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The market has trended down for seven sessions in succession, the longest period of sustained loss in the past 15 months. The Nifty is down 5.25 per cent from its all-time highs. It could fall further if the Delhi Assembly Elections see the AAP gain a majority.
On the external front, Europe continues to see turmoil and there is nervousness about China. foreign institutional investors (FIIs) have been net sellers through February. The poor trend in Q3 corporate earnings has also been a dampener, with many Nifty blue-chips taking a hammering.
The Reserve Bank of India (RBI) refused to cut rates, although it gave a reasonably positive assessment in its policy review last Tuesday. There was an SLR cut, which would release some funds for corporate lending, assuming banks found takers since demand for corporate credit seems slack. The central bank will wait for the Budget before more concrete action.
The rupee has appreciated a lot against the euro and yen, moving up by over 10 per cent against those two currencies since January. RBI has bought the dollar in quantity to prevent over-appreciation against. Forex reserves are at record levels and likely to rise further since RBI is building a war chest to guard against currency volatility.
Both currency and equity volatility is very likely to continue through February. Turmoil in exchange rates is almost guaranteed. The PSU disinvestment programme is being held in abeyance, given the turnaround in sentiment.
At some stage, optimists will start punting on the Budget and then the indices could rebound very sharply. Note that the February series will go into expiry pre-Budget so, any disappointments will be seen only in the March series.
The Bank Nifty has pulled back from a peak of 20,907 to a current value of 18,400, more than 10 per cent correction. It is high-beta with respect to the Nifty/Sensex and likely to continue correcting. It is also likely to rebound very sharply as and when it does rebound. Stop-loss any BankNifty futures position at a minimum of 150 points from entry. The Nifty put-call ratio is bearish across both the one-month and the three month timeframe. The three-month PCR is at 0.96, while the Feb PCR is at 0.89. Premiums asymmetry has eased but calls are still a lot more expensive.
The Feb Nifty Call chain has open interest (OI) peaking at 9,000c and smaller OI bulges at 8,800c and 8,900c. The implication is, a rise till 9,000 is not impossible. The Put OI is ample between 8,000p and 9,000p with several peaks at 8,500p, 8,600p, 8,700p and the largest OI at 8,300p.
The Nifty could move 200-plus points either way in a single session, hitting 8,800 or 8,300. Traders must be braced for that excess volatility. The current index value is at 8,526 with futures at a premium of 30 points. The close to money options of 8,500p (116), 8,600c (125) are high priced. A bearspread of long 8,400p (82), short 8,300p (56) costing 26 and paying a maximum 74, is some distance from money. A long 8,700c (82), short 8,800c (52) costs 30, with a payoff of 70. A long-short strangle set of long 8,400p, long 8,700c, short 8,300p, short 8,800c costs 57, and has a payoff of 43.
