Wary markets are on bear watch on Thursday

MUMBAI: For the stock markets, the day of reckoning is here. A bearish mood built up on Wednesday, with the Bombay Stock Exchange Sensex dropping 249 points ahead of Thursday’s expiry of stock and index futures contracts.

Contracts in the National Stock Exchange’s Nifty index and stock futures expire on the last Thursday of every month.

As the latest one approaches, those with open positions start squaring up while simultaneously seeking to carry the position forward to the next month — a phenomenon called rollover.

The smoothness — or lack of it — with which speculative positions are rolled over or squared off affects the underlying cash market for shares.

Given the turbulent movements this week, some market-watchers are expecting a drop in share prices today.

Says Vijay L Bhambwani, CEO of BSPLindia.com: “There are very few short positions to cut in the market and the drift could be downward.”

What he means is that when too few people take up bearish positions (sell short, that is), there will be less need for them to buy futures to square off their short positions.

“The Nifty futures put-call ratio (or the ratio of sell to buy) has been between 1 and 1.5 historically, but today it is at 0.72. Meaning, historically, for every 100 long (buy) contracts, there have been up to 150 short (sell) contracts. But now, for every 100 longs there are only 72-75 shorts. In other words, there are fewer bears to buy at lower levels. This is indicative of vulnerability,” says Bhambwani.

To ease the pressure, the NSE moved late on Wednesday to roll back the additional exposure margins that it had slapped in the cash and derivatives segments on April 24. But few analysts expect this to improve sentiment immediately. “Over the next fortnight, it could help, but for Thursday it wouldn’t matter much since both bulls and bears get equal incentive to back their views,” says an analyst with a foreign brokerage.

The technical factors also point to frailty, analysts say. “Nifty May futures contracts, which expire on Thursday, are trading at a discount of 28.30 points to the underlying index. And the June contracts are at a discount of 85.05 points. The May number has to converge with the underlying index, since the settlement price on expiry date is the value of the underlying spot market price. This means only one thing - weakness,” adds the foreign brokerage analyst.

Also, rollovers have been relatively poor, which shows that the retail investor does not have the resources and/or lacks buying conviction.

The reasons are not far to seek. Since May 10, when the index closed at an all-time high of 12,612, the Sensex has lost 2,039.23 points, or 16 per cent. It closed at 10,573.15 on Wednesday, thanks largely to continuous selling by foreign institutional investors (FIIs, see chart). They have sold more than Rs8,800 crore worth of shares.

Rahul Nangalia of Nangalia Stock Broking Pvt Ltd, a 70-year-old firm housed in the BSE building, agrees that the market is skating on thin ice. And the predicament of the trader is unenviable. “Equity is out of his portfolio, culled to the bone to pay for his sins in the futures segment,” Nangalia says. “So, the cog that lent liquidity and volatility to the market is crippled for now. The market will take some time to heal.”

But almost all analysts DNA spoke to were sanguine about the long term. The refrain is that these are temporary or technical glitches that will get ironed out. “There is no stopping India’s fundamental growth story,” says the analyst with the foreign brokerage.

Getting the bears off the stage in the short run may take some doing, but as one analyst pointed out, “All we need is a couple of sessions of solid FII buying to turn the tide.”