As Vix slips to a 20-week low, Street fears decline

The stock market’s fear gauge, called the volatility index (Vix) is at a 20-week low, hitting 17.25 at the end of Friday’s trade.
Mavens say it indicates a reversal in the positive trend seen as last week drew to a close.

Vix is a measure of how sharply participants expect the market to move in the near-term. The current level is the lowest since it hit 17.03 on January 4, 2011.

By the end of the week before last, Vix had fallen below 20 for the first time in May to 19.45. Then it abruptly rose 8.17% to 21.04 last Monday on fears of the European crises growing worse. That day, the Sensex fell 332.76 points after rising 239.89 points over the previous two sessions.

This time around, the Vix has fallen 11.31% from 19.45 the week before last. After rising 418.9 points or 2.34% on the Sensex over the last two sessions, the market could be expected to fall from Friday’s close of 18266.10 or 5476.10 on the Nifty, say experts.
“The support may go down to 5300 or 5200 levels. Any rise could be used to exit or short,” said Siddarth Bhamre, head-derivatives at Angel Broking.

“It is really surprising that the Vix has not moved up. If this lasts longer, there could be more downside,” said Abhinay Jain, head of derivatives, Sharekhan.

A number of participants are writing put options closer to 5200 in anticipation of a rangebound market, say experts.
A put is an instrument which pays off if the market declines, and a call is one which does so if it rises.

“Puts are actively being written at the 5300 level so 5325 could be a good support for the market. On the upside one could watch 5600 levels,” said Karun Mutha, head of derivatives at HSBC Invest Securities.

Foreign institutional investors have been net buyers by `923.13 crore last week, including provisional figures for Friday but the trend may be negative in the longer term on account of currency headwinds, say experts.

The dollar has begun to rise in anticipation of the coming end to the second round of stimulus for the United States called Quantitative Easing 2 or QE2.

A strengthening dollar is a negative for FIIs who reconvert their rupee investments into dollars at redemption.
Domestic institutions were net buyers by Rs87.5 crore after turning net buyers by Rs388.25 crore on Friday, according to provisional exchange figures.