Is Short Covering fueling the Sensex and Nifty 50 rally?

The Indian stock market surged on Wednesday, ending a 19-day streak of weak trading. The Nifty 50 index, after opening lower at 22,073, climbed to 22,347 by the end of the session, marking a gain of over 250 points. The BSE Sensex also rose by nearly 740 points, closing at 73,730. The Bank Nifty index gained 241 points, ending at 48,487. The broader market experienced strong buying as the BSE Small-cap and Mid-cap indices surged by 2.80% and 2.66%, respectively.

Experts attribute this rally to five major factors:

Short Covering

According to market analysts, this rally could be a relief rally after a prolonged period of decline. During this time, many institutional investors (FIIs) had accumulated significant short positions. As the market showed signs of recovery, these investors might have started covering their short positions, contributing to the upward movement.

Decline in the US Dollar

The US dollar hit a three-month low, which further fueled the buying activity. As the dollar weakened, foreign institutional investors (FIIs) might have booked profits in the US currency market and simultaneously covered their short positions in Indian stocks.

Drop in US Treasury Yields

While US treasury yields rose slightly, recent profit-booking in the US dollar market triggered a dip in bond yields, creating a favorable environment for short covering in Indian stocks.

Renewed Concerns Over US Inflation

Despite Donald Trump’s speech at the US Congress, the renewed fear of rising inflation in the US could have spooked investors globally. The potential for the Federal Reserve to take a more hawkish stance to combat inflation is fueling concerns, and some of this caution could have spilled over into the Indian market.

Decreasing Fear of Trump's Tariffs

The market has largely discounted the fear of Trump's tariffs, and this diminishing concern is contributing to the rally. Experts believe that the US stock market, despite being priced to perfection, could face a significant correction, which might bring some balance to global market sentiment.

Market Outlook

Looking ahead, experts suggest that the Nifty 50 index needs to close above 22,500 to confirm a more stable market sentiment. Similarly, for continued bullish momentum, the Bank Nifty should see a decisive move beyond the 49,200 mark. On the Sensex, immediate support is seen at 73,000, with the next major support at 72,000. A close above 74,500 would further solidify positive market conviction.

Disclaimer: As always, investors are encouraged to consult with certified experts before making any investment decisions, as market conditions are subject to change.