The developments of last Friday gave us an interesting perspective on how global financial markets can impact the life of an individual who might not at all be involved with the markets. The German parliament approved a permanent bailout scheme and new budget rules, which resulted in the infusion of liquidity into the debt-hit small economies of Europe, which in turn led market participants to turn bullish. We are not saying that such a reaction is right or wrong but are only trying to highlight the fact that integration of world economies and different asset classes has increased substantially.
The wave of optimism was certainly visible in the stock markets across the globe and our markets, too. The Nifty managed to cross the resistance zone of 5,150-5,200 in the opening minutes of trade and rallied further, with no trace of correction during the day. We believe this wave of optimism might continue for some more time, as indications are evident from the derivatives data.
First, it was wrongly assumed by market participants that the rally in June from sub-4,800 levels to over 5,100 level was because of short covering. Short positions formed by strong as well as weaker hands were not covered and we have seen traces of it getting rolled over in the July series as well. For most participants, including us, 5,150-5,200 was a strong resistance level. But that was for the June series. At the end of the last series, we observed that in the rollovers in Nifty quite a few foreign institutional investors (FIIs) had gone long from mid-June. On the other hand, Bank Nifty, where some foreign investors have been shorting in a big way since the May series, were showing lesser rollovers. This indicates that conviction in long Nifty rollovers was much higher than in short bank Nifty rollovers. Also, options data indicates the 5,300 call build-up, which has low implied volatility, was getting accumulated by strong hands. This is evident from FIIs’ buy figures of index options.
| CHANGING TIMES | ||
| Jun 28,’12 | Jun 29,’12 | |
| Brent crude ($/bbl) | 91.36 | 97.80 |
| EUR/USD | 1.24 | 1.27 |
| USD/INR | 57.00 | 55.53 |
| Gold ($/ounce) | 1552.10 | 1,597.40 |
| FIIs’ activity on Friday (Rs cr) | ||
| Equity cash | 3046.76 | |
| Index futures | 1568.34 | |
| Index options | 1375.67 | |
The way in which FIIs have poured liquidity into the system and call options built-up in strike prices as far as 5,700 indicates that this market has more leg on the upside. However, our main premise for continuing to ride the upside momentum is not continuity of liquidity in the above manner but it is short covering, which we would be betting at large.
Bank Nifty, which as a sector has the highest weightage in the index and has seen a lot of shorting pressure in the previous two expiries, might see significant short covering. There are other sectors like capital goods and infrastructure where some pockets have a lot of short positions.
Taking all this into consideration, we would suggest not shorting this market, since we might be in an oversold zone. At every dip you may witness participants stuck in short positions coming forward to cover positions and lend support to the market. Though our optimism is restricted till 5,400, we would suggest continuing to ride the long positions.
The author is Head –Equity Derivatives, Angel Broking
