FII Vs DII

These days there is a very strong news flow about the FII money flow! It definitely is interesting to see how DII and FII play the markets. Rarely we see them being on the same side and NEVER they both have emerged as net seller since April 2007 (lack of data make me put this disclaimer). So we can safely say whatever be the case euphoria or panic, these guys who make 95% of daily turnover are against each other.

September 2010 has just brought this age old truth in front of us again. You can see this continuous buying by FIIs and selling by DIIs since June '10. Obviously the buying has been far larger by FIIs and hence we are seeing positive closing for each month.

Lets try to summarize what some observations from the above table.

1. Last 1000 Nifty points gain since June has totally come due to FII buying. DII has been net seller for all 4 months. I would like to add here itself that "Dollar Index" has peaked in June. (Just a coincidence or there is some relation with this FII flow!!)

2. During the period Dec '07 to Mar '09, basically the entire collapse of Nifty, FIIs have been net seller with exception of a single month! Does this mean the FIIs are the driving force of our market? Is this why we tend to everyday see FII figures. To get an idea what they are doing, so that we can position ourselves the way they behave? Also note the DII were buyers during the entire slump! I am sure they must have been kicking themselves, as they tried catching the falling knives. But someone has to buy isn't it ?

3. The data is from Dec '07 when Nifty closed the month end at 6138 to Sep '10 when it closed on 6030, a difference of 100 points, but look at the last row. In this round trip FIIs are net seller of 41k crore, while DIIs a net buyer of 93k crore. A net increase of 52k crore! What does it mean, apart from liquidity sucked through new issues, we can argue money has flown into non-index names. If that does not justify the excess money into the market, could it be that the 3rd component of the market is playing the spoilsport. The 3rd component which in India can be categorized as Retail and HNIs? Is it that these guys are consistently getting out of the market (atleast from the big names in index)?

* I have read (with supporting data) that retail investors are in a sell mode in the US markets as well, they are not at all trusting the rally and consider the stock market as a one big "rigged" casino.

If that is the case (retail being sellers) can we expect a retail rush to come in and get fooled once again when they are dumped with all the junk at the costliest price tag? Or can finally retail investors get rid of the "dumb money" tag when the dirty game of FII selling to DII starts ?

4. Also to be noted is that FIIs are down 41k crore, which means they still have enough ammunition to take Nifty over 1000 points from here! (If you consider the earlier peak was when FIIs were fully invested). But I bet during this downturn India would have been fortunate and a larger corpus can be expected for it from the global players. Would certainly like to add the factor of bailout packages distributed to big banks who instead of lending them to businesses have started gambling with it.

5. As for the DII, they have been supplying the FIIs all the goodies till now, but 4 consecutive months of selling has a never seen before kind of feel. Will they finally give up and buy? I guess the DIIs are more difficult to assess kind of animal. They are a cunning lot and has done well to tackle the "brute force" operators which FIIs are. Look how they kept buying when the world was falling apart in Oct '08 and selling when Nifty went circuit up in May '09. It would be interesting to see what they do in coming months. 

I feel there is way too much bearishness about dollar and its time for it to rebound and clear some short. Which would force FIIs to sell and DIIs would be the most probable buyer. But can they buy at levels where only few months back they were net sellers? Will there be an unprecedented month when both FIIs and DIIs sell (kind of impossible!), but who knows?

There are a lot of questions which would be answered in coming months. And many more questions arising. One thing is for sure the FIIs make money and so do the DIIs. In a world of zero sum game who is losing them?