Recovery traps short-sellers

Insurance firms aid smart recovery by Sensex, but a few brokers lose heavily

Heavy buying by domestic insurance firms helped the benchmark indices to recover smartly today after an initial free fall. But quite a few traders, who had built huge shorts, lost heavily.

Dealers in broking firms said it was a ‘Black Tuesday’ for seasoned short sellers and at least a couple of India-focused hedge funds as the domestic equity benchmarks managed to recover their intra-day loss of over 3.5 per cent.

“No trader on Dalal Street thought that the markets could recover so sharply today. They had built huge shorts after the SGX Nifty witnessed a gap-down opening of 122 points, or 3.16 per cent,” said the CEO of a Mumbai based brokerage firm involved in big institutional trades.

The stock of State Bank of India, which closed the day with gains of 6 per cent at Rs 1,585 after an intra-day low of Rs 1,432, surprised many. Another favourite stock of the punters — Reliance Industries — recovered from its intra-day low of Rs 1,800 to close at Rs 1,928, up 2 percent. Reliance Infrastructure, Reliance Petroleum Ltd, HDFC Bank and Sterlite Industries and BHEL too saw a sharp rise after the initial fall.

Short sellers had made good money on Monday after the global financial market turmoil devastated the Indian stock markets. The Sensex and Nifty had closed the day with declines of 470 points and 155 points, respectively on Monday.

The 50-share Nifty Index of the National Stock Exchange (NSE), one of the widely tracked index, recovered by nearly 150 points, or over 3 per cent.

Punters lost huge money on the Nifty futures trading. During the day, the index had dipped to a low of 3,919 points and staged a sharp comeback. The index closed at 4,074.

The Sensex closed the day at 13,518 points with a marginal loss of 12 points, or 0.09 percent. It had touched an intra-day low of 13,051.

As per provisional data, domestic institutional investors bought shares worth Rs 612 crore, while foreign institutional investors were net sellers to the tune of Rs 1,303 crore. Brokers said major domestic institutional buying was reported during the last one hour of trade.

Nifty futures are the most widely traded futures contract in the country and most of the punters often take leveraged positions as it become relatively easy to predict the direction during a global turmoil.

Ambreesh Baliga, vice president at Karvy Stock Broking, said: “The domestic markets seem to be very near to its bottoms. The stocks are available at throwaway prices and it could be a good opportunity for investors,”

Sukumar Rajah of Franklin Templeton Investments said: “While Indian firms are not directly impacted by the global developments, FII outflows have put pressure on the markets.” The FIIs have pulled out close to $8.3 billion since the start of 2008.

The key benchmark indices in China, Japan, Hong Kong, Taiwan, Singapore, and South Korea were down by 1.01-6.1 per cent while the UK, Germany and France were down by between 0.37-1.54 per cent.

Markets are now keenly watching the move by US Federal Reserve, which is likely to cut its key interest rates as the financial crisis is weakening the dollar with a direct impact on the economy.