The index futures long-short ratio serves as a crucial sentiment indicator, reflecting market sentiment by comparing the number of bullish positions held by foreign institutional investors (FIIs) to their bearish positions. A low ratio suggests that FIIs are bearish on the Indian equity market, whereas a high ratio indicates bullish sentiment.
Calculation of Long-Short ratio (Typically looked in the context of FIIs)
| FIIs Data in Equity Derivatives as of Jul 04, 2024 | No of Contracts |
| Future Index Long | 4863823 |
| Future Index Short | 94225 |
| TOTAL | 580607 |
| Long (%) | 84% |
| Short (%) | 16% |
| Long-Short Ratio | 5.16 |
What does this 5.16 number indicate?
More than 5 long index bets for every single short position in index futures
As the Long-Short ratio is a mean reverting number ideally a ratio of 3 indicates a correction. However, This time, the ratio jumped from 2.03 straight to 4.5, far exceeding the overbought zone, and stabilizing above 5 with no sign of correction.
The ratio, when considered in isolation, may not provide meaningful insights. Ideally, it should be analyzed through a time series comparison to discern trends in sentiment. Additionally, it should be supported by other indicators to develop a comprehensive view of the market.
For example the current data in isolation suggest that Nifty is in overbought zone and ideally a correction is awaited. But the India VIX, the fear gauge, has dipped below 13 levels, indicating lower volatility and a Bullish sentiment.
ANALYSIS OF RECENT NIFTY DATA
| DATE | FIIS LONG-SHORT RATIO | NIFTY CLOSING PRICES | INDIA VIX |
| 04-07-2024 | 5.16 | 24302 | 12.855 |
| 03-07-2024 | 5.1 | 24286 | 13.205 |
| 02-07-2024 | 4.59 | 24123 | 13.64 |
| 01-07-2024 | 4.75 | 24141 | 13.83 |
| 28-06-2024 | 4.72 | 24010 | 13.8025 |
| 27-06-2024 | 4.47 | 24044 | 14.1525 |
| 26-06-2024 | 2.03 | 23868 | 14.045 |
| 25-06-2024 | 1.59 | 23721 | 14.3125 |
| 24-06-2024 | 1.44 | 23537 | 14.0575 |
| 21-06-2024 | 1.32 | 23501 | 13.18 |
The increasing long-short ratio, coupled with a declining India VIX, indicates signs of bullishness. This is further supported by the Nifty index, which is continuously reaching all-time highs.
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