Conviction only after 4700 Nifty is broken

As the anxiety over an event subsides the dominant trend takes over. This is what happened last week in domestic markets. The strength of the market got corroborated by deceleration of declining trends on Monday followed by consolidation in the 3900-4000 range, followed by a sharp upmove whose vigour and broad nature surprised even the bulls.

The declining volumes and velocity towards the close of last week has led me to believe that the markets may consolidate in the range of 3900-4000 for a couple of trading sessions before resuming the uptrend, but the strength of the market took me by surprise. The rally was aided by strong global cues which helped in accelerating the advance. The huge discount was indicative of shorts, which aided the move past 4200 Nifty due to short covering and fresh longs.

The huge positions in puts of 4000 and 3800 started getting unwound, indicating that trader expected the market was unlikely to go below those levels. Further, the covered put players rushed to cover their Nifty shorts as their stop losses would have triggered above 4150-4200 levels.

The reduced implied volatility from 40% to 30% even on down days was indicating that downmove was getting exhausted. The writers of 4100 calls to would have helped Nifty futures turning into premium from discount due to hedging activity.

If one looks at winners of this week rally, our pre-Budget analysis of open interest of sectors brings distinct correlation. I was expecting power, FMCG, pharma, metals, real estate and auto to benefit besides PSU stocks if the Budget was positive or neutral for them.

But some of them like power, reality and autos got sold off initially whereas FMCG, pharma and auto gained in spite of the falling markets. But post sell-off, the sold-off once again bounced back strongly and are above pre-Budget levels in some cases.

The buying interest seems to be coming from long-term investors as the open interest (OI) build-up is not significant despite an almost 10% upmove, indicating delivery based buying and short covering. The sectors witnessing hectic build-ups include realty, banking, cement and IT.

The IT stocks, which were underperforming, are likely to outperform considering global outperformance by peers in Nasdaq and steady guidance provided by domestic majors such as Infosys and TCS.

Hindustan Unilever is likely to move up as consolidation is getting matured in 260-270 range and underperformance to its peers likely to attract rotational interest by the sectoral investors.

Construction and infrastructure space sold off heavily due to unwinding of high-expectation positions and lack of fresh triggers. 

As the rally gathers steam, fresh longs are expected to benefit ABB, Siemens, HCC, Nagarjuna Construction and others.

Private banks are consolidating with fresh build-up being witnessed on the last two days on the long side. PSU peers are already up and may consolidate gains.

Underperformance by Reliance, SBI, L&T and ONGC is likely to reduce as conviction buying resumes. Unitech and DLF are likely to consolidate gains.

The market is likely to make a big move considering the open interest and price performance of the last few sessions. Traders remain suspicious of the upmove, though it may trigger strong buying as left-out feeling gathers space. The situation is somewhat similar to March, when the market was trading in range of 2700-3000. But if this fails to take the market above 4600-4700, then we may once again languish after mild sell-off in 4000-4200 range.

I believe the probability of sharp upmove is higher and midcap high-beta derivative stocks like HCC, Jaiprakash, Punj Lloyd and other may appreciate sharply.

The writer is head, derivatives and strategy,  PINC Research