A key indicator of market trend, which is derivative position of foreign portfolio investors (FPIs), shows there could be some reprieve in the near term from fall in the stock markets. It is the third time this year so far that FPI net short position mainly in the Nifty index has spiked to more than 1 lakh contracts, which analysts say could lead to short-covering.

The net short position in Nifty index stood at 1,04,000 contracts. On earlier occasion this happened when net FPI short position in Nifty touched 1.34 lakh contracts in the month of April and over 98,000 contracts in June. The Nifty index rallied nearly 8 per cent and 9 per cent respectively in the preceding months from its low levels then.

During March, the Nifty index had touched a low of 10,200 and built-up in short position peaked in April. , And then, the squaring-off short positions had lifted the index to 10,900 in May. Similarly, at the end of June month expiry in derivatives, the Nifty index traded below 10,600 level and the net FPI short positions of nearly one lakh contracts then started reversing in the following month propelling the Nifty index to a new life-time high above 11,700.

Rush to cover positions

“As of now, sentiments in the stock markets are at their nadir. This coupled with huge net FPI short position in Nifty index is a recipe for temporary reprieve from decline in the key indices,” said Rohit Srivastava, Fund Manager, Sharekhan-BNP Paribas.

The Nifty and Sensex are down nearly 15 per cent from their life-time high hit in August this year. Jamming of credit in the system post IL&FS debt default has hit investor sentiments. The leverage in markets has significantly gone down in the past few weeks.

Those holding short position can only profit from it if the underlying in which they have built position falls and they earn the different in price of selling and buying at lower levels. But, if the street is crowded with short sellers and all are waiting for it to fall, any covering of position at current level could spark a rush to close position taking the markets higher, analysts say.