FPI long-short ratio hints at reversal?
Historically, the low reading signifies support for the market and an imminent upward move.
Historically, the low reading signifies support for the market and an imminent upward move. The ratio is a measure of investors’ expectation of the market, with a low reading indicating bearishness and a high reading the opposite. The low reading (below 0.48) of the FPI index long-short ratio may result in an average upward move of 5.9% for the Nifty by the end of the monthly derivatives expiry, according to data compiled by IDFC securities.
The rarity of the 0.48 reading can be gauged from the fact that there have been only five instances of the ratio dropping below this number since 2012. Out of the total 1,860 trading sessions since 2012, there have been only 27 sessions when the ratio dropped below 0.48.
Neeraj Agarwal, vice president, alternative research at IDFC Securities, said that “buy on dip” strategy is expected on the Nifty, with a likely target of 11,600-11,650 level, and the index has support in the range of 11,900-11,950. “During the period December 2018 to March 2019, the Nifty faced strong resistances in this range on multiple occasions. We now expect the range to act as a strong support level,” he said.
Since 2012, when the FPI index longshort ratio fell below 0.48, the Nifty posted a positive return by the expiry on four occasions and a negative return once. Even the instance of negative return was followed by a strong upward move of 7.2% in the following month that offset all losses of the previous month.
The cash selling of FPIs of about $1.8 billion in the past one month has coincided with accumulation of short interest in the index futures. The total FPI index futures open interest has increased marginally to 0.19 million contracts, from 0.18 million contracts observed on the day of inception of August series.