Derivatives markets are showing signs of decline

This is due to retail and high net worth individuals (HNIs) turning bearish while foreign investors turned bullish – a reversal that often leads to market declines and pullbacks in the short term.

Retail/HNIs, designated as ‘clients’ by the NSE, were a cumulative net bullish of 333,364 contracts in index futures (Nifty and Bank Nifty) on June 4, when the election results were announced, but reversed this in the 12 sessions ended June 21 to be a net bearish of 57,613 contracts.

During the same period, foreign institutional investors (FIIs) changed their net bets on index futures from 355,379 bearish contracts to a cumulative 73,991 bullish contracts.Whenever such a reversal has happened in the past, the market has tended to retreat or fall.A retreat is a 5-10% fall from the peak while a correction indicates a 10-20% fall from the peak.

For instance, on September 18 last year, when the Nifty was trading at 20,133.3, individuals/HNIs ​​were net short by 84,214 contracts (adjusted to take into account the change in Nifty contract size from 50 shares to 25 shares as on April 26 this year) while FIIs were net long by 117,990 contracts. From there, the Nifty fell 1000 points to close at 19,133.25 on November 2.

By that date, Individuals/HNIs ​​had turned bullish by 292,822 contracts and FIIs had turned bearish by 351,396 contracts, following which Nifty rallied by 2,100 points in just 34 sessions to hit 21,255.05 on December 21. Though a reversal has occurred this time too, brokers are expecting a small and short-term pullback of around 2-3% from Nifty’s recent closing level of 23,501 as markets tend to rise a week or two before the Union Budget.

“We expect a pre-budget rally but before that there could be a modest 2-3 per cent dip, which could take us to 23,000-22,800,” said Dheeraj Leri, managing director and chief executive officer, HDFC Securities. “From that level, I think the market could move up and retest today’s (June 21) all-time high (23,667.10).” The Nifty closed at 23,501.10, down 0.28 per cent, on Friday. Leri said investors are shifting money from auto and public sector stocks to defensive sectors such as private banks and FMCG, which could spur a rally ahead of the budget announcement next month. Equirus quant Kruti Shah sees the reversal taking it to 23,000, which he calls a “good level” for the market to enter. “I think there will be some disruption across sectors but midcaps could continue to outperform largecaps,” Shah said. He expects the market to rise to 24,200 after an initial dip and a pre-Budget rally.