Unlike the September rally, this one was on thin volumes indicating lower investor participation.
The recent correction in the market should not surprise investors. The indications were there for some time, according to market experts.
Between March 21 and April 4, the Nifty have rallied 10 per cent, but trading volumes have not kept the same pace.
The average combined cash turnover on BSE and NSE in this rally was Rs 15,214 crore a day – much below the six-month daily average of Rs 18,432 crore.
Even though foreign institutional investors (FIIs) brought in an impressive Rs 10,200 crore in the secondary market during the 12 trading sessions, it did little to help improve trading volumes.
| MARCH VS SEPTEMBER RALLY | ||
| Mar-11 | Sep-10 | |
| Nifty % Gain | 10.2 | 11.2 |
| No of trading days | 12 | 15 |
| Avg daily cash turnover * | 15,214.00 | 20,593.60 |
| NSE F&O Turnover* | 1,36,666.1 | 1,17,258.3 |
| Source: BSE & NSE Compiled by BS Research Bureau * In Rs Crore on BSE and NSE combined | ||
This suggests there were fewer domestic investors trading in the markets. Domestic institutional investors were net sellers of Rs 3,100 crore in the same period.
The deliveries as a percentage of total traded shares were relatively high at 44.5 per cent in the period, compared with an average of 41.5 per cent in the last six months.
Yogesh Radke, senior manager (Institutional Equities, Quantitative Research Desk) at Edelweiss Capital, said: “The huge FII buying in the last 10 days of March resulted in an increase in delivery volumes, but after that the flows have cooled off.”
A senior market analyst from a reputed broking firm said: “Typically, when the cash turnover is low and markets rise, it indicates that markets are going to remain volatile. It also means that long-term money by long only funds has not come in. This rally may not sustain, as confidence level is low.”
Market analysts also said high net worth individuals (HNIs) and traders had not participated in this rally. Deven Choksey, managing director, K R Choksey, said: “General participation is missing, which is not a good sign; FIIs are mostly participating in the frontline stocks and options. This has caused the future and options (F&O) volumes to swell as well.”
The average F&O turnover during this rally was around Rs 1.4 lakh crore, higher than the six-month average of Rs 1.3 lakh crore.
Another market analyst added: “Even speculation in mid-caps is picking up. If an investor wants to buy 10,000 shares of a mid-cap company in the cash market, the impact cost is high. However, they can buy the same volume in derivatives market at a lower impact cost.” Impact cost is the cost that a trader pays for a transaction. Typically, if a counter is more liquid, the bid-ask spread is lower, resulting in low impact cost.
Another reason which led to high F&O volume was this rally coinciding with March expiry. Historical data suggest that turnover is generally high during the expiry week. Moreover, given the sharp up move and earnings around the corner, FIIs are hedging in F&O, said the analyst.
This rally is also different from the one in September, when the Sensex had gained 11 per cent in 15 trading days. Between August 31 and September 21, combined average trading volumes were nearly Rs 20,600 crore a day.
Analysts advise traders and investors not to get carried away by rallies driven on thin volumes and wait for consolidation or dips before entering the market. Radke added: “Retail investors should avoid taking any leverage or risky positions. Go long in only value stocks and stick to large caps.”
