Bulls back on the Street

Biggest expiry day rally in 20 months; Sensex at record high

Indian equities staged a smart rally in the last two hours of trade on Thursday, the day of expiry of the May series of derivatives contracts, with the benchmark Sensex closing at a new high.

The Sensex gained about 250 points in the last two hours as traders resorted to large-scale short covering and positive news of a benign crude oil price outlook and the US Federal Reserve's likely delay in raising interest rates came in, said brokers. 

The Sensex went up by 448.4 points, or 1.5 per cent, to close at 30,750, while the Nifty closed at 9,509, up 149 points or 1.6 per cent. This is the highest rally posted by the Nifty on an expiry day in the last 20 months. The rally was led largely by banking stocks as the stocks of ICICI Bank and HDFC Bank went up 3.5 per cent and three per cent, respectively. 

The Bank Nifty, a gauge of banking stocks, was up 2.9 per cent to close at 23,191 — a new high.  Among the Sensex companies, Larsen & Toubro was the biggest gainer with a rally of five per cent. On the other hand, pharma stocks dragged the index down, with Lupin losing 7.3 per cent. Shares of Dr Reddy’s Laboratories and Cipla lost more than three per cent each.

According to brokers, traders had built up significant short positions in the Nifty over the past two weeks, expecting a correction in the markets. However, the Sensex and Nifty have remained strong, thanks to good liquidity and strong institutional flows.  A dealer at a foreign brokerage said, “On the day of expiry, bears were trapped and were forced to cover their short positions at hefty premiums in the derivatives market, leading to a sharp rally in the benchmark index.”

Traders say the expected correction may have got postponed. “Nifty futures have seen a roll-over of around 70 per cent from the May to the June series, with a negative cost. This could mean less attraction among the bulls to carry their position to the next series,” said Chandan Taparia, derivatives analyst, Motilal Oswal Securities.

The current derivatives position suggests that traders are expecting a correction. The negative roll-over cost suggests that traders were either closing their current month positions or letting them expire, indicating a possibility of a sell-off in the near term, say experts.

The put-call ratio (PCR), the ratio of the number of put options to the number of call options traded, surged 2.26 times on Thursday — the highest since the expiry day in January. 

Traders said a PCR of more than one indicates investors are building more short positions compared to long positions and are expecting a correction in the near term. 

In the cash segment, while the BSE Midcap underperformed the large-cap indices to gain 1.35 per cent, the BSE Smallcap was up two per cent.  

Also, global cues were positive after the US Federal Open Market Committee minutes highlighted that the Fed had agreed to hold raising interest rates until there was clarity that the recent weakness in the US economy was temporary.  Most global stock markets rose on Thursday. While HangSeng surged by 202.3, Dow Jones, Nasdaq and Nikkei rose by 69.6, 46.73 and 70.2, respectively.

Crude oil prices, too, fell on Thursday as the Organization of Petroleum Exporting Countries (OPEC) extended production cuts at the same levels for another nine months, and on expectations that the oversupply would continue. 

In the past one month, there has been a marked shift of interest from mid- and small-caps to large-cap, blue-chip companies. In the period, the Sensex has gained 2.6 per cent, while the BSE Midcap and Smallcap indices have lost 3.7 per cent and 3.4 per cent, respectively. 

Experts say the midcap rally has resulted in the ballooning of valuations of mid- and small-sized companies at a time when there is not much improvement on the earnings side. 

“While the benchmarks are rallying on the strength of ample liquidity and positive institutional buying, mid- and small-caps seem to have entered a phase of correction,” said G Chokkalingam, founder and CEO, Equinomics Research & Advisory. 

Investors should be cautious while buying in the mid- and small-cap space and consider only companies with clean balance sheets, he added.