An oversold stock market could be in for a bounce back


Mumbai: An indicator of foreign investors’ bearish positions in index futures has run into the oversold zone. Historically, after such a situation, there has been a rally in the Indian stock market.

Foreign portfolio investors (FPIs) have a net short position in Nifty futures of more than 1 lakh contracts, which analysts said is high. On the previous five occasions when FPIs have built large bearish positions, the market has rallied 5-8 per cent in the next one month.

“It shows an oversold condition of the market in the near term as traders are over-pessimistic,” said Rohit Srivastava, founder, Overseas investors have been sellers in the Indian markets since July. The government’s announcement of higher tax on the super-rich and FPIs registered as trusts triggered an outflow from the Indian markets.

The sentiment was already weak due to slowdown in the Indian economy and lack of any stimulus from the government to counter this slowdown.


This contrasts with the sentiment prior to the national polls result on May 22, when FPI flows led the pre-election rally.

Another sentiment indicator, Put-Call ratio (PCR) based on volumes — the volume of puts traded divided by the volume of call options — has also risen. The 31-day average of volume PCR is at 0.66 — the highest reading since October 2011, said analysts.

When PCR rises, it means traders are buying more puts than calls. A trader buys put options when she is pessimistic. But, when PCR rises to extreme levels, it is also considered to be a sign of contrarian indicator.

“A high number of puts trading is also a result of excessive pessimism in the market. A market rally would relieve these pressures in a bout of short covering,” said Srivastava.

The Sensex ended 52.16 points, or 0.1 per cent, higher from the previous close at 37402.49 on Monday, which is about 7 per cent off from the record high of 40312.07 hit on June 4 this year.

However, others in the market believe while a bounce back may be on the cards, the rebound could be short-lived.

“A couple of indicators are hinting at a reversal in the market as stocks fall in the oversold zone, but the sentiments remain weak. There could be some bounce back but sentiments are not likely to change dramatically,” said Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities. “On Monday too, Asia and Europe markets gained but the Indian market ended flat. The 200-DMA level of 11,180 (Nifty) could act as a resistance level,” said Radke.

Amit Gupta, head of derivatives at ICICIdirect feels any rally could fizzle out. “Since 2016 we have seen market fall by 11 per cent on two counts and by 15 per cent on one count and these events have been followed by a bounce back,” said Gupta.

Analysts are seeing less chance of a rally also because corporate earnings have been disappointing. Globally, the US Federal Reserve has indicated that the central bank will not be starting a prolonged easing cycle and US-China trade tensions continue to simmer.

CLSA, in a recent note, said that a weak economy triggered broadbased earnings cuts in Indian companies post June quarter. “Positives were few given the slowing economy,” said CLSA.