Global financial markets witnessed a sharp shift in sentiment during the week as investors reassessed geopolitical risks, movements in crude oil prices and the outlook for global monetary policy. The steep decline in energy prices offered significant relief to equity markets, although lingering uncertainty over the US-Iran conflict and the US Federal Reserve’s next policy move continues to shape investor positioning, said Jay Thakkar, Head of Derivatives and Quant Research, Vice President.
One of the biggest developments was the sharp decline in Brent crude prices, which settled at $98.32 per barrel on Friday, November 6. Brent witnessed a weekly decline of approximately 17%, marking its steepest weekly fall since the beginning of the COVID-19 pandemic.
The decline followed a reduction in the geopolitical risk premium after the US midterm election outcome raised expectations of a possible de-escalation in the US-Iran conflict. Additionally, signs of weakening demand and increasing supply availability contributed to the correction.
However, the geopolitical situation remains far from resolved. Fresh tanker-related incidents near the Persian Gulf and the Strait of Hormuz on November 5 brought supply disruption concerns back into focus. Consequently, crude oil recovered marginally towards the end of the week.
For India, the correction in crude oil is a significant positive development. Lower energy prices can ease pressure on the import bill, support the rupee, moderate inflationary pressures and improve the earnings outlook for several crude-sensitive industries.
At the same time, the US monetary policy outlook remains uncertain. Stronger-than-expected US employment data has reinforced concerns that the Federal Reserve may not be in a hurry to reduce interest rates. This could keep US bond yields and the dollar supported, potentially limiting the attractiveness of emerging-market equities.
The important takeaway is that the global environment has become more favourable for Indian equities from the commodity perspective, but geopolitical uncertainty and global liquidity conditions remain important variables.
For the domestic market, a sustained correction in crude oil below $100 per barrel could provide a meaningful macroeconomic tailwind, provided geopolitical developments do not reverse the recent improvement.
Domestic Market Performance: A Dramatic Change in Investor Sentiment
Indian equity markets delivered an exceptional performance during the week, with Nifty gaining approximately 1,977 points, or 8.58 per cent, to close at 25,030.35 on November 6.
Sensex advanced 8.82 per cent to settle at 81,028.02, marking one of the strongest weekly advances in recent years.
What makes this recovery particularly interesting is the magnitude of buying witnessed across heavyweight stocks, banking companies and financial services businesses.
The broader market also participated, although the gains were relatively concentrated in large-cap stocks. Nifty Midcap 150 advanced 5.81 per cent, while Nifty Smallcap 250 gained 3.71 per cent.
Banking stocks finally witnessed meaningful participation, with Bank Nifty advancing approximately 8.04 per cent during the week.
The recovery was supported by three important developments:
- A substantial return of foreign institutional investors to the domestic cash market.
- A sharp correction in international crude oil prices, improving India’s macroeconomic outlook.
- A significant reduction in bearish positioning in index derivatives, which accelerated the upward movement through short covering.
The most interesting aspect of this rally is that the improvement in cash-market buying coincided with a substantial unwinding of bearish derivatives positions.
This raises an important question: are foreign investors merely covering existing short positions, or are they beginning to establish fresh bullish exposure to Indian equities?
The answer to this question will determine whether the current recovery can develop into a sustained market trend.
FII Activity: The Biggest Positive Surprise of the Week
The most significant development during the week was the return of foreign institutional investors as aggressive buyers.
FIIs were net buyers of approximately Rs 45,960 crore in the domestic cash market between November 2 and November 6. Interestingly, they remained net buyers throughout all five trading sessions.
Their buying intensified towards the end of the week, with purchases of approximately Rs 14,975 crore on November 5 and Rs 13,750 crore on November 6.
In contrast, DIIs were net sellers of approximately Rs 24,197 crore during the week, indicating that domestic institutions utilised the sharp recovery to book profits.
This represents a significant change from the preceding months, when domestic institutions were consistently absorbing foreign selling.
The return of foreign buying is encouraging, particularly because it has coincided with an improvement in global risk appetite, lower crude oil prices and a sharp recovery in domestic equities.
However, investors should not immediately conclude that the entire FII selling cycle has reversed.
The important variable will be whether foreign investors continue deploying capital into Indian equities over the next few weeks.
If cash-market buying remains strong and is accompanied by fresh long additions in index futures, it would indicate a much stronger improvement in institutional positioning.
Derivatives Outlook: Short Covering or Fresh Long Formation?
The derivatives market witnessed an important change during the week and, in my view, this deserves greater attention than the headline index performance.
The sharp appreciation in Nifty was accompanied by a reduction in bearish positioning among foreign institutional investors.
As per the latest participant-wise derivatives positioning snapshot available for November 6, FIIs held approximately 48,656 long contracts against 1,49,072 short contracts in index futures.
This translates into a long-short ratio of approximately 0.33, indicating that foreign investors continued to maintain considerably higher short exposure than long exposure.
