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Saturday, March 13, 2010

Derivatives: With no immediate triggers, market is in consolidation mode

The trend really looks directionless in the absence of major domestic triggers and the market may consolidate at this level for some time before charting its next course.

After the post budget buoyancy, the market entered into creeping mode in the absence of any major trigger. It seems a consolidation phase as is evident from the open interest (OI) build-up in some of the front-line stock futures. Although the OI for these stock futures increased, the trend showed a cautious outlook. Some of them have even shed OI. However the trend in the nifty option indicated bullish scenario. During the week ended 12th March 2010, the S&P CNX Nifty rose 48.30 points to close at 5137. The nifty future closed at a premium of 7.7 points to close at 5144.70. The average volume in the F&O segment during the week under review was just Rs 61691.43 crore. Previous 2 days witnessed significant unwinding of OI in the nifty march series signifying cautious outlook. For the full week however the nifty march series shed 1.82 lakh shares in OI to take the total OI to 2.52 crore shares. All throughout the week the activity in the stock future front was quite erratic, thus resulting in overall market volatility during the week. Most of the major stock futures however added decent OI during the week under review.

For e.g. Reliance march future added 6.06 lakh shares in OI during the week under review to take the total OI to 1.36 crore shares. Tata Motors, Unitech, ICICI Bank, SBI and Sail also added OI during the week, while Tata Steel and DLF shed OI during the week under review. Although the nifty option trend indicates bullish signs, the mixed trend in the stock future segment indicates side way movement to continue for some time. Although the budget overall has been positive for the market, there are apprehensions of earnings downgrade for some players due to increased excise duty and other taxes.

Overall the market wide OI on Friday increased by 3.78 crore shares to 203.10 crore shares as compared to the previous day. Index future shed OI while stock futures and stock options witnessed addition of OI by 1.91 crore shares and 1.58 crore shares respectively as compared to Thursday

In the nifty option front the 5100 and above strike call witnessed fresh buying thus adding significant OI while the strikes below 5100 shed OI signifying covering of calls wrote earlier. The 4900 and 5000 strike call shed 3.34 lakh shares and 5.37 lakh shares in OI while 5200, 5300 and 5400 strike calls added 17.24 lakh shares, 15.57 lakh shares and 9.17 lakh shares respectively. In the put segment the 5000, 5100 and 5200 strike puts added 51.28 lakh shares, 30.56 lakh shares and 17.55 lakh shares respectively.

The most active calls were 5100 and 5200 strikes, while the most active puts were the 4900, 5000 and 5100 strikes. The OI in 5100 and 5200 strike call increased to 74.36 lakh shares and 61.43 lakh shares respectively due to aggressive call buying. The OI in 5000, 5100 and 5200 strike puts stood at 1.21 crore shares, 66.16 lakh shares and 24.43 lakh shares respectively.

The trend really looks directionless and there would be horizontal movement for some time in the absence of major domestic triggers. The global market will remain the key for the market till the month of April, when the 4th quarter results of the Indian Inc starts flowing in. The market may consolidate at this level for some time before charting its next course.

Fourth quarter advance tax numbers , monthly inflation data in focus

The figures of advance tax payment by top Indian firms and inflation data for February 2010 will be in focus after strong post-Budget gains on the domestic bourses this month. Performance of global stocks will continue to have their bearing on Indian equities.

Investors will eye figures of advance tax payment by top Indian firms which will give an indication of fourth quarter March 2010 earnings. The fourth and the last installment of advance tax is due on 15 March 2010.

After the latest data showing a surge in industrial production in January 2010, the next major data is of monthly inflation for February 2010 on Monday, 15 March 2010. The headline inflation is seen surging to near 10% mark in February 2010 from a rise of 8.56% in January 2010. Food prices will be keenly watched in coming weeks for the second and third round impacts of last month's fuel price hike.

A rate hike before the next scheduled policy review in April 2010 is, however, unlikely after RBI deputy governor Subir Gokarn recently said it would be premature to take any mid-term policy action. Market men see a 25 basis points hike in the repo and reverse repo rate each by the Reserve Bank of India (RBI) at the April-2010 policy review. Higher interest rates may impact corporate and consumer confidence.

Indian equities will continue to take cues from global stocks. Investors are awaiting further insight into the state of the US economic recovery on Friday, 12 March 2010 when data on US retail sales and consumer sentiment figures will be out. The numbers are expected to indicate how big an appetite Americans have for spending.

Indian stocks witnessed a good post-Budget rally driven by sustained buying by foreign funds since the presentation of the Union Budget 2010-2011 on 26 February 2010. As per data from the stock exchanges, foreign institutional investors (FIIs) bought stocks worth a net Rs 7815.98 crore this month, till 11 March 2010.

The stock market has applauded the Union Budget 2010-2011 due to its thrust on infrastructure development, government's pledge to reduce fiscal deficit over the next three years, a smaller-than-expected 2% hike in excise duties, and reduction in taxes for individuals which will boost disposable income. The Finance Minister has assumed a modest GDP of about 8% and inflation of about 4.5% for 2010-2011.

Going ahead, the key triggers for the stock market are structural reforms such as decontrol of petrol and diesel prices, targeting of food subsidies, and financial sector reforms such as increase in foreign direct investment in insurance sector.