Short rolls may rise near expiry

Global fears of stimulus unwinding and a banking regulation overhaul in the US rattled markets. The panic spread from China to the US, and dragged down the emerging markets. Our markets too witnessed a fall with increasing volumes, indicating short-term pressure and dampening sentiment.

The way even PSUs such as GAIL, ONGC, NTPC and BEML have come under selling pressure indicates some selling by traders who were betting on firm trends before IPOs. This may lead to further sell-offs as positions were heavy in those stocks.

The solace I believe is the cost of carry, which has turned negative (20 basis points for the Nifty and almost 5-10 bps in frontline counters such as Reliance, SBI, ICICI, GAIL, ONGC, ITC, HUL, Bharti and SAIL. This may help arrest the fall as shorts look for opportunity to cover up.

The Nifty added around 5 million shares in open interest (OI), mainly on the short side. Similar activity was observed in options as the 4900 series put added almost 30 million shares. Combined Nifty and near money puts added almost 10 million shares in open interest.

As we approach expiry, short rolls may intensify, helping the market stabilise and leading to some short covering if no big negative event happens globally. The levels of 4850-4900 may act as a support with put unwinding likely.

The sectors likely to show resilience are auto, IT, capital goods and cement on the downside. Among PSUs, Bhel, BEML and BEL may find buying interest at lower levels. Patel Engineering and ABB look good to go long with medium term outlook.

Power stocks may be volatile given the NTPC IPO in first week of February. NTPC may bottom out at Rs 215-220 and one can initiate long position in Rs 220 calls of February. Power Grid and PTC may be accumulated over the next week.

In banking, mid-cap PSU banks are showing resilience. SBI and ICICI may remain under pressure.

In realty, DLF may bottom out and as a contrarian bet Rs 360 February calls can be bought.

Metals may remain subdued and rollovers need to be watched carefully before forming a view.

Oil & gas may start stabilising. GAIL and Essar Oil can be considered accumulation candidates. 

Nifty can touch 4800 amidst accelerated sell-off but may stabilise post that and may move above 5000.  Overall, Nifty may trade in 4800-5200 band in the near term and once the dust settles down on US banks and our credit policy, we may see resumption of upmove as markets are still left with a lot of shorts.

 The writer is head, derivatives and strategy,  Pinc Research.