Outlook’s bleak but markets bottom and regain ground months before the fundamentals show visible turnaround.
The carryover trend seems very strong going into settlement week. Trading volumes and open interest are also at high levels with a visible tendency of profit-booking in long positions.
Index strategies
This has been an extremely high volume month. While the FIIs have almost doubled collective exposure in value terms, their exposure as a percentage of open interest has dropped to around 35 per cent of all OI from an average of 39 per cent. They seem to be taking Texas Hedges in that they have been net long in the derivatives section and net buyers in cash.
Carryover sentiment is good. At this stage of settlement there is usually less than 20 per cent of Nifty futures OI in the mid and far months. This time around, almost 40 per cent of Nifty futures OI is already in May-June. If the trend is maintained through the next four sessions, there could be a record rollover.
There's usually a feedback loop in terms of high volumes and rising prices breeding higher volumes and higher prices. April has been a remarkable settlement so far. Against all odds, the market has gained a massive amount. Can this pace be maintained? If it is, the long, vicious bear market that started in January 2008 has finally played itself out. In fundamental terms, the outlook still looks bleak but markets often bottom and start regaining lost ground months before the fundamentals show a visible turnaround. However, I'm still bearish because of the political factor.
The outcome of general elections is uncertain and the uncertainty should start telling on the nerves in May. Quite a large chunk of the Rs 5,000-odd crore FIIs have pumped into the stock market (cash) in the past few weeks may be round-tripping election funds. If so, it will be cashed and deployed in the next stages of campaigning and in the horse-trading that follows.
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The immediate consideration would be settlement. It would be rational to expect at least some profit-booking from long traders. Indeed we've seen some long positions being extinguished and it shows in the Nifty put-call ratio. While the overall ratio in terms of OI is 1.5 (bullish) the April ratio is 1.9 (on the verge of overbought). The high PCR has been driven by the cashing out of April calls. Incidentally, around 42 per cent of index option volume is already in May and beyond.
Futures in the BankNifty and the CNXIT have both been generating relatively high volumes as well and the BankNifty at least has become a popular contract in its own right. It's a pity that nobody is interested in the Junior contracts or the Midcap-50, since the underlyings have been high-beta and high-volume.
The CNXIT did better than expected last week despite the rupee staying stable. Wipro was the only major, which seemed optimistic in the near term. But it weakened on Friday. The BankNifty for a change, underperformed the Nifty. This was due to profit-booking in banks that have had a big run-up. Settlement considerations could mean the profit-booking continues. It may be interesting at this stage to take a look at expectations as they appear to be mirrored in the long-term options segment. On the put side, between May-December 2009, most of the OI is in a range between 2,300p and 2,800p. That seems to be consensus of pessimistic expectations.
There is some interest in the June 2011 4,500p and 5,000P contracts but those are hedges for structured products. On the call front, most of the long-term money is ranged between 3,300c and 4,000c. This would be the consensus expectations for the next 6-7 months. The outliers here are the 5,000c and the 5,700c contracts of the June 2011 series, which would again be a part of some structured product.
The market has been seeing daily volatility in the range of 3.8 per cent and this could rise in the next four or five sessions. That implies 150-200 point Nifty sessions are likely. Long traders can reduce expiry risk by staying within 200 points of the money. Technically, the potential upside target in the next five sessions is about 3,700, while the possible downside is about 3,200.
Close-to-money option spreads offer decent risk to reward ratios; better than the expiry risk and historical volatility warrants. A long 3,500c (39) and short 3,600c (11.5) combination costs about 27.5 and pays a maximum of 72.5. A long 3,400p (25) and short 3,300p (10) costs about 15 and offers a maximum payoff of about 85. A long-short straddle with long 3,400p and long 3,500c offset by a short 3,200p (4) and a short 3,700c (4) costs 56 and pays a maximum of 144. Despite the expiry risk, this position may be worth taking.
| STOCK FUTURES/OPTIONS The market has turned stock specific in the past five sessions due to the results season. This may be enhanced by settlement considerations. Reliance Industries, Reliance Capital, Reliance Infra, etc., could be high-beta plays which will move with the market in an exaggerated fashion. |
If there is profit-booking, interest rate sensitive infrastructure and real estate stocks like Unitech, JP Associates, IFCI and DLF could be very vulnerable. DLF has already seen some profit-taking. Keep a stop at Rs 245 and go short.