The market current rally has enough elements to confuse even veteran traders. The FII long-short ratio, now beyond all traditional parameters, is probably the most puzzling of the lot.
Until recently, the FII long-short ratio – a measure of the number of bullish bets as against bearish positions – was more predictable. The markets typically corrected when the ratio was near 3 or approaching that threshold. However, this time, the ratio jumped from 2.03 straight to 4.5, far exceeding the overbought zone.
Whether this signals a new dynamic or serves as a powerful cautionary message remains to be seen.
“Generally, when the ratio used to touch around 3, there used to be a correction, but the major reason for the ratio continuing to reach near 5 and stabilising with no sign of correction is the Lok Sabha Election outcome,” said Rajesh Palvia, head-technicals and derivatives, Axis Securities. “Also, if you look at India VIX, an indicator of market volatility, which did make a high of almost 32 on the election result day, has gradually come down and touched the monthly low zone of 12-13, indicating less apprehension with the current rally.”
At the end of May, FPIs’ put-call ratio declined to as low as 0.15. Since then, there has been a sharp rally, with the Nifty rising 11% since the Lok Sabha election results on June 4. Out of the 19 trading sessions post-election results, the Nifty fell just five times, and even then, only marginally.
“FIIs’ long-short ratio was working as a key indicator in the past 2-3 years; and 5-6 times, the index bottomed out with the bottom formation of long-short ratio and topped out on the reverse,” said Chandan Taparia, technical analyst, Motilal Oswal Financial Services. “But in the recent past, the ratio headed to 5, and the index is still holding its gains with momentum.” Taparia feels India’s emerging equity culture also has a role to play in sending equity gauges higher across the market-cap spectrum.
