Market Crashes Amid All-round Pessimism

Updated: Jan 26 2003, 05:30am hrs
US - Iraq war fears, worries of terrorist attacks close to Republic Day and falling US market - all these factors have led to the market crash during the week. The intensity of losses was quite substantial on the last two trading days. Week on week basis, the S&P CNX Nifty declined by almost three per cent to close at 1056.05 level on Friday.

The market breadth was negative with 70 per cent of the shares in Nifty index registering fall. Tech counters were badly hit with NIIT, Digital and Satyam falling by 16.82, 14.24 and 13.82 per cent respectively after dismal quarterly results from Satyam, NIIT and HCL Technologies. Having started with the tech meltdown, the downturn spread in the old economy counters too. HDFC Bank, Grasim, Bhel, Shipping Corporation and ICICI Bank were among the few exceptions during the week that bucked the trend.

The derivative market witnessed a lot of action specially on the last two trading days with total turnover rising by around 10 per cent as compared to the previous week. The turnover in the derivative segment at NSE has been consistently increasing since August 2002 and average daily trading volume has almost doubled in the span of six months. As the January contracts are set to expire on Thursday, investors rolled over their positions to February expiry contracts.

Index Futures

A total of 43,169 contracts were traded in the Nifty futures segment with significant trading volumes witnessed on Thursday and Friday. The open interest remained almost flat with positions building up in February expiry contracts and decline in January positions.

The significant feature has been the cost of carry that opened in positive territory on Monday, declined to negative zone on Wednesday and then again rose to the 22.75 per cent level on Friday. It is clearly reflecting the high volatility that prevailed in the market during the week. Based on the closing of Nifty futures for February contracts, it seems that market would rest a while before deciding the future course.

Index Options

After a while, this segment witnessed reasonably good trading interest as investors flocked to safeguard their positions by trading in Nifty options. Even the outstanding positions rose both for Nifty calls as well as puts. Most of the time Nifty calls were active at 1070, 1080 and 1090 level while the put options were active at 1070 and 1080 level.

The depressed market sentiment is reflected in rising put-call ratio that was prevailing at 0.87 level on Friday. Further, the implied volatility was around 16 per cent for both calls and puts for February expiry contracts while the same for January contract was 19 per cent for calls and 14 per cent for puts. These trends indicate an uncertain future outlook on the market in short term.

Options On Individual Shares

This segment witnessed high trading interest with a total of 1,07,271 contracts traded during the week with aggregate put-call ratio of around 0.43 for the number of contracts traded. Tisco made it to the list of top five traded contracts following spectacular results with high trading interest witnessed at 160 level. As the January expiry is approaching, some profitable opportunities are available for investors.

Futures On Individual Shares

This segment witnessed trading in 2,69,274 contracts during the week, almost 11 per cent higher as compared to last week. This increase in trading was caused by closing out positions in January contract and fresh positions in February contracts. A lot of variation was witnessed in the trading volume of the topline shares, however, the open interest did not change significantly. This indicates that investors have used this market for arbitrage as a lot of such opportunities were available on intraday basis and otherwise. These opportunities would continue to exist on intraday basis in the coming week also. The cost of carry for Satyam, Reliance, Digital, Telco and Tisco was in double digit for February contract that indicates a positive outlook for these shares at current prices.

Outlook For Future

For the two consecutive weeks, the foreign institutional investors have been net buyers while the mutual funds continued to betray. The coming week is very crucial for setting the tone for future market movement. The Cabinet Committee on Disinvestment is meeting on Saturday to decide the modalities for disinvestment of HPCL and BPCL. The UN inspectors report on Iraq is expected on Monday. The quarterly numbers of Reliance will be announced on Friday.

The outcome of these events will significantly affect the market. Investors should closely watch the developments before making any significant commitment. Though a short-term downturn is not ruled out, investors should avoid any panic selling because the fundamentals are reasonably sound in the medium-term. Therefore, wait, watch and then act would be the best policy.

(The writer is a faculty member at the Lal Bahadur Shastri Institute of Management, Delhi and can be contacted at