When it comes to the stock markets, one thing is certain—volatility never takes a day off. On July 31, the expiry of the July F&O series, traders braced themselves for turbulence. US President Donald Trump’s surprise decision to impose a steep 25% tariff on Indian exports sent shockwaves through the financial world and initially dragged the Sensex down sharply in early trading.
But here’s the twist—despite this gloomy start, the Sensex index and its peer, the Nifty 50, staged an impressive rebound within the first hour of trade. How did this happen when global headlines screamed uncertainty? Let’s dive into the two major factors that turned the tide for Indian markets that day.
1. Extremely High FII Short Positions: The Pessimism That Sparked a Rebound
The first and perhaps most powerful driver behind the recovery was the mountain of short positions built up by Foreign Institutional Investors (FIIs).
FIIs went into expiry day with a long-to-short ratio of just 14% to 86%—the highest level of short bias recorded since March 2025. In simpler terms, almost every major foreign investor was betting that the stock markets would fall further.
Now, here’s where it gets interesting:
When such an extreme level of bearish positioning piles up, it usually sets the stage for what’s known as short covering—a phenomenon where traders who bet against the market rush to buy back shares to limit their losses when prices stop falling. This sudden buying pressure often sparks a sharp bounce, just like we witnessed on July 31.
Think of it like a crowded movie theater: if everyone is rushing toward the exit at the same time, even the slightest push in the opposite direction can create chaos—and in this case, the chaos worked in favor of the bulls.
2. Turnaround Signal from the Nifty PCR: Reading Between the Lines
The second factor was the Nifty Put-Call Ratio (PCR)—a widely watched indicator used to gauge market sentiment.
Just a few sessions before expiry, the PCR had dropped to 0.6, and by expiry day, it only recovered slightly to 0.7. Now, what does that mean?
A PCR value below 1 often signals that the market is oversold. Traders are heavily buying puts (which are essentially bets against the market) compared to calls. Historically, whenever the PCR dips this low, it has almost always preceded a reversal because extreme bearishness eventually runs out of steam, forcing traders to switch sides.
In short, a low PCR is like a coiled spring—eventually, it has to release, and when it does, the bounce can be surprisingly strong.
The Rupee’s Remarkable Comeback
Adding to the mix, the rupee also joined the recovery party. After posting the sharpest intraday fall in more than three years, the currency clawed back 14 paise from its all-time low by 3 pm on July 31.
While this may sound like a small move, in the world of forex trading, even a few paise can make a big psychological difference, signaling that panic selling was cooling off and confidence was making a tentative return.
Why the Rebound Didn’t Last All Day
Of course, it wasn’t all smooth sailing. While the initial recovery was strong, the stock markets struggled to hold onto all their gains. By the final hour and a half of trade, the Nifty 50 had already given up nearly 200 points from the day’s high.
This late-session sell-off was a sobering reminder that while short-term technical factors (like short covering and PCR) can create bounces, broader concerns—such as US tariffs and global trade tensions—still hang over the markets like a dark cloud.
What This Means for Investors
So, what can investors take away from this roller-coaster session? For one, it proves that even when negative headlines dominate the news cycle, technical indicators and positioning data can spark unexpected recoveries.
If you follow the Sensex index or track Sensex Moneycontrol updates, you know this isn’t the first time the markets have bounced back from the brink—and it won’t be the last.
Lessons from July 31: The Power of Market Psychology
Markets aren’t just about numbers and charts—they’re about people and their emotions. Fear and greed often move faster than logic, and the events of July 31 perfectly highlight this.
When FIIs were overwhelmingly short, and PCR was flashing oversold signals, the stage was set for a classic short-covering rally. But as quickly as the rally started, it faded, showing that sentiment-driven moves don’t always last without strong fundamental support.
Should You Be Worried About Tariffs?
Not necessarily. While tariffs may cause temporary jitters, history shows that the stock markets often adapt faster than we expect. Corporate earnings, domestic liquidity, and global trends typically have a more lasting impact than one-off trade shocks.
If anything, tariff-driven corrections sometimes create fresh buying opportunities for savvy investors who are willing to look beyond short-term noise.
How to Navigate Volatile Markets
If July 31 taught us anything, it’s this: don’t panic when the Sensex index takes a hit. Instead:
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Watch FII positioning: Extreme levels of shorting often signal that a rebound is near.
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Monitor PCR levels: A low PCR can be a hidden clue that markets are about to turn.
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Stay calm during tariff headlines: Short-term shocks rarely derail the long-term trend.
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Focus on fundamentals: Over time, earnings and growth prospects matter more than knee-jerk reactions.
The Bottom Line
The July 31 session was a masterclass in how technical indicators can override even the scariest headlines. Despite Trump’s 25% tariffs on Indian exports, the stock markets proved once again that fear doesn’t last forever.
Yes, the rally didn’t hold until the closing bell, but it served as a reminder that market psychology, not just policy, drives price action in the short term. For investors, staying informed and focusing on the bigger picture is the key to surviving—and thriving—in volatile times.
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Conclusion
In the ever-changing world of the stock markets, days like July 31 show that resilience is often hiding in plain sight. Even when the news looks grim, the combination of FII short covering and a low PCR can create an unexpected lifeline for the bulls.
So, next time you see a tariff headline or a sudden market drop, don’t rush for the exit. Instead, remember that the same forces that drive prices down can also set the stage for the next big recovery.
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