The buyback of troubled assets through the trillion dollar package is one of the factors driving the rally,” said Dhiraj Sachdev, head - portfolio management services, HDFC Asset Management.
Another foreign hand in the upmove is that of the foreign institutional investors (FIIs). “FII selling has also gone down, and there is support from the domestic institutions,” said Shahina Mukadam, director, Varun Capital Markets.
Domestic institutions have been net buyers in the past week by Rs 149 crore.
FIIs have bought nearly Rs 1,000 crore worth of equities in the same period.
FII buying is helped along by the movement in the dollar. “The weakness in the dollar has a strong correlation to the current rally,” said Sachdev of HDFC Asset Management.
The negative sentiment prior to the rally had resulted in a build-up of shorts, say experts.
And this sustained reversal has caught many traders on the wrong foot.
“There has been short covering from the people who have not expected the markets to cross the 2700-2800 mark. The move beyond 2850 has caused the market to go even higher,” said Ambareesh Baliga, vice-president at Karvy Stock Broking.
Sachdev agreed. “The expiry is this week and that has resulted in more short covering.”
Expiry takes place on the last Thursday of the month.
The rally could still have some steam left in it, feel market experts. However, it is not expected to go beyond the psychologically important 10,000 mark.
“Profit booking is expected to take place as it gets closer to the 10,000 mark. Technically, the rally should take it slightly below that level,” said Mukadam of Varun Capital.
Baliga of Karvy too does not see the market going much beyond such levels. “The markets could go to 3000-3050 points on the Nifty, but is unlikely to move beyond that,” he said.
