Derivatives: Markets expected to remain range bond with downward bias

Consistent profit booking through out the next week can be expected although there won't be a steeper correction.

The market opened this week on 18th May 2009 cheering the UPA alliances thumping victory in the Lok Sabha election. A clear mandate for the Congress-led United Progressive Alliance (UPA) in Lok Sabha election send stocks surging with trading on the bourses halted for the day at about 11:55 IST. For the first time in the history of the stock markets trading was halted because the market-wide circuit was applied due to a solid surge. Earlier, there have been instances when trading was halted when market-wide circuit filters were applied due to a market crash. This was much anticipated after the kind of number of seats the Congress has managed to win, since this will ensure that the government need not have to rely on the Left parties to form the government. This will enable the newly elected government to go ahead with various reforms, which was other wise consistently toppled by the left allies.

In a matter of a few seconds after the opening bell, the Sensex and the Nifty had breached the 15 per cent circuit barrier set by the exchanges, the Sensex gaining 1790 points and the Nifty 532. Trading was halted for two hours till 11.55 a.m. With in seconds of resumption of trade at 11.55 a.m., the second circuit breaker had to be applied as the indices went on to breach the 20-per cent level. The Sensex closed at 14,284 with its highest ever single-day gain of 2,110 points or 17.34 per cent, while the Nifty gained 652 or 17.7 per cent, to close at 4323.

But the bad news was that on this day the volumes were very narrow and the retail investors hardly participated in the gain. The combined volume in the bourses was Rs 3,103 crore (Both NSE and BSE cash and future and options). So the gain in the index was just a number, which might serve as a sentiment improver. Nothing more can be inferred from this. Before the market opened for trading on Monday the Singapore exchange, SGX Nifty Futures were trading up more than 11%. Now this is a fundamental err which has happened before. The price of the future of an index is based on the underlying index price. Before the underlying or any of the components of the underlying starts trading how can the future price be determined is a seriously debatable issue. Ideally the market consolidates after such a kind of rally, however this has not seen happening since the market rose without much volume. As a result the index would hover around this level until new trend either way would emerge. Consistent profit booking through out the next week can be expected although there won't be a steeper correction.

The S&P CNX Nifty for the full week ended May 22 surged surged 565.90 points to close at 4237.55. The market ended the week with a healthy 36.65 points higher as compared to the previous trading session.

In the domestic futures & options market the Nifty future contract remained at a premium to the underlying through out the week and it closed the week with a 10.45 points premium to the underlying. During the initial 2 days of the week the Nifty near month contract added significant open interest (OI), however after that it started shedding OI. The average volume during the current series till date was Rs 56,518.28 crore and the volume during the current week was Rs 63,802.08 crore as the volume considerably increased after the days when the market hit upper circuit level.

On 22nd May the Nifty May Open Interest (OI) shed 32.88 lakh shares and the total OI in Nifty May expiry stood at 3.02 crore shares. The mid month Nifty contract however added 34.03 lakh shares in OI and its total OI stood at 76.09 lakh shares.

During the previous week there was some activity in the Nifty 4000 strike call indicating that the market could easily cross this level on Monday as the market opens for trade. Now after the index hit the circuit limit on Monday, new OI were added in call strikes ranging from 4300 to 4900 strikes. Now these were call writing done at these levels and the trend continued through out the week indicating that the market has several strong resistances to cross if it has to maintain the upward momentum. On the other hand during these days the Nifty put strike ranging from 4000 to 4500 witnessed addition of OI due to aggressive put buying at these levels. Both these signs indicate bearish scenario as the market participants expects the market to consolidate at these levels. The option action on 22nd May was mixed. However as mentioned earlier, the market may not go into a complete profit booking mode as nobody has made profit. Had there been enough volume or had there been market wide participation on Monday we could have expected some correction. There would be intermittent profit booking, but that won't be substantial. Thus the market may remain flat until the expectations are translated into material developments and until the real economy improves. Fundamentally the Indian market looks expensive compared to the emerging market peers.

The Nifty 4300 strike call witnessed huge activity with fresh call being bought at this strike. The OI of 4300-strike call increased 4.60 lakh shares and stood at 26.53 lakh shares on 22nd May 2009. The open interest in the 4200 and 4500 strike call also increased to 3.24 lakh shares and 1.68 lakh shares whereas on the last day of the week the 4300 strike put added 1.97 lakh shares in OI.

The index put call ratio fell to 0.87 on 22nd May 2009 as compared to 1.21 during the previous trading session, whereas the stock put call ratio fell to 0.29 as compared to 0.35 during the previous session. Thus the market wide put call ratio was 0.85 as compared to 1.17 on 21st May 2009. The PCR indicates overbought scenario

The top ten contracts contributed to around 30% of the total traded volume in Futures on individual securities. RELIANCE was the most active future contracts on individual securities traded today with 30681 contracts and ICICIBANK was the next most active futures contracts with 28390 contracts being traded. Reliance OI fell by 5.68 lakh shares and the total OI was 72.46 lakh shares, whereas ICICI Bank OI fell to 1.47 crore shares. DLF OI fell by 22.56 lakh shares to 1.68 crore shares.

The market would remain range bond with a strong resistance at 4450-4500 levels. The expectation that is being built from the election outcome is an over reaction. This cannot be considered as a beginning of another bull market as for that to happen the global real economy has to improve. The expectations have to be translated into material outcome. The market discounts the good news as well as the bad news, but often it misses the reversals.