F&O stocks to watch; Nifty, Bank Nifty outlooks as FPIs turn cautious, HNIs bullish amid Lok Sabha elections 2024

Nuvama Institutional Equities in its latest derivatives note said foreign portfolio investors (FPIs) have adopted a cautious approach by lightening their long futures and options (F&O) positions, which were hedged with index shorts. In contrast, HNIs and retail investors, who had reduced their long positions in both the index and SSF (single stock future) in March series, significantly increased their long positions in both areas in April series.

"Remarkably, HNIs have now gone all-in on the long side, with a massive $18.2 billion net SSF long position, marking historic high levels at the start of any series. Based on past experience, such a decisive move by HNIs often results in the index trading within a narrow range, with more dynamic action unfolding across various sectors," Nuvama said.

Abhilash Pagaria, Head of Nuvama Alternative & Quant Research, said May is gearing up to be an action-packed month with national elections on the horizon, and the anticipation of outcomes could lead to heightened volatility in the market.

The election results, expected in the first week of June, will likely be a focal point for investors, particularly with the current ruling government poised for another term. While the outcome seems certain, attention will shift to the margin of victory, which could spark market excitement, he said.

"Turning to the Nifty Index, with HNIs starting the series with net long positions at a historic high, I anticipate the index to trade within a narrow range (22,350 to 22,700) initially, with more significant action unfolding in specific sectors and stocks. Post the immediate consolidation we should move towards new all time high before elections results. If any decline till 21,900 should be used as an opportunity to go long," he said.

Pagaria said the outlook for the May series leans bullish, with broader markets likely to outpace the Nifty index. Historical data over the past decade indicates a favourable seasonality trend for May, with the Nifty settling in the green 70 per cent of the time, boasting average returns of 2.5 per cent.

"Additionally, Nifty Bank tends to outperform, boasting an average gain of 3.5 per cent with an 80 per cent strike rate. Sector-wise, I'm inclined towards the auto sector once again, particularly favouring Eicher Motors, M&M, and Maruti Suzuki. Within FMCG, ITC emerges as a low-beta long option, while Hindustan Aeronautics and NMDC also appear well-positioned for potential gains of 5-8 per cent," he said.

"The chemical sector presents itself as a promising long-term bet, offering potential gains over the medium term (3-6 months). Conversely, on the hedged short side, FMCG and Pharma names seem appealing. With May promising a mix of political and market dynamics, strategic positioning within sectors and stocks will be the key to navigating potential volatility and capitalizing on emerging opportunities," he said.