Stocks are at their highest in two months; why are analysts flagging caution?
The last time Nifty's put-call ratio reached a peak, the index lost 16% over several months. However, US mid-term election results and the trajectory of oil prices could also play a part in setting the mood for the market.
Indian stocks rose for the fourth straight day on Tuesday, reaching their highest level in the last two months, supported by a decline in crude oil prices and optimism ahead of the US mid-term elections. However, a key contrarion indicator suggests that the market may have entered overbought territory, raising the possibility of a decline as investors sell shares to book profits. The Nifty closed 1.58% higher at 23,810.85, its highest since 4 September, while the BSE Sensex advanced 1.62% to settle at 76,917, the highest since 1 September.
The market capitalization of BSE-listed companies rose by ₹4.5 trillion. Foreign institutional investors turned net buyers for the third consecutive day, buying shares worth ₹6,856 crore on Tuesday, provisional data from NSE showed. The Nifty is now trading 7.3% above its 52-week intraday low of 22,179.9 on 8 October, triggering expectations that markets might be close to topping out and could witness profit-taking in the short term.
The indicator in question is the Nifty aggregate put-call ratio (PCR) open interest which reached 1.52, its highest since 5 January's 1.46, signalling that the market might be overbought. Open interest refers to the outstanding buy-sell options positions at various Nifty levels. After the PCR touched a high of 1.46 on 5 January this year when the Nifty was at a record high of 26373.2, the index plunged 16% till October.
The rise in PCR above early January levels has analysts advising caution. A 1.52 ratio implies that for every 100 call options on Nifty sold, traders have sold 152 puts, hoping that the markets would rise and they could pocket the premium paid by put buyers. This is why the indicator is known as a contrarion one because a higher quantum of puts, instead of being seen as bearish, is seen as a bullish sign.
However, when the quantum of puts far exceeds that of calls, caution is warranted. Past precedents on 5 January this year and on 27 September 2024 when the ratio was at 1.50, showed markets tending to top out when the reading soared. Back in late September 2024, the market fell 17.25% from a then record high of 26,277.35 to a low of 21,743.65 on 7 April 2025, as global tariff wars raged. "With the aggregate PCR touching 1.52, we may be close to making a top and due for a short-term pull-back if the past is any indication," cautioned Rohit Srivastava, founder of analytics firm IndiaCharts.
"The indicator, as in the past, shows we are in an overbought zone, though we are nowhere close to the high,” Srivastava added. The relative strength of Indian equity markets is also evident when compared with global markets. Since the Nifty's 52-week low on 8 October, several major global indices have witnessed declines, while Indian markets have moved in the opposite direction. During this period, Japan’s Nikkei 225, Hong Kong’s Hang Seng and China’s CSI 300 declined by 9.93%, 2.51% and 8%, respectively.
In the US, the S&P 500 and Nasdaq Composite fell by 3.34% and 8.62%, respectively. In contrast, the Nifty 50 gained 5.34%. Brent crude fell over 7% on Monday to $104.80 a barrel after talks between Iranian and Qatari officials rekindled hopes of a peace deal and steadier Middle East supplies. It rose to around $106 on Tuesday after reports of renewed US-Iran conflict. Easing geopolitical tensions remains the primary factor that could drive crude oil prices lower, said George Thomas, fund manager at Quantum Asset Management.
India's stock prices are closely linked to the trajectory of oil, given the country's energy import dependence. “While alternative routes may emerge over time, their development is unlikely in the near term. Therefore, any meaningful near-term moderation in crude prices would largely depend on a resolution of the ongoing geopolitical tensions,” Thomas added. Except for the Nifty Energy, Metal and PSU indices, all the sectoral indices closed in green.
Among the stocks that pulled up the Nifty higher were HDFC Bank, ICICI Bank, and Bharti Airtel. While SBI was the one which contributed the most in pulling the index downwards as a one-off gain lowered the bank's non interest income. The bank’s non-interest income, however, fell by 5% from a year ago to ₹19,066 crore. Shrikant Chouhan, senior vice president (research) at Kotak Neo said the market could swing either way depending on the outcome of the US midterm polls, which could have a bearing on oil.
"If Trump is weakened at the midterms, we could see further moderation in oil prices and a further rally in markets, but if he ends up getting stronger, then uncertainty on the West Asia crisis could linger, increasing the choppiness," he said. The US goes to mid-term polls on 3 November, a pivotal referendum on President Donald Trump’s second-term administration, determining whether Republicans maintain full control of Congress.
A Democratic victory in either chamber would split Washington's power, effectively stalling the administration's legislative agenda while opening the door to aggressive congressional oversight.
