Short covering, long formation = highest gain since May 2009

The markets rose the highest in last 21 months as the institutional investors engaged in value buying post the budget which is seen little better than expected.

The benchmark Sensex rose 623.10 points, or 3.5%, to close at 18446.50, while Nifty registered a similar rise to close at 5522.30.

Buoyed by the positive sentiments following no negative surprises in budget, Tuesday’s rise was the highest since markets rose 2110.79 points on May 18, 2009 after UPA came into power for the second time.

“There is a hump in terms of event risk, which we have passed. There were no negative announcements in the budget, which has helped sentiment,” said Gaurav Dua, head of research at Sharekhan.

“Even though the budget as an event has been neutral, fiscal discipline outlined in budget seem to have cheered the markets. With GDP growth forecast of around 9%, the net tax revenue growth of 18% seems realistic as improving tax compliance measures like bringing SEZ under tax net will increase tax inflows,” said Deven Sangoi, head of equity at Birla SunLife Insurance.

The sentiments were further helped by robust monthly sales growth for auto companies and strong economic data released for the month of January.

The manufacturing PMI data released by HSBC highlighted that India’s manufacturing sector growth in February was better than that in last two months. The PMI index rose to 57.9% in Februaury from 56.8% in January and 56.7% in December 2010.

There was also good news in the form of stronger growth for the infrastructure sector, according to government data released on Tuesday.

An index which tracks growth in infrastructure rose 7.1% in January 2011 over January 2010, according to data from the government of India’s press information bureau.

The index is composed of six industries with a combined weight of 26.7% in the Index of Industrial Production index, which is widely tracked as a measure of the industrial output of the country.

The infrastructure index registered a growth of 5.6% for the nine months between April 2010 and January 2011, higher than 5.5% during the corresponding period in the previous year.

Buying was seen across the board with all 13 sectors on the BSE ending with gains in the range of 1.7% to 6%. Auto was the top-performing
sector with gains of 5.64% on the back of strong manufacturing data, while banking (4.35% up) and reality (4.20% up) also saw short-covering
rally.

“Tuesday’s rally seems to be a blend of short covering and long formations. The Nifty premium going up significantly along with low decline in open interest suggests long formation. There has been significant decline in implied volatilities (IVs) as well and we are seeing FIIs going long in index futures, index options and stock futures,” said Siddharth Bhamre, head of derivatives at Angel Broking.

The Nifty March futures closed at 5543.85, a 22 premium over spot index as compared to 4 point premium seen on Monday. The India VIX, a measure of implied volatility, dropped by 8.93% to 22.2%.

The foreign investors who have sold shares close to Rs10,000 crore during last two months, were net buyers of equities worth Rs 418.5 crore in cash market. The domestic institutional investors too bought shares worth Rs95.64 crore on Tuesday, as per provisional exchange data.

However the market experts do not see too much upside for the markets in the near term considering the headwinds on account of rising crude prices and high commodity prices still remain.

“Whatever positives were there in the budget, those have been discounted in last two days rally. The government has not done anything to contain inflation and rising interest rate cycle may not stop in near term. The markets face resistance at 5650-5700 levels and we may again see markets reacting to external factors like liquidity and crude prices.” said Bhamre.

The downside in the immediate term also seems to be limited, believe experts.

“At these levels, the markets seem to have factored in lot of negatives on the domestic front like rising interest rates and higher commodity prices. Though the valuations are reasonable, the corporate earnings are not likely to see any positive revisions in near term. The near-term volatility will persist and markets may see time consolidation considering the uncertainty on account of external factors like tension in Middle East leading to further spike in crude prices.” said Sangoi.

“The FIIs do not seem to be directionally bearish on markets and there is huge open interest in 5300 and 5400 put options which seems to suggest immediate support at these levels,” said Bhamre.