Massive selling volume hints at unwinding of longs

A combination of negative news both at home and abroad prompted investors to press the sell button on Friday, pushing the market down nearly 2% on huge volumes as the benchmark Nifty closed below psychological support levels.

The worrying aspect is the selling was accompanied by record volumes with a combined turnover of Rs215,152.95 crore being witnessed on the two exchanges — the highest ever on non-expiry days.

The activity was more on the derivatives side with a turnover of Rs192,604.43 crore seen in NSE derivatives segment due to unwinding of long positions created over last several days.

“There is no significant build-up of shorts, but longs are being unwound. That shows risk aversion is building up and smart money is gravitating towards cash,” said a top broker, not wishing to be named.

The volatility index, a measure of implied volatility (IV) over the next 30 days, jumped 11.73% to close at 21.63.

“Nifty IVs have been rising, which seems to suggest that market participants are a bit scared. However, it’s more of an unwinding of long positions and no major shorts are being created at this point of time. It appears that speculators or put writers at higher levels of 6200-6300 are unwinding their positions,” said Bhavin Desai, manager - derivatives at Motilal Oswal Financial Services.

Nifty put options at 6200 and 6300 levels for November series shed 17.76% and 36.94% in open interest as people betting on markets moving upside squared off their positions.

Though the markets seem to have immediate major support at 5950-6000 levels in the near term, participants urge caution.

“Nifty futures has not added significant open interest, which means there are no major aggressive shorts in the system. Though nothing seems to suggest a sell-off kind of situation currently, one needs to be cautious,” said Desai.

This appears to be a short-term correction with 6000 seen as the next major support. If markets do break this level, the next support in intermediate term would be at 5700 levels,” said DD Sharma, vice-president - research at Anand Rathi Financial Services.

The markets opened weaker on negative global cues after fears of sovereign crisis re-emerged and Shanghai Composite Index fell 5.16% on tightening fears in China.

Weaker-than-expected index of industrial production numbers at home also spoiled investor sentiment.

The Nifty, which was expected to have good support at 6150 levels, closed the day well below 6100, at 6071.65.

“Mirroring weak Asian markets, foreign institutional investors have sold heavily across the board, which has led the Nifty to close below 6150, a key level considering its recent upmove from 5940 to 6340,” said Shrikant Chauhan, senior vice-president, Kotak Securities.

Bloomberg adds: Meanwhile, global stocks fell, led by a 5.2% drop in the benchmark Shanghai index, and commodities tumbled amid speculation China is preparing to raise interest rates.

The yen strengthened against its 16 major counterparts.

The MSCI Asia Pacific Index lost 1.4% to 132.33 as of 5:50 p.m. in Tokyo and the Shanghai Composite Index sank the most since August 2009.