This is an important distinction.
Despite the sharp recovery in the cash market, FII index futures positioning remains net short. Therefore, the recent rally has not yet established that foreign investors have completely turned bullish in the derivatives segment.
However, the large outstanding short exposure also creates the possibility of further short covering if Nifty continues to move higher.
The next few sessions will be important in distinguishing between two possibilities:
Scenario 1: Continued short covering
If Nifty sustains its gains and moves higher, investors holding bearish futures positions may be forced to reduce their exposure.
This could create additional buying pressure and potentially extend the rally even without a substantial increase in fresh long positions.
Scenario 2: Fresh long formation
A stronger bullish signal would emerge if FIIs begin increasing their long positions while simultaneously reducing their short positions.
Such a development would indicate a genuine change in institutional sentiment rather than merely the unwinding of existing bearish bets.
For the market, the second scenario would be significantly more constructive because it would indicate that foreign investors are beginning to rebuild directional exposure to Indian equities.
What the Options Market Is Indicating
The options market will also be important in determining whether the current rally can sustain itself.
After a nearly 2,000-point weekly advance, option writers will be reassessing their positions, particularly around the 25,000 strike.
The important factors to monitor during the coming sessions are:
- Call unwinding: A reduction in call open interest at strikes above the current market level would indicate that overhead resistance is gradually easing.
- Fresh put writing: Additional put writing at and around the 25,000 level would suggest that option writers are becoming comfortable with the higher market base.
- Put-call ratio: A rising PCR accompanied by healthy price action would indicate improving positioning. However, an excessively high PCR could also indicate crowded bullish positioning and the possibility of profit booking.
- Change in open interest: Price appreciation accompanied by an increase in futures open interest would indicate fresh long formation, whereas rising prices with declining futures open interest would generally indicate short covering.
- India VIX: A decline in volatility alongside rising prices would provide stronger confirmation of improving market confidence.
One important event to consider is the change in the weekly expiry schedule. Nifty’s November 10 expiry has been shifted to Monday, November 9, because Tuesday is a trading holiday on account of Diwali-Balipratipada.
Consequently, the market will witness a shortened trading window for the weekly contract, potentially increasing the pace of time decay and the sensitivity of option premiums to intraday movements.
The Muhurat trading session is scheduled for Sunday, November 8.
For traders, the combination of a sharp weekly rally, substantial outstanding FII short exposure and an adjusted expiry calendar could result in elevated intraday volatility.
The critical question is whether the 25,000 level attracts fresh put writing or whether traders begin booking profits and building fresh call positions at higher strikes.
That positioning will provide a useful indication of how aggressively traders are willing to defend the new market levels.
Crude Oil: A Major Relief for Corporate Earnings
The correction in international crude oil prices is another development that could have a meaningful impact on the earnings outlook for Indian companies.
India’s dependence on imported energy makes crude oil an important determinant of inflation, currency stability and corporate profitability.
A sustained moderation in crude prices could benefit several sectors.
Aviation: Lower aviation turbine fuel costs can improve operating margins for airlines, provided the benefit is not offset by weaker passenger yields or other expenses.
Paints and Chemicals: Several petroleum-linked raw materials are important components of manufacturing costs. Lower input prices could improve profitability and support margins.
Tyres: Natural rubber, synthetic rubber and other crude-linked inputs influence the cost structure of tyre manufacturers. A sustained reduction in input costs could be positive for the sector.
Oil Marketing Companies: Lower crude prices could improve marketing margins, although the actual benefit will depend on retail fuel pricing and inventory valuations.
Logistics and Transportation: Lower fuel expenses can improve operating economics for companies with substantial transportation costs.
However, upstream oil producers could face lower realisations if international crude prices remain subdued.
The larger implication is that lower energy prices can provide support to India’s macroeconomic fundamentals at a time when global inflation and interest-rate uncertainty remain important concerns.
Sectoral Outlook: Financials and Capital Market Stocks Lead the Recovery
The latest market recovery has resulted in a significant improvement in sectoral participation.
Capital Markets emerged among the strongest performers, advancing approximately 10.73 per cent during the week. Financial Services gained 10.41 per cent, while Realty advanced approximately 10.17 per cent.
Banking, automobiles and consumer durables also witnessed meaningful buying interest.
The strength in financial services is particularly important because banking and financial companies account for a substantial proportion of Nifty’s market capitalisation.
If this participation continues, it could provide a more sustainable foundation for the broader market.
Capital market-related companies could also benefit from an improvement in investor participation, higher trading activity and renewed interest in equities.
On the other hand, IT remained a relatively weak performer, gaining only around 1.14 per cent during the week. This indicates that investors are still differentiating between sectors based on earnings visibility and global demand conditions.
Going forward, I would closely monitor banking, financial services, capital markets, automobiles and companies with strong domestic earnings visibility.
The coming week will be particularly important because the market enters it after one of its strongest weekly rallies in recent years.
There are several positive developments supporting the domestic market:
- FIIs have returned as significant cash-market buyers after an extended period of selling.
- Crude oil has corrected sharply, reducing pressure on India’s external balances and inflation outlook.
- The reduction in bearish derivatives positioning has created scope for further short covering.
- Banking and financial stocks have started participating more meaningfully in the broader recovery.
- Improving market sentiment could encourage investors to rebuild exposure to selected midcap and large-cap companies.
However, there are also reasons to remain measured.
The FII derivatives positioning snapshot still indicates a substantial net short position. The market has also advanced considerably in a very short period, making it vulnerable to profit booking.
Additionally, geopolitical uncertainty remains unresolved, and any fresh escalation could result in a sharp reversal in crude oil prices.
Jay Thakkar said, “my expectation is that the market could witness consolidation after the sharp weekly advance, but the overall sentiment has improved considerably.”
The key indicator to watch will be whether the market’s strength is supported by fresh long formation in index futures or remains largely dependent on short covering.
A sustained improvement in both cash-market buying and derivatives positioning would provide stronger evidence of a durable recovery.
The sharp recovery in Indian equities during the week represents an important shift in market sentiment.
The return of foreign institutional buying, the correction in crude oil prices and the unwinding of bearish derivatives positions have collectively improved the outlook for domestic equities.
However, the derivatives market suggests that foreign investors have not yet completely abandoned their bearish positioning.
This leaves room for further short covering, but a genuine trend reversal would require fresh long formation alongside continued cash-market buying.
My approach would be cautiously optimistic. Rather than assuming that the entire correction is behind us, investors should monitor institutional positioning, option-writing activity and the sustainability of the recent foreign inflows.
The next phase of the rally will depend on whether the market can attract fresh capital rather than relying exclusively on the closure of existing short positions.
The most important development to watch is the transition from short covering to fresh long formation. If that transition takes place while crude oil remains under control and FII cash buying continues, the current recovery could develop into a much broader and more sustainable bullish phase.
For now, the market has regained considerable momentum, but the derivatives market will provide the next important confirmation of whether foreign investors are genuinely turning bullish on India.
Index Levels to watch out for Next week
As per the weekly options data, 25000 strike has the highest call base, but a close above the same indicates the probability of it sustaining above it is higher if it opens above it, as there is a further round of short covering. Now, the weekly PCR has reached 1.64 levels, which is overbought; however, in the last weekly expiry, the Nifty kept moving higher despite the overbought reading in the PCR. The next weekly and the monthly PCR are not overbought hence there is a further scope of short covering, as well as the support or the base has shifted significantly higher at 24000 levels which now has the highest put base as well as the support of the gap. On the upside there is no major hurdle on a positional basis until 25500 and thereafter 26000 levels, which will be the next 2 targets.
The BankNifty has also provided a breakout above 57000 levels and as per the options data there is highest call base at 58000 strike hence a breakout beyond those levels will lead to further short covering until 59000 and 60000 levels whereas on the lower side 57000 strike now remains a significant support and unless that is not broken the overall bias will be positive.
There has been underperformance by the broader markets relative to the large caps, as there has been significant short covering by the FIIs in the large cap names; however, from hereon, the broader markets are also likely to witness a good up move, as once the Nifty Midcap Select sustains above 14000, thereafter the fireworks are expected.
The 3 stock recommendations are as follows
Buy PFC Fut in the range of 322-327 stop loss below 315 and Targets 340 and 350
PFC has formed a short term base and there has been quite a short positions built up which is now likely to recover considering the recent upward momentum in the market. As per the options data, 310 to 320 strikes have witnessed additions in the puts whereas 330 has the nearest call base above which a bounce until 350 is expected which has the next highest call base. The stock has managed to close above the max pain level of 325 which is a positive sign
Buy HDFCLIFE Fut in the range of 560-570 stop loss below 540 Targets 585-600
The stock has witnessed a good recovery in the last week and it has been second consecutive positive close in the stock. Overall the Banking and Financials have witnessed significant short covering and from hereon there is more short covering expected in this stock considering the renewed buying interest in the sector as well as FIIs are on short covering spree. As per the options data, the highest call base is at 540 strike and the stock is trading significantly above the same and there is yet short covering expected in this stock. On the lower side now 540 will act as a strong support whereas 580-600 are the next target levels.
Buy IREDA Fut in the range of 110-112 stop loss below 105 Targets 120-125
There has been significant correction in this stock and there has been too much short built up as well and since there has been aggressive short covering in the overall markets a short covering in this stock cannot be ruled out as the large cap stocks have already witnessed short covering and now the broader markets are expected to do the same.
As per the options data, the strikes 100 and 110 have seen good put additions whereas, 110, 115 and 120 strikes still have significant call additions and price has closed above 110 hence some unwinding in 110 strike call is expected which can trigger the upward momentum until 120-125 as well. The futures data is too positive as there has been positive divergence as well as enough shorts held.