Shorters Run for Cover

Originally published on BusinessLine.com, September 22, 2010.

Broking firms do not see any margin pressure.

Market players who had gone short on the Nifty at the 5,300 – 5,400 levels have reason to feel upset. The Nifty closed on Tuesday at 6,009 and many brokers were advising clients to book losses and go long again.

A trader in Chennai who went short on the market, particularly on the Nifty since the 5,400 levels, has just managed to arrange funds from private financier to meet the exchange-stipulated margin commitments. Another trader said he offloaded some of his heavyweight shares to meet margin requirements.

"I am nervous about the markets as they climb. Technically, there is no overhead resistance until we reach the prior all-time highs. However, it is extremely unusual for the markets to continue these types of breakouts without some correction. You can't keep climbing if everyone has already bought," said technical analyst Mr Brandon Wendell, a Certified Market Technician and Senior Instructor at Online Trading Academy.

Brokers are clear that they need to be proactive and forcibly square-off short positions held by a lot of their clients. "I do not see margin calls being triggered by short selling. The markets won't correct big time in a hurry. There will be considerable consolidation and stock churning," said Mr Nirmal Rungta, Head, Private Client Group, A.K. Stock Mart.

"Naked short positions though, have been reported with brokers in Saurashtra, Gujarat and Rajasthan, but long positions won't be squared off in a hurry," he added.

Stock churning likely

Brokers say that they would lose clients if they do not give them the right advice. "Clients are actively trading futures and options nowadays. Any naked short position would result in huge mark to market losses, In addition, if we don't advise them against such risky bets they would lose faith in the market and we in turn would lose a valuable client. Hence our dealers communicate their daily outstanding positions and our research team analyses and communicates future implications to all clients," said Mr Subhash Sharma, Head, Operations Gupta Equities.

Though market analysts do not see the bullish trend reversing, entering into these overbought markets with new money amounts to a large risk that is too great for the potential rewards, they say.

"I would recommend waiting for a pullback to support levels of 5,900 on Nifty and 19,600 on Sensex before buying. Additionally, I would analyze price as it reached those levels for signs of a possible bounce," sums up Mr. Wendell.

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