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The market spiralled downwards. The latest cause for fear was a remark by the Prime Minister, which hinted at taxes on capital market profits. The Nifty dropped to a new three month low. Foreign Portfolio Investors (FPI) continued to cut back on emerging market exposures and Domestic Institutional buying is not enough to hold prices, in the absence of retail support.
The Nifty dipped below 7,900. It made a small recovery from 7,893. Even so, the close of 7,908 was below the previous three months low of 7,916 (registered November 21). A pattern of lower lows confirms that the bearish trend is strong. Of course, the Nifty is also trading well below the 200-Day Moving Average (200-DMA) (which is at about 8,245). On the upside, the 200-DMA would be a key level to beat. On the downside, this breakdown sets up a potential target of 7,500. The rupee continues to struggle versus the rising dollar. If FPI selling continues, the rupee could collapse to historic lows. Despite the low rupee, there has been no rally in export stocks, including IT stocks, which are considered a traditional hedge against higher dollar. The prognosis for corporate results has deteriorated as analysts have downgraded many sectors. Advance tax collections are low, which is a proxy indicating lower revenues. Every sentiment and macro-indicator indicates that consumption is down.
The VIX has risen in the past three sessions while the Index and index futures have fallen. Admittedly, this signal could be error-prone close to settlement. The signals taken suggest further net index losses interspersed by occasional sharp but short rallies. For example, there could be a short-covering rally in the last three sessions of December. The Nifty has large resistances in the 8,000-8,050 zone, where such a rally may end.
The Nifty Bank has cracked below 17,700. The market is waking up to the fact that banks will suffer higher NPAs and lower credit growth through the second half. The RBI’s sucking out liquidity has pushed yields up again after a big drop in November. A long Nifty Bank (January 25), 17,000p (144), and long January 25, 18,400c (117), costs 261. This is close to zero-delta with the index at 17,655. The breakevens are roughly at 16,740, 18,661. One end of this long strangle could be hit with three big trending sessions. A calendar spread by selling the inverse position of short January 5, 17,000p (35) and short January 5, 18,400c (19). This cuts the cost of the January 25, long strangle to a net 207. If a short option is struck, the long strangle will also rise. Put-call ratios (PCR) are unreliable close to settlement. But, the PCR does look very bearish, at 0.8 for the three month period. The January Nifty call chain has high open interest (OI) till 85,00c, with reasonable OI till 9,000c. The January put chain has a high OI at 8,000p, at 7,800p, and another bulge at 7,500p, with good OI till 7,000p.
The Nifty is at 7,908 with negligible premium. A bullspread with long January 8,100c (68), short 8,200c (40) costs 28 and pays a maximum 72. This is 192 points from money. A bearspread with long January 7,700p (61), short 7,600p (36) costs 25 and pays a maximum 75. This is 208 points from money. These positions could be combined for a long-short strangle set. The net cost is 53 with maximum gain of 47 and breakevens at7,647, 8,153. The January straddle of 7,900c (161) and 7,900p (121) is also nearly zero-delta. It costs 282. Obviously the strangles are more attractive. It is tempting to sell the 7,900 straddles and buy the long-short strangles.
