FPIs’ bear flip may maul markets more

livemint.com:

₹20,384.2 crore of cash shares, turning net sellers of ₹3,852 crore so far this month. The National Stock Exchange’s Nifty marked a life high of 22,124.15 points on Tuesday, when FPIs held a cumulative net bullish position of 79,599 contracts in index futures (Nifty and Bank Nifty). However, they unwound all their bullish bets and turned net short by 4,659 contracts on Thursday, coinciding with the market pulling back almost 3% from the high to close at 21,462.25, thanks to a bloodbath in HDFC Bank Ltd shares.

A pullback or retracement is defined as a fall of 5% from the peak; a correction is a slide of 10-20%. A bear market happens when prices fall below 20% from the peak. Analysts expect foreign investors to increase their short positions in the forthcoming sessions, adding further volatility to the market.

Whenever this has happened in the past, markets have tended to correct and bounce back only when they hit extreme short levels (see table). For instance, on 2 November last year, FPIs held net cumulative short positions of 175,698 on index futures and the Nifty traded at 19,133.25. From here, they covered the bearish bets and by 21 December held a net cumulative long position of 89,782 contracts, by which time the Nifty had risen to 21,255.

But now, they have turned negative and clients—retail and high net-worth investors—have become positive. While a bounce-back can’t be ruled out after the sharp fall over the past two days, the near-term trend could be downward if FPIs sell in cash and index futures, analysts feared. “There could be still more short creation by FPIs and more downside in store, interspersed by bouts of volatility," said Abhilash Pagaria, head of quant research at Nuvama Wealth.