Short cover could spur market this week

Short covering could take the Nifty above 6,900.

The share market could get a boost, as traders are likely to cover their short positions ahead of the expiry of April series derivative contracts on Wednesday.

Quick buying of shares already short-sold (meaning, the seller didn’t own these at the time of sale but intended to borrow later, to meet the sale commitment) because the scrip moved up instead of the expected fall, to avoid or limit one’s losses, is termed short covering.

The expiry date for all stock options in India is the final Thursday of a contract month; if, however, that or Friday is a holiday, the expiry is on the Wednesday. As the markets will remain closed on Thursday, on account of voting in Mumbai, the futures and options (F&O) expiry will take place on Wednesday.

A lot of market participants were caught off-guard after the market saw an unexpected jump last week, amid weak investor sentiment and three days of losses. The National Stock Exchange’s Nifty benchmark rose on Thursday by 1.6 per cent or 104 points to close at 6,779, above its crucial support level of 6,775.

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Market experts believe short covering could take the Nifty above 6,900. “We are expecting it, as the market was surprised by the up-move. The index could touch 6,900-levels on the back of this,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.

“Short covering will be seen as the positive sentiment in the market is likely to continue. Traders were caught by surprise last week after the Nifty managed to close above 6,775. It can go up as high as 6,900-levels. Rollovers are also expected to be strong,” said Sahaj Agrawal, deputy vice-president, derivatives research, Kotak Securities.

The market is expected to remain highly volatile due to the F&O expiry and 6,789 will be the Nifty’s crucial support level (meaning, going by past trends, the price is likely to ‘bounce’ off this level, rather than break through it).

Results, FIIs

Market players will also keenly watch the March quarter earnings numbers, especially of some of the large private banks, which ran up sharply in the recent rally.

HDFC Bank, ICICI Bank and Axis Bank will announce their fourth quarter numbers during the week. Foreign brokerages have reportedly been increasing their exposure to these names, in anticipation of good corporate numbers from these banks.

Foreign institutional investor (FIIs) flows slowed their purchases last week, with many more choosing to sit on the sidelines with the elections underway. Analysts expect FII buying to remain muted till the election results next month. Last week, FIIs were net buyers at Rs 278 crore (Rs 2.78 billion), as against the Rs 1,796 crore (Rs 17.96 billion) in the week before.

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“FII buying has come down drastically with a month left for the election results. Investors are looking to book profits. Even participation through P-notes (participatory notes) is slowing,” said U R Bhat, managing director, Dalton Capital.

A positive earnings announcement by index heavyweight Reliance Industries is likely to boost the market on Monday, said analysts. “Growth in newer areas of business, as well as refining margins, will help Reliance (meaning, its scrip),” said Deven Choksey, managing director, KR Choksey Securities.

Information technology stocks are also likely to be in focus, especially the tier-II names, after biggies Infosys, Tata Consultancy Services and Wipro delivered numbers in line with market expectations.