Short covering led Friday’s rally, don't jump the gun, say D-Street veterans

Despite a rise in number of cases of coronavirus and shutdown enforced in select cities, domestic equity induces paused their losing streak and bounced on Friday, surprising many on Dalal Street.

The Maharashtra government ordered shutting down of all non-essential services in the state, including private offices, as a precautionary measure, while the Delhi government ordered closure of shops.

Analysts tracking the market said Friday’s rally was largely led by short-covering, and buying might emerge despite negative sentiments, depending on how global investors chart their path. However, they cautioned investors not to read too much into it.

“Friday's bounce was a short covering-led rally only as the market was falling continuously. What I believe is that the overall trend remains negative but the way Nifty bottomed out near 7,800 on Thursday and now making higher tops and higher bottoms, it may see some recovery towards the 9,200 mark,” said Chandan Taparia, Derivatives & Technical Analyst at Motilal Oswal.

Nifty has fallen nearly 35 per cent from its record high in January. On Friday, the market bounced on smart gains in energy, pharma and FMCG stocks.

Anup Chandak, Deputy Vice President F&O at Sharekhan, said short covering had started a few days back as a lot of index shorts by FIIs got squared off. They had around 1.58 lakh contracts, which came down to 89,000 as of Thursday, he pointed out.

A rally in global markets also helped improve sentiments back home.

Major Asian markets closed with smart gains. European markets also opened higher, while US futures indicated a positive opening for New York indices. It is an indication that investors the world over are rushing to equities.

“Data showed a lot of shorting by FIIs have been covered. Add to it smart gains in FTSE indices in the last two days, especially when Italy and the UK are among the most affected regions. That set up a good story for those who are long,” Chandak said.

Italy is the second worst affected country after China, where this flu-like virus originated. In fact, Italy has recorded more fatalities than China and the numbers are far from peaking. Bank home, India reported a fifth death from the virus, with over 200 cases.

Some analysts said the market saw some low-level buying on Friday, but one should not be too hopeful. “There are buyers for blue chips as they have fallen too much,” said Anil Sarin, Executive Director & CIO - Equities at Centrum Broking.

“But do not read too much into today’s jump. Anything can happen, as it is an evolving situation. There could be a weakness in the market on Monday, when it opens after a two-day gap,” Sarin said.

Hugh Albert Johnson, CIO, Partner and Chairman of Hugh Johnson Advisors, told ET Now that the jump seen in equities globally on Friday could just be a dead-cat bounce.

“As long as we do not see any light at the end of the tunnel, you are likely to see continued volatility, which means more up days and down days,” he said.