 "Economic omens not propitious for a rebound")
Information technology, textiles, pharma, automobile components - there's one common factor to the sectors which seem to show some characteristics of recovery. All of these are export-oriented and/or benefiting from an import substitution effect. A weaker rupee has offered these protection in the domestic market.
While this is a useful outcome from a weaker rupee, the absence of a broader recovery across more sectors is disturbing. There are no signs that sentiment, investment or consumption, is recovering. At best, all one can say is that the economy might have bottomed out.
The latest Index of Industrial Production (IIP) numbers suggest maybe even that has not happened. The IIP was negative in October 2013, over October 2012. This year, no deseasonalising for festive season shifts is necessary, since the holidays came around the same time as last year. The economy was already decelerating in 2012-13. So, the omens aren't propitious for a rebound.
One can think of several scenarios. If RBI raises the minimum 25 basis points and leaves cash reserve ratios (CRR) untouched, the market will probably see some sort of relief rally. If the Fed decides to hold off on tapering in January or to taper in tiny token increments, a relief rally across global markets is a likely outcome.
If the Fed does decide to taper full-on, there will be a correction across global markets. This will override anything RBI does. If RBI raises rates by 50 basis points or throws in a CRR hike on top of a repo rise, the market will also slide down.
A trader must take all these scenarios into consideration and decide which of these is more likely.
Then, he must take positions accordingly. The chances are, next week will see very high volatility, one way or another.
The Nifty is likely to develop some sort of strong trend - maybe a net movement of four-five per cent in either direction. The financial index, the Bank Nifty, could be hypersensitive. It is volatile anyhow. A couple of 400-500 point sessions are very likely and it could open with large gaps. A move of 1,000 points away from the current price or an even larger swing is not impossible.
If you have a view, your strategy is clear. Buy long calls or long puts on the Nifty or Bank Nifty, depending on the direction you think is likely. If you don't have a directional view, you can still bet on changes in volatility.
Do you bet on volatility increasing? In that case, you should look to strangle the Bank Nifty or the Nifty with long options (both calls and puts), placed at some distance from money. If you think there won't be much movement because the market has already discounted Fed and RBI action, then you should sell strangles at a distance from money and hope to pocket the premium.
The December expiry will be drawing closer, which complicates the situation. Premiums will decay rapidly at some distance from money. That makes selling a a little more tempting. Nevertheless, the newsflow and the fact that FIIs are nearing their financial year-end, makes selling a risky proposition. The chances of a big move is just too high.
While this is a useful outcome from a weaker rupee, the absence of a broader recovery across more sectors is disturbing. There are no signs that sentiment, investment or consumption, is recovering. At best, all one can say is that the economy might have bottomed out.
The latest Index of Industrial Production (IIP) numbers suggest maybe even that has not happened. The IIP was negative in October 2013, over October 2012. This year, no deseasonalising for festive season shifts is necessary, since the holidays came around the same time as last year. The economy was already decelerating in 2012-13. So, the omens aren't propitious for a rebound.
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In the absence of growth, inflation becomes the key focus point for valuations and that leads to interest rates. This week is likely to see a focus on US tapering and on the possibility that the Reserve Bank of India (RBI) will raise rates. It looks extremely probable that RBI will raise the repurchase rate. We could also get some clarity on the US Federal Reserve's timelines for tapering of its QE3.
One can think of several scenarios. If RBI raises the minimum 25 basis points and leaves cash reserve ratios (CRR) untouched, the market will probably see some sort of relief rally. If the Fed decides to hold off on tapering in January or to taper in tiny token increments, a relief rally across global markets is a likely outcome.
If the Fed does decide to taper full-on, there will be a correction across global markets. This will override anything RBI does. If RBI raises rates by 50 basis points or throws in a CRR hike on top of a repo rise, the market will also slide down.
A trader must take all these scenarios into consideration and decide which of these is more likely.
Then, he must take positions accordingly. The chances are, next week will see very high volatility, one way or another.
The Nifty is likely to develop some sort of strong trend - maybe a net movement of four-five per cent in either direction. The financial index, the Bank Nifty, could be hypersensitive. It is volatile anyhow. A couple of 400-500 point sessions are very likely and it could open with large gaps. A move of 1,000 points away from the current price or an even larger swing is not impossible.
If you have a view, your strategy is clear. Buy long calls or long puts on the Nifty or Bank Nifty, depending on the direction you think is likely. If you don't have a directional view, you can still bet on changes in volatility.
Do you bet on volatility increasing? In that case, you should look to strangle the Bank Nifty or the Nifty with long options (both calls and puts), placed at some distance from money. If you think there won't be much movement because the market has already discounted Fed and RBI action, then you should sell strangles at a distance from money and hope to pocket the premium.
The December expiry will be drawing closer, which complicates the situation. Premiums will decay rapidly at some distance from money. That makes selling a a little more tempting. Nevertheless, the newsflow and the fact that FIIs are nearing their financial year-end, makes selling a risky proposition. The chances of a big move is just too high.