Morning Murmur

Markets are likely to begin the week on a buoyant note. Coaxing the stocks higher will be the bullish sentiment that prevailed on Friday, when Dalal Street downed its shutters for the week. The international cues this morning would only fuel this morning rally. The US markets would be closed today for the Memorial Day holiday. So the local punters could call the shots on Tuesday as well as there would be no US clue.
Both the Nifty and the Sensex have taken support from the upward sloping trendline formed by joining the April 2 and May 11 lows. The bounceback for both indices occurred around the support levels on this trend line, bringing credibility to thebounce and the line. The biggest thing to watch would be the IT sector, where OI has risen by Rs 1977 Cr and the CNX IT has not gone anywhere, though the Nifty has inched up by 1.7%. The IT stocks are likely to open higher and could lead the rally. They can also pose the greatest risk, whenever the rally stalls. Meanwhile, a report in the press, saying that the SBI will extend its footprint to one lakh more villages in the next two years could give sleepless nights to the MNCs in the
business.

Last week, when Dalal street downed its shutters for Friday, the Open Interest (OI), a sum total of all contracts in the Futures and Options segment , reached an all time high mark of Rs 66,427 Cr. The earlier record was Rs 63,586 cr seen on January 24th this year.

This has prompted some alert Television anchors to raise an alarm over the weekend. It is customary for the media, whether print or electronic, to raise a red flag, whenever earlier records are broken. Ever since the global market Pundits blamed the high OI at that time, Rs 54, 156 Cr to be precise, for the May debacle that sliced off 3872 points of the Sensex, the markets have shivered whenever OI has gone up.

While on the surface, a higher OI is a logical concern, but a study of the composition tells you that the heavens are not going to fall because of this. The markets are better place than what they were last May, from a derivatives perspective.
The first reason is that the share of the Nifty OI out of the Total OI , is 48% today as compared to just 30% then. Trading in the Nifty is more liquid . Puts and Calls are also more liquid in the Nifty. If a trader has a bullish view and has bought the Nifty futures, he can conveniently buy a Put in the Nifty, which prevents any further losses at the same time keeping his upside gains open.

The Puts and Calls in individual stocks are not that liquid. In a stock like Glaxo, you may not find a seller of Call or Put and even if you do, it will be at a price, which will be closer to the moon than terrafirma. So a high proportion of Nifty OI means, that the traders are in a relatively safer terrain, where exit is possible, with limited losses.
That brings us to the second piece of vital statistics. What is the proportion of Stock Futures to the total OI. 64.92% of the OI in May 2006, consisted of Stock Futures. The ratio at present is only 45.80. This is again very healthy.

And here is the clinching evidence. Aggregate Stock Futures in absolute terms today stand at Rs 30,277, lower than what they were in May, 2006, at Rs 34,784 Cr.
This is despite a higher Index , a higher total OI and more number of stocks in the F&O segment. The number of stocks in the segment last year were 118. Today they are 186. This data effectively puts things in perspective.

Other Recommendations.

Emkay Shares meanwhile has put a HOLD on Shree Cement with a target price of 1200. They say, Shree Cements commissioned its incremental capacity of 1.5 million tonnes in FY08.

With about 6.0 million tonnes of incremental capacity expected we feel demand –
supply gap would still be maintained. In such a scenario, Shree Cement would gain
on account of increased volumes. At the current price of Rs 1095, the stock trades
at a PE of 10.9x FY09 and an EV/EBITDA of 5.1x and would like to put a target of 1200.