The Bank Nifty is probably the key to the wider market’s movements.
A low-volume settlement ended on a bright note due to short-covering that may have translated into some impulse buying. Carryover was moderate but prices were on the uptrend on Day 1 of the February settlement.
Index strategies
The cash market technical signals were balanced on last Friday but there were some signs of weakness in the derivatives market. Carryover was moderate though OI improved on Friday. The liquid index futures were all at some discount to their respective underlyings and in the Nifty, the March future was at a discount to the February contract. This is a bearish signal although the differential was not worth taking any calendar arbitrage.
The fundamental signals continued to be negative. On the positive side, government security yields continued to be soft and the RBI predicted WPI would fall to about 3 per cent in March, although the central bank refused to make further cuts in policy rates and CRR. Fuel price cuts could help inflation abate. On the other hand, the Q3 results stream has continued to be universally bad and the RBI also cut its 2009-10 GDP estimates as did the IMF.
Although FIIs tended to remain on the sell-side of equities, they have increased their F&O exposure a little, to around 39 per cent of all outstandings. This is close to the average exposure they have held through most of last year. That they sold massive quantities through last year is small consolation.
Carryover was low volume – around 60 per cent of all index positions were carried over according to some estimates. It was in general, a low-volume settlement with even lower OI. Unfortunately, the VIX has looked more and more out of sync with reality in the last eight days of every settlement due to its flawed methodology of higher weightage on far-month positions. However, for what its worth, the VIX signals less volatility going forward and that means higher prices if the classic inverse correlation holds. We are now into a situation where the near to mid-term options are under consideration for VIX, so the signals may be slightly more reliable.
Technically the cash market signals are mixed. The Nifty itself looks bullish if we ignore the low volumes. The CNXIT looks neutral or bearish. Since this is a new settlement, short covering is not likely to be a factor.
The Bank Nifty is probably the key to the wider market’s movements. It looks as though it went bullish on Friday with an engulfing pattern when the intra-day high-low spread was much greater than the previous sessions and the index closed up. This is a bullish pattern. But the Bank Nifty underperformed through the rest of last week. The divergence between PSU bank price movements and private banks’ prices is marked.
If the Bank Nifty moves up again through next week, it will be driven by positive sentiment about PSUs. The Bank Nifty’s moves are crucial because it could be a driver for the Nifty itself as well as for the non-banking finance sector and rate-sensitives like realty and automobiles.
If the banking sector delivers, it will probably trigger a generic rise that will pull the Nifty through resistance at 2,900 and up till around the 3,100 mark or higher. If the selling pressure in the 2,900-zone proves to be too great, the Nifty is likely to trade down until the 2,650 level or lower. It could even trade down till around 2,500.
The options market suggests that the sentiment is mildly bullish. The over put-call ratio has moved to around 1 while the PCR in terms of OI for Nifty options is around 1.2. In fact, the PCR (OI) for February is around 1.5 which is quite bullish. About 57 per cent of OI is in the February series.
The trader would have to be focussed on a very wide range. As mentioned above, the market could move from anywhere between 2,500 to over 3,100. The option chain has sufficient liquidity across this entire period. In the long-term, the June 2009 calls have the maximum liquidity in the 3,000c, which was last traded at around 224. The equivalent 3,000p of June 2009 was last traded at about 370. This suggests that hedgers see breakevens in the range of 2,630 and 3,225. Moves beyond these levels would be unexpected and probably cause upheavals.
A bullspread with long Feb 2,900c (112) and short 3,100c (40) costs around 72 and pays a maximum of 128. A bearspread with long February 2,800p (102) and short February 2,600p (48) costs 54 and pays a maximum of 146. The bearspread has a better risk-reward ratio. Both positions may be struck within the settlement.
A strangle with long 2,700p (70) and long 3,000c costs (69) costs 139 and can laid off with a short 2,500p (33) and short 3,200c (22).That reduces the net cost to 84 and the combined breakevens are at 2,616 and 3,084. The maximum possible returns on a one-way move is 116. If it is possible to hold this position till settlement, it seems quite tempting since there could be some pay-off on both sides.
| STOCK FUTURES/OPTIONS Apart from bank stocks, there could be interesting futures positions available in scattered heavyweights across various sectors. For example, Reliance Industries is looking fairly bullish and it could move till around 1,450 if the trend is genuine. Petronet and TV 18 also appear to have a following among bullish traders as do Renuka. There’s some enthusiasm for Maruti as well. However, most interesting seems to be L&T, which has seen massive volumes without much upwards movement. Keep a stop at Rs 675 and go long with a target of Rs 750. |
