Despite bullishness by both DIIs and FIIs since January, the broader indices have gone nowhere.
Since January 4, 2010, when the market reopened, the domestic institutions (DIIs) have bought roughly net Rs 9,700 crore, while Foreign Institutions (FIIs) have sold net Rs 1,000 crore. Net institutional exposure, FII and DII combined, has been net buying of about Rs 8,600 crore in the last 10 weeks. Note that this is all transactions against delivery.
The market has however, moved from a January 4 value of 5,232 Nifty to a current value of 5,137. The net loss in index values is nominal. But it could only have occurred if there was some net selling pressure when all transactions are accounted for.
Equity movements can be most simply understood in terms of supply-demand. If there is excess stock supply at a certain price, prices slide. Vice-versa, prices rise if demand for stocks at a given price exceeds the supply of stocks. For prices to fall, there must be over-supply of stocks.
Given net institutional buying, the stock supply must have come from non-institutional sources. Presumably operators and retail investors (for convenience's sake, call them "retail") sold and delivered enough to take the market South, despite institutional bullishness.
This is rare. Usually index movements are strongly correlated to institutional attitude. Institutions have substantially more financial and intellectual resources at their command. They also have access to more and higher-quality data.
Usually institutional attitude is not very clearly delineated because when one set of institutions are bullish, another set are bearish and the net effect tends to neutrality. But this was not true in the past 10 weeks. The net institutional attitude was throughout substantially bullish.
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It is a rule of thumb for market-watchers that when divergences occur in retail and institutional stances, the market will almost always move in the direction the institutions are betting. Typically, such divergences arise at bull market peaks, when retail buys what institutions sell. Or it occurs at bear market bottoms, when institutions buy what retail sells.
Indeed, such a divergence did occur in January 2008 at the Nifty's record high when retail was buying as institutions sold. It was also seen at the October 2008 lows and the March 2009 lows when retail selling was absorbed by surplus institutional demand.
However, the market position between January-March 2010 cannot be easily characterised as that sort of turning point. In 2010, the Nifty has been trading around 15-20 per cent off its record Jan 2008 peak and it's roughly doubled from the 2008-09 lows. If the stances had been reversed with retail being bullish, the case could have been made that a peak had been hit.
Are the retail players correct in going bearish? Or is this likely to be another case where the big money is making the right call? Well, institutional attitude has altered radically in composition in the 10 sessions since the Budget, though it remains net bullish.
From Budget session onwards, the DIIs have sold a net Rs 4,700 crore while the FIIs have bought over Rs 9,000 crore (these numbers are included in the Jan-March 2010 data above). That is a really interesting switch. The market is up approximately 4 per cent in this most recent period. Retail remains a net seller by inference, since net institutional attitude (DII+FII) has been positive.
FII buying during this period, could, to some extent, be construed as money fleeing to a relatively safe haven. But it must have at least partially been triggered by positive responses to the Budget. However, the Budget clearly induced DIIs to turn bearish while it seems to have made little difference in retail attitude
FIIs have far more money than DIIs though they don't always choose to deploy it in India. Without making politically incorrect arguments about investment IQs, it can be said that long-term Nifty movements are better correlated to FII buy-sell patterns than to DII buy-sell patterns.
Curiouser and curiouser. Post-Budget, we have a situation where domestic investors, DII and retail combined, are apparently bearish. The FIIs are apparently bullish. Who is more likely to be proved correct in the long-term?
One comes back to resources. FII resources exceed DII and retail resources combined. If the FII attitude remains bullish, they can generate more buying demand at any given price than the DIIs and retail can match with selling. Assuming the last 10 days was not a flash in the pan, or some corrective effort after 8 weeks of selling, the market should be set for more gains.