Nymex move, N-deal talk trigger short-covering

MUMBAI:  The pin that could prick the oil bubble just got sharper. The New York Mercantile Exchange on Tuesday announced margin changes for its crude oil and related futures contracts with effect from close of business on Wednesday.

“Oil has all the chances of coming down today as the Nymex has imposed additional margins. But we (domestic equity markets) already have reached where we should be if oil falls to $130,” says Pankaj Valia, an independent adviser to high networth individuals.

The Nymex move was one of the triggers for a stampede of short sellers, who had hammered stocks in the last three sessions, rushing to square off positions.

Volumes in the cash and F&O segments surged by 25%. The Sensex surged 702.94 points or 5.42% to close at 13,664.

Developments on the political front also added fuel to the bull fury. Jignesh Desai, head of institutional sales, SBI Capital Markets, said, “This bounce-back was expected. The last few days we have seen continuous selling by overseas institutions has made it a completely oversold market. The last two days even the domestic institutions have joined the selling. Sentiments have reversed on the hope that the nuke deal would go through by end of this week. I feel an intermediate bottom has been made at 12800 levels. I expect the market to consolidate for next two three sessions and make further moves after seeing the developments on the nuclear deal.”  

DNA Money had mentioned the possibility of a technical bounce due to the heavy short build up in Nifty. India Infoline analyst Rajiv Varma had said there is a possibility of a short squeeze, which may see index take support at 4000 levels with resistance at 4100, in the Money report on July 1. Nifty rose 196 points to close at 4096.

Nifty also had faced some resistance at 3950 levels, where there fresh short positions were initiated, said Vivek Jain, derivatives analyst, Edelweiss.

But shorts were under pressure since morning in the single stocks futures. “In the past few sessions, lot of single stock futures had developed deep discount of 2 to 2.5% to their spot prices. No matter the amount of arbitrage, this discount would not contract. But Wednesday was different. Though Nifty was facing some resistance at around 3950 with fresh shorts coming in, the discount on single stock futures was constantly contracting.”

Banking and real estate stocks were the most shorted in the past few days. Banking scrips saw good covering of short positions early on. For example, SBI July contract saw the overnight discount of Rs 25 wiped off in morning trade.

But real estate stocks did not see short covering until DLF announced a buyback in the afternoon. India’s largest real estate firm DLF said that its board will meet to approve the buyback of its equity shares.

The stock surged 15%. The DLF July futures contract saw its discount plunge from 9.5% to 2.6%. L&T and HDFC Bank , whose July series contracts were trading at a discount of 19% each on Tuesday’s close.

After Wednesday’s shortcovering, the discount narrowed to 1% and 5%, respectively. SBI, Siemens and Mahindra are other counters which saw double-digit percentages of discount narrow down significantly.

Sensex opened with a positive gap but plunged to a low of 12,822 in mid-morning trade, its lowest level in nearly 15 months. At the day’s high of 13,711.01 hit in late trade, the Sensex rose 749.33 points, the biggest intra-day gain since 25 March 2008.
“A number of counters which trading at 4-5% loss at lows closed with gains between 6-12%. The index volatility was approximately 1500 points. This could be read as a typical sign of shifting of direction. But money required for the additional rise may not come that easily,” says Valia.

Dinesh Thakkar, CMD, Angel Broking, also feels that market is close to a bottom. “I feel there is lot of value in this price. You either get good value or good sentiment. You can’t bargain for both.”

But Valia warns that a rate hike by ECB, which is scheduled to meet on Thursday could be a spoiler. A retail trader, short of confidence could be the other spoiler. “They have lost more confidence, than the money they have lost. Participation from retail side is zero. Even the day traders want to sell first and buy lower. In the last six months every rally has been sold into. What we saw was a bull relief. But, market needs much more than one day of buying.”

Thakkar of Angel feels a crash in oil would help that. “Looking at prices and fundamentals, I feel oil has reached its top. I don’t see much of upside. On the other hand, I don’t just see oil prices reversing. But oil might crash."