Ratio of total traded value of open interest in stock futures and index futures goes past 70:30.
In 2010, this has happened only twice, according to data compiled by BS Research Bureau. Both time the market corrected about 10 per cent.
On January 15, the ratio stood at 71.45: 28.55. Then, the Nifty had corrected 10.16 per cent, or about 533 points.
The second time it happened was on April 26, when the ratio of open interest in stock futures and index futures was 70.19:29.81. That time, the Nifty gave up 9.71 per cent, or about 1,722 points.
| FUTURE SHOCK | |||||
| Date | % of Total notional | Nifty Correction | |||
| Index Futures | Stock Futures | Nifty as on Date | In % | In points | |
| Jan 15, ’10 | 28.55 | 71.45 | 5252.20 | -10.16 | -533.55 |
| Apr 26, ’10 | 29.81 | 70.19 | 5322.45 | -9.69 | -515.70 |
| Aug 23, ’10 | 28.19 | 71.81 | 5543.50 | what next ? | |
| Data Compiled by BS Research Bureau | |||||
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Interestingly, before the start of the market slump in 2008, this ratio used to be over 70:30.
Does this mean there is a risk of correction this time too? “The Nifty has corrected 10-15 per cent whenever this ratio has surpassed 70:30,” said Vikas Khemani, head of institutional equities at Edelweiss Securities. “I do believe the long-term India story remains intact, but the markets are poised for an 8–10 per cent correction in the short term,” he added.
However, this time, the correction may not be that severe, says Siddarth Bhamre, head of equity derivatives at Angel Broking. “In the previous two occasions in 2010, when the ratio went above 70:30, there were mostly long positions. However, this time, there is a blend of both long and short positions,” he said.
According to Bhamre, traders are short on large-cap stocks like Reliance Industries, NTPC, SAIL and Reliance Power.
Leveraged positions in the derivatives market exacerbated the fall in Indian stocks in early 2008. “Compared with the peak in 2008, at present there are more participants in the derivatives market. This means per person leverage is much less,” he added.
The 50-stock Nifty closed at 5,543 on Monday, up 12.85 points, or 0.23 per cent.