Stock market: FIIs covering shorts. Rally ahead? Here’s what Sumeet Bagadia says

The recent sharp rally in the stock market, after a year of subdued performance, appears to mark the beginning of a new bull phase rather than just a festive season bounce, says Sumeet Bagadia, Executive Director at Choice Broking. 

In an interview with Ritik Raj of Business Today, Bagadia said that sectors like pharmaceuticals, metals, auto, banking, and defence appear well-positioned to outperform in the coming months.
Edited excerpts:-

After a year of muted returns, the stock market has rallied. Is this just a temporary festive season bounce or the start of a new, sustainable run?

After a year of subdued performance, the recent sharp rally in the stock market appears to mark the beginning of a new bull phase rather than just a festive season bounce. The up move has been supported by strong corporate earnings and notable activity in the derivatives segment, where FIIs have been seen covering a significant portion of their short positions in index futures—adding momentum to the rally. On the technical front, benchmark indices are forming higher highs and sustaining above key moving averages, supported by broad-based sectoral participation. While short-term volatility cannot be ruled out, the overall market structure suggests that this rise is backed by structural strength rather than sentiment alone. This suggests the foundation of a more sustainable uptrend in the months ahead.

Which sectors do you believe are best positioned to outperform in the coming years or months?

Looking ahead, several sectors appear well-positioned to outperform in the coming months and potentially over the next few years. The pharmaceutical sector is expected to benefit from strong domestic demand, robust export opportunities, and ongoing innovation in specialty drugs. Metals are likely to see momentum from rising global commodity appeal and supportive government policies. The auto sector continues to gain from electric vehicle adoption, improving consumer sentiment, and healthy domestic demand. Banking remains attractive due to steady credit growth, improving asset quality, and strong deposit trends. Meanwhile, the defence sector is poised for growth with increased government spending on modernization and strategic initiatives. Overall, these sectors combine structural strength with favorable macro trends, making them key beneficiaries in the current market environment.

What impact could a potential US-India trade deal have on Indian equities?

A potential India–US trade deal could have a significant impact on Indian equities, with IT and textile sectors likely to emerge as key beneficiaries. In the IT space, companies heavily reliant on H-1B visas for staffing U.S. operations have faced increased costs following the recent visa fee hike. A favorable trade agreement would ease these operational uncertainties, supporting revenue growth and enabling more stable long-term business strategies. Referring to the monthly IT index chart, the sector has been displaying strong momentum, forming consistent higher highs, which indicates sustained bullish sentiment. On the textile front, high U.S. tariffs have limited export competitiveness, and any reduction under the proposed trade deal could substantially boost demand for Indian textile products. Technically, textile stocks have shown renewed buying interest, signaling a potential uptrend. Overall, such a trade deal could act as a structural support, strengthening sector fundamentals and reinforcing positive market momentum for both IT and textiles.

We've seen a huge correction in mid- and small-cap stocks this year. Is this a warning sign, or is it a good time to buy?

The sharp correction seen in mid- and small-cap stocks this year appears to be a healthy phase of consolidation rather than a sign of structural weakness. After a strong rally over the past year, valuations had turned elevated, prompting profit booking and sector rotation towards large-cap counters. Technically, both the Nifty Midcap and Smallcap indices have retraced towards their crucial moving averages on the weekly chart, indicating mean reversion after an extended uptrend. Momentum indicators such as RSI have also eased, reflecting cooling sentiment and reduction in excessive speculative activity. While the broader trend remains constructive, the near-term outlook calls for caution as volatility could persist until a clear reversal pattern emerges. Investors should watch for signals like higher lows formation, improvement in market breadth, and renewed buying interest to confirm trend resumption. Overall, the recent correction offers a potential buying opportunity, but it would be prudent to wait for credible reversal signs before taking aggressive positions in the mid- and small-cap space.