A big breakout to new record levels came immediately upon the announcement of elections. Foreign institutional investors (FIIs) promptly started pumping in large sums in what looks to be a bet on a Bharatiya Janata Party (BJP)-led government. Once the market broke past resistance in the Nifty 6,350 zone and then beat the previous all-time highs just above 6,400, momentum traders got into the act.
The Nifty is now testing resistance in the zone above 6,500 and it's hit successive all-time highs in the previous four sessions. This is entirely new territory so target-setting is likely to be very inaccurate. But a target of 6,700-6,800 looks possible in the short-term, computed purely on the basis of the breakout from a trading range of 6,000-6,400.
If FII buying continues to run at the same pace of roughly Rs 5,000 crore of net buying per week, much higher index levels could be attained. Domestic institutions are net-negative in the past five sessions and domestic retail is also showing some caution. Heavyweights which receive FII backing are doing much better than smaller stocks. A positive change in sentiment from DIIs or retail could also give more thrust to the rally.
Volatility is inevitably up. Pullbacks on profit-booking, or changes in sentiment could take the Nifty back till 6,400. Below that, there's support at every 50-points. On the upside, the long trader would hope for the pattern of successive all-time highs to continue. In terms of time, it's very likely that the euphoria will continue at least until the elections end. That could mean eight to nine weeks of net bullishness.
Reversal in sentiment could occur if there's some perceived setback for the BJP's prospects or some geopolitical blow-up. In the absence of some factor that causes pessimism, there are a few trends that seem to be well established over the past week.
The rupee has strengthened to 60.85 versus the dollar - this is mainly on the back of FII inflows. Of course, the lower current account deficit and the accrual of more forex to reserves have both aided sentiment in this regard. The trader needs to be careful of following this trend however since any dollar bounce could now take the dollar back till 62 levels.
As a result of the stronger rupee, traders and investors have rotated out of information technology (IT) and pharmaceuticals and into sectors like capital goods, oil and gas and above all, financials. The Bank Nifty has outperformed the overall market, as it usually does in a bull run. It could continue to exhibit its high-beta performance. Private sector banks are safer but public sector banks are more beaten-down and hence, may have greater upside while this rally lasts. More speculative action in NBFCs could also be driven by bank license awards.
The Nifty's put-call ratio (PCR) is heading into highly bullish/overbought zones. The March PCR is at 1.5 plus, while the three-month PCR is more normal at 1.3. The VIX is up sharply, indicating that premia close to money have jumped. Traders should be braced for the Nifty to swing anywhere between 6,350 and 6,750 in the next 10 sessions.
A long March 6,600c (70) and short 6,700c (35) costs 35 and pays a maximum 65. A long March 6,500p (60) and short 6,400p (35) costs 25 and pays a maximum of 75. The spot Nifty is at 6,537 with the March futures at 6,567. A strangle, combining a long 6,700c (35), long 6,400p (35) with a short 6,300c (20) and a short 6,800p (15) costs a net 33 with breakevens at 6,367, 6,733.
