While net trading positions of foreign institutional investors (FIIs) in index futures generally set the trend for the broader markets, this correlation has strengthened significantly in last one year. Experts say the increased polarisation in the market, due to which trading activity has been centred in a handful of bluechip stocks, may be contributing to this higher correlation.
“There has been a clear divergence between the performance of large-caps and smaller companies, which is one of the reason in this correlation going up. At the beginning of the November series, we observed increased leverage by FIIs with the open interest in the index futures reaching its highest in since March 2013,” said Azeem Ahmad, chief manager of derivatives with ICICI direct.
In last one year, the correlation between the five-day moving average of net FII positions in the index futures and the Sensex has strengthened to 45%, compared with 15% for the last three years and close to 3% for a period of five years.
Moreover, the index positions have been strong indicators of market trends in last six months. Since April 2013, there have been three instances when net FII positions in index futures reflected an upcoming change in trend. For example, between the first and last week of April, when this five-day average swung from net exits of R618 crore to net purchases of R1,411 crore, Sensex rallied nearly 10% to 20,212. Between April and mid-June, as the average value of the net FII positions fell to reflect net selling of R1,011 crore, Sensex lost close to 1,479 points and fell by 7% to 18,719.
Using this correlation, index futures activity is suggesting a renewed upmove in the markets. As on Monday, net index positions of FIIs turned positive at R56 crore. Sensex added close to 388 points or 2% on Monday to end session at 20,605.08.
Since the end of Ocober 2013, the average net position were reflecting selling pressure as positions remained negative till last week, falling to a low of R647 crore in net exits for the five sessions ending November 5, 2013. The market corrected by 4% in the period.
“Whenever the market is in a strong trend, FII participation in the index futures goes up. Hence, one needs to compare the correlation with its long-term trend,” he added.