The FIIs continued to hold around 39 per cent of the entire F&O outstandings but they were net buyers in the cash markets this week. That cancelled out the bearish effect of domestic institutional sales.
By the standards of the past three months, it was a quiet week. The market fell “only” about 5.5 per cent. Trading remained thin, volatility stayed high, and fear remained the dominant emotion.
Index strategies
There is still two weeks to go for the settlement. Ample time for the bearish trend that started this week to strengthen before short covering puts a floor on prices. At this instant, both the FIIs and local institutions are heavy sellers.
If that consensus in attitude continues, so will the bearishness. It is exceedingly likely that the FIIs will continue selling since they have redemption pressures that will probably continue till the end of the quarter at least. At this moment, Indian institutions are also facing redemption problems so, there is a good chance they will also continue selling.
One key variable that is worth watching in this context is the rupee. It is been clearly driven down by the massive outflows of over $13 billion in portfolio investments. Every time the FIIs have eased off on the selling, the rupee has recovered slightly.
In turn, the rupee’s fluctuations have been strongly correlated with movements in several key industrial sectors, of which, banking and IT are the key ones. When the rupee has weakened, IT has done well – one reason why IT has been a counter-cyclical hedge in an 11-month period when the currency has lost roughly 20 per cent. When the rupee has strengthened, banking has recovered – the recoveries have been temporary, but pronounced.
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As of now, the BankNifty looks weak, the CNX IT looks neutral, and the rupee is testing support between 49 and 50. The NSE’s USDINR November currency future contract does seem to indicate that the rupee is set for a bounce since it has strengthened from 49.38 to 49.15 in the past couple of sessions, after bouncing from a low of 49.62.
This contract is heavily traded by institutions, who are major players in the equity markets and it may be an early indicator that FII selling will ease in the next two sessions.
If so, there is certainly a case for going long on the BankNifty, and shorting the CNXIT and also there is an implication that the Nifty itself may recover from current levels. Another encouraging signal is the lower WPI readings caused by lower crude prices. This usually has a positive influence on local sentiment.
However, most of the near-term signals are bearish. Many major stocks and industry groups have already made downside breakouts and the Nifty itself seems to have broken a key support on Friday.
The VIX is very high, historic volatility is very high, the Nifty November futures is trading at a small discount to spot. Trading volumes are low, both in spot and in futures markets. The hedge ratio is high. There has been erosion in volume and open interest in both the BankNifty and CNXIT as well.
The carryover has been reasonable so far in Nifty instruments with open interest (OI) growing quickly in both December futures and mid and far term options. About 40 per cent of Nifty option volume is in December and beyond.
The overall Nifty put-call ratio in terms of OI is reasonably neutral at 1.05, but the November PCR is bearish at 0.9. However, the PCR is far better than it was at the beginning of the November settlement.
We still have a situation where prevailing intra-day volatility is exceeding the weekly change in index values and that is very dangerous for traders. It also makes it tough to offer advice since premiums are shifting by huge amounts intra-day. Thankfully, there is ample liquidity in the option chain down to 2,300, which does offer some leeway to hedgers. The market could hit those levels in three big down-trending sessions.
There is just a chance that the Nifty will recover to above the 2,850 support and move back into a range-trading pattern between 2,850 and 3,250. Far more likely, it will fall until it tests support at the 2,550 levels. If that support is broken, the 2008 low at 2,250 is liable to be tested.
Bearspreads slightly far from money offer slightly better risk-reward ratios than the equivalent bullspreads. A long 2,700p (113.5) and a short 2,600p (82.9) costs Rs 32 and offers a maximum return of Rs 68. A bullspread with long 2,900c (112.75) and short 3,000c (74.25) costs Rs 39 and pays a maximum of Rs 61. Not too much of a differential actually. The bearspread looks on balance to be a better choice.
A long strangle with long 2,600p and long 3,000c costs Rs 157 and it can be laid off with a short 2,400p (39) and short 3,200c (28.5) for a net cost of about Rs 90 and a potential maximum return of Rs 110 if there is a move in any one direction. It is very unlikely that there will be a move in both directions.
The inverse position would be profitable if the market stayed inside 2,510-3,090 until November 27. Given time to expiry and our estimates that the market is unlikely to swing beyond 2,550-3,250, this is actually more likely. Hence, the short 2,600p and short 3,000c strangle covered by a long 2,400p and long 3,200c seems like a reasonable risk.
| STOCK FUTURES/ OPTIONS There are very few stocks that present tempting prospects on the long side. About the best long futures positions appear to be Bharti Airtel and HPCL. Among the potential shorts, Maruti, Tata Motors, Lupin, Bhel, L&T and Tata Steel all look interesting. So does ZEE Entertainment, which has made a downside breakout on massive volumes. Keep a stop at Rs 115 and go short. |