With Monday’s sharp rally pushing the Sensex past 76,000 and the Nifty50 above 23,300 for the first time, equity markets appear to have fully priced in the consensus exit poll results. Despite this, implied volatility remains significantly higher than the historical average. Until the actual Lok Sabha election results are confirmed on June 4, the market sentiment is expected to remain uncertain.
While the exit poll numbers have alleviated some anxiety, evidenced by a sharp drop in the India Volatility Index (India VIX) on June 3, nervousness still lingers. A return of the India VIX to normal levels would signal that the market’s anxiousness has subsided.
Moreover, a considerable number of short positions in the market, including those held by foreign institutional investors (FIIs), have yet to be covered. Some traders are holding out hope for a different outcome on vote counting day. If these short positions are forced to be covered, the Nifty50 could see an additional 1-2 percent rise from current levels.
Once existing short positions are cleared, the market may see some profit-taking. FIIs might cover their shorts but are likely to remain cautious until the Budget announcement, as pre-Budget nervousness could prevail. Foreign Portfolio Investors (FPIs) might seek to capitalize on any market dips that occur during this period, reassessing their stance on the Indian market post-Budget.
Medium-term investors are advised to wait for the market to stabilize rather than pursuing stocks at current levels. From a long-term perspective, investors should focus on large-cap stocks, particularly in the infrastructure and manufacturing sectors.
In contrast, mid and small-cap stocks should be avoided at this time. Anticipated market volatility leading up to the Union Budget may present opportunities for investors to explore the broader market space.
