Nifty clocks best gains in 34 months in December F&O series. Can it beat this show in January?

Benchmark Nifty 50 rallied over 8% in the December derivative series, clocking its best gains in a series since February 2021. This was also the highest series gain by the index in 2023.

Further, foreign institutional investors significantly increased their net long positions, taking the long-short ratio sharply higher to 2.28 at the beginning of the January series from 0.56.

Open interest in Nifty January futures at over Rs 301 billion or 13.9 million shares, is the highest seen since the April derivative series, pointed out analysts.

The base with which the new year and the January series begin shows the ultra-bullish sentiment prevailing in the market.

However, most analysts have sent out a word of caution and believe that a trend reversal is quite possible in the current series.

“It’s quite evident that FIIs, previously leaning towards a short bias, have now pivoted strongly towards a long bias and their current index future long positions make up nearly 70% of the total open interest. Such a pronounced bias can introduce volatility and potential market unease, in my view,” said Abhilash Pagaria of Nuvama Quantitative Research.

The last time the long-short ratio of FIIs in index futures reached such high levels was in July 2023, and Nifty 50 witnessed a sharp decline the next month, pointed out analysts.In fact, historical data too, suggests that January has been a relatively weak period for markets.

Over the past 17 years, January has often demonstrated a tendency towards weaker returns, with 11 instances of the month concluding in negative territory, SBI Securities said in its report.

While brokerage IIFL Securities expects Nifty 50 to move towards 22,000-22,200 levels in the current series, it has also not ruled out profit booking, possibly in the latter half of the series, going by the historical trends.

In Friday’s trade, the 50-stock index was down 0.1% at 21746.15 points after hitting a lifetime high of 21801.45 points on the last of the December derivative series Thursday. Year-to-date, the index has registered 20% gains.

The brokerage sees strong support for the index at 21,000-21,500.

Sectoral Picture

One sector that could possibly help the Nifty 50 inch further higher is information technology, believes Pagaria.

“As per the last 20-year seasonality, the IT index has the highest probability of delivering positive returns versus other sectoral indices in January. Also as per our Quant and momentum perspective, we have a long bias towards the tech sector” he said.

In the December derivative series, the Nifty IT index outpaced the Nifty 50, rallying nearly 10%.

However, the performance of the IT sector hinges upon the quarterly earnings and the guidance that companies will offer later in January.

SBI Securities expects banking, metal, pharma, healthcare, FMCG, oil & gas, and consumer durable sectors to outperform in the current month series based on the rollover data.

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(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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