For any serious trend to develop, institutional investors need to act in unison or IT and Financials sectors have to align
Incremental gains triggered higher volumes in the derivatives segment. Despite bullish undertones, actual price moves were moderate.
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Volumes climbed significantly in the derivatives segment and open interest (OI) is also up. Cash volumes also rose. Volatility remains low. The Nifty is making gradual gains. It has spent a lot of time between 5,300 and 5,400 and hasn’t cleared resistance at the upper end of that zone.
Last week saw FII and domestic institutional investor (DII) attitudes aligned for the first time since Budget. Since March 1, the FIIs have bought a net Rs 16,650 crore while DIIs have sold net Rs 4,400 crore. However, in the last five sessions, DIIs bought Rs 300 crore while FIIs bought Rs 1,660 crore. Clearly Indian traders (retail and operator) have been substantial net sellers.
Going by recent historical record, volumes need to cross around Rs 15,000 crore in the cash market and around Rs 80,000 crore in F&O before serious trends develop. Current volume action is lower than that. However, if institutions remain positively aligned, volumes may rise past tipping point.
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Another set of alignments – between the IT and Financials sectors – is desirable for a trend since the Nifty rarely has a strong trend when the CNXIT and BankNifty are not in tandem. At the moment, the CNXIT looks weaker. The CNXIT has been adversely affected by the rising rupee while the Bank Nifty has so far, shrugged off fears of rate hikes in the April Credit Policy.
IT results start this week and Infosys will probably set the trend. If Infosys has decent advisories and positive surprises, the CNXIT could jump. If Infosys disappoints, the index will take a tumble. As of Friday, Infosys looked fairly positive. The CNXIT index is likely to move more than Infosys because the advisory usually sets off a chain reaction in other heavyweights like TCS, Wipro and HCL Tech.
In financials, the news and past policy stance suggests the April RBI review will see anti-liquidity measures. Inflation is strong and rising global metals and crude oil prices will exacerbate it. However, the Bank Nifty is up 10.7 percent since Budget while the Nifty is up 9 per cent. The out-performance may continue if there isn’t an excessive policy rate hike.
Technically, the Nifty is hitting stiff resistance above 5,370. It hasn’t risen past 5,400 since February 2008. On the downside it has impressive support down to 4,800. This is a long settlement (April 29) and there is no noticeable expiry effect yet. But OI is clustered close to the money (CTM).
Examining the Nifty option chains, one notes a lot of winning calls have been cashed in the recent past. Despite this, OI has risen. The put-call ratio (PCR) is in the bullish zone with the overall Nifty PCR (in terms of OI) at 1.4 while April PCR is at 1.7, which is high. May and beyond, PCR is hovering at 1, on the edge of the danger zone. About 37 per cent of option OI has migrated beyond April.
The Nifty put option chain for April shows twin peaks of OI and 5,300p (55) and 5,200p (33) and much less OI at 5,100p (18) and 5,000p (11). The call chain has OI at 5,300p (116), maximum OI at 5,400c (58) and some OI at 5,500c (22) and 5,600c (7). The cut off below the 5,200p suggests that this is a key support. If the market slides below 5,200, it could correct a lot further.
A CTM bullspread of long 5,400c and short 5,500c costs 36 and pays a maximum of 64. The CTM bearspread of long 5,300p and short 5,200p costs 22 and pays a maximum 78. These are good risk-reward ratios especially three weeks from settlement. Combining these two spreads creates a long-short strangle combination. That combo costs 58 and pays a maximum of 42 in any one direction. Breakevens are at 5,242, 5,458.
Another two-way position would involve a wider strangle set with long 5,500c and long 5,200p. This costs 55 and is laid off with short 5,100p and short 5,600c to reduce net cost to 30. The breakevens are at 5,170, 5,530. The maximum return is 70 if the market touches either 5,100 or 5,600.
A third possibility is a CTM bearspread (long 5,300p and short 5,200p) coupled to a long Nifty future with a stop loss at say, 5,300. The maximum loss on that position is 84 at 5,300 (the Nifty was settled at 5,362). The maximum upside is unlimited with breakevens at 5,216, 5,384. The maximum downside return is 16 at 5,200.
| STOCK FUTURES/ OPTIONS The stock market offers several interesting positions. As mentioned above, the other IT majors are likely to develop a trend that mirrors Infosys (spot 2,683). In the options market, a long Infosys 2,700c (55) and short 2,800c (22) bullspread would cost 33 and pays a maximum 67 for a 2:1 ratio of return to risk. Reliance Industries and Cairn offer long positions in the futures segment as do Axis Bank and DLF. JP Associates is another potential long position. IFCI (spot 53.5) offers a bullspread with long 55c (1.45) and short 60c (0.55). The potential maximum return would be about 4:1. Sail (234) has unusually high liquidity in the 240p (10.15) and 240c (5.55). Somebody must suspect serious pressure building on the stock. Sesa Goa is another scrip that has seen quite a lot of action. Spot has dropped from Rs 490 to about Rs 469 in the last session and the futures has fallen further till Rs 463. It could be worth a short position. |