Within the derivatives segment, open interest in single-stock futures is also a good indicator of bubble build-ups.
MUMBAI: When it comes to predicting the future, the derivatives market is quite prescient.
And what it told on Monday should be soothing to the investors.
Implied volatility — or the market expectation of volatility — in derivatives has actually come down from 25% last week to 19% on Monday, when the Nifty touched a new peak, said Zeal Mehta of Emkay Share.
Simply put, it shows players expect a stable uptrend, and optimism is quite broadbased.
Within the derivatives segment, open interest in single-stock futures is also a good indicator of bubble build-ups.
On Monday, open interest in single-stock futures stood at Rs 28,449 crores and at Rs 3,916 crore in options.
That is a rise of Rs 3,076 crore in futures and Rs 1,107 crore in options over last Monday, or just about Rs 600 crore a day in futures alone.
Not a rampant, senseless rise, but a slow build-up.
Now flashback to the cracks of May 2006, and February 2007 and see the contrast. Both times, by rising furiously, open interest in single-stock futures had raised large red flags and the inevitable happened.
Also, this time around, open interest has been rising with share prices. Meaning, there is good buying at higher levels. Put it another way, the bets seem to be on more rise in share prices.
Monday was also the third straight session where open interest in derivatives had risen, and also the first time in three days that open interest had risen on Nifty futures.
Contrast again - with what had happened in the market in the past couple of weeks: every time it went up, either shorting or unwinding of longs followed. There was just no confidence to take that all-important leap past the peak.
Interestingly, all this has come even as foreign funds took $614 million off the table from Asian markets last week, said a Citigroup report by Elaine Chu, Markus Rosgen and Chris W Leung on Saturday.
More importantly, 96% of this was from China ($438.4m) and India ($149.3 m) put together. (See report on last page)
That, however, hasn’t had an impact, though the net FII investment in May, as per Sebi data too, is nothing to crow about - just Rs 672.7 crore.
In April, FIIs had invested Rs 5,533 crore.
Coming back to Monday’s trade, Reliance Industries has been the prime driver since the March correction, as higher refining margins are expected to benefit the company in the current quarter. Between the February peak and now, the stock has gained over 26%.
On Monday the Sensex rose 0.81% or 115.19 points to 14418.60. The Nifty was up 1.10% or 46.40 points to 4260.90.
“In a no-negative news scenario, Reliance and other frontliners have been driving the indices,” said Rahul Nangalia of Nangalia stock broking.
Technically, says Deepak Jasani, head of research, HDFC Securities, the markets could continue the rally.
“Since we are into uncharted territory, it is difficult to predict any levels for the market. But since Nifty has crossed the all time high, Sensex should follow suit.” Jasani said.
Birendra Kumar Singh of Brics Securities, nevertheless, said the next level to watch for the Nifty will be 4297.
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