Plight of market continues in February as big ticket primary market issues stood cancelled. February expiry started with short covering with 5% cut in Nifty OI.
Plight of market continues in February as big ticket primary market issues stood cancelled. February expiry started with short covering with 5% cut in Nifty OI (open interest). It touched intra-week high of 5,543 finally closing at 5,120, almost 10% down from highs, on weekly basis.
US economic data continue to show worsening situation and uncertainties prevail.
If one analyses over a period of last 3 months on the basis of risk-rewards ratio, then trades which have given best return is cash future arbitrage trades.
We have seen two very contrasting markets in very short span of 2-3 months. November and December saw extremely bullish scenario with longs paying high cost for rollover as well as higher interest cost (COC) to take position in futures.
In January, as the market tanked and shorts started getting built in futures, COC dropped and futures started trading at par to discount from cash price. This is when cash arbitrage started getting unwound.
Cash arbitrage funds and FII who did cash arbitrages trades started selling cash and buying future there by reversing the position. Some unwinding even happened at 100-150 bps discounts to cash price. Thus if we take overall return then cash arbitrage trades gave a return of 300-350 bps (36% pa). COC is still low, signifying bearish tone.
Market wide OI dropped from peak of Rs 1.40 lakh crore to Rs 70,000 crore. If we analyse the break up then since mid of January, we have seen OI in stock futures dropping from highs of Rs 81,000 crore to Rs 35000 crore, almost 57%.
There is significant cut in futures position as one could guess many retail traders would have wound up position. Thus market has got lightened a bit due to exit of short term traders and speculators.
One can assume existing position is with deep pocket investors and traders who can withstand the pressure of margin and daily mark to market. Taking this into consideration, there is less likelihood of big sell off from current levels.
Index based shorts have increased at every bounce back. OI in Nifty future stands at 4.08 crore units and is quite high. We have seen Nifty futures trading largely in range of 25-35 pts discount during the first week of February.
During the same period, Nifty futures OI has increased by 15% indicating short build-ups. From current levels, shorts have to be bit cautious as chances of short trapping prevails.
Sector-wise, we have seen good action in IT companies with cash accumulation on dips. OI in IT companies stand at historic lows.
For example, in case of Infosys shorts started getting build from end of December 07 resulting in price dropping from 1,800 levels to 1,500 by mid of January 08.
During the crash actually it fell by another Rs 100 making lows of Rs 1,380. Since then we have seen short booking profits. We have seen good accumulation in technology stocks in last few trading sessions as stable rupee and cheaper valuation make them attractive.
Banking is another sector where fresh long buildups have happened. Overall market sentiment remains bearish and recent tumbling of some big ticket IPO’s only worsened the things. Upcoming Reliance Power listing will be crucial as big stakes stands in a question mark. All in all, market looks attractive for investment with 4-6 months horizon.
The writer is head - derivatives & strategy, PINC Research
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