Relief Rally in the offing

Short-sellers, who covered back their futures positions amid the panic on Friday, must be thanking themselves for not having become too greedy. With the US Federal Reserve cutting its discount rate to banks by 50 basis points in a bid to ease liquidity, beleaguered equity markets across the globe seem poised for a relief rally.

Already, on Friday, US and European markets were trading higher. Analysts expect Dalal Street players to liquidate the rest of their short positions in futures and create long positions on Monday, if the US markets manage to sustain gains on Friday.

Most traders covered a large chunk of their short positions in Nifty and stock futures mid-way through the session on Friday tracing the bounceback in the CNX S&P Nifty, thanks to the rebound in European and Asian markets. The short-covering resulted in discount between CNX S&P Nifty and Nifty futures narrowing to 5 points from 50 points earlier in the session. The discount, however, widened to 26 points at close on Friday due to the fresh creation of short positions at the fag end of the session.

Driven by the hectic activity, total turnover in the equity futures and options (F&O) segment on Friday stood at
roughly Rs 65,000 crore. The highest-ever turnover on the domestic F&O segment was recorded in July at Rs 80,000 crore.

Analysts said several short-term and day traders have profited immensely by going short in Nifty futures, when the underlying index was 200-300 points higher. These investors had created short positions at higher levels mainly in anticipation of a sharp fall in the indices. The Nifty, which closed at 4,108 on Friday, after touching the day’s low of 4,002, has fallen 200 points, or roughly 5%, in the past couple of sessions.

Analysts said several day traders wrote (sold) Nifty puts at strike prices between 4,020 and 4,050 on Friday, after the market rebounded. An investor writes a put option when he expects the price to remain steady or rise.

Religare Securities AVP-derivatives Anil Gupta said: “The Nifty has strong support at 4,050-levels, breaking which the key support level is at 3,850.”

On Friday, the US markets rose sharply in opening trades after the Federal Reserve approved a 50 basis points cut in its discount rate on loans to banks. Investors cheered the cut in the discount rate to 5.75% from 6.25%, despite the US Fed’s statement that “downside risks to the economy have increased appreciably”.

The move is expected to free up some money to the economy’s banking system, which had dried up considerably after the crisis in the US subprime mortgage market.