Market Easing Out In A Range-bound Manner

Updated: Dec 22 2002, 05:30am hrs
Nearing Christmas and new year eve, everyone seems to be relaxing a bit and avoiding any large commitments. The market moved in an extremely range-bound fashion with S&P CNX Nifty declined by almost one per cent to close at 1079.30 on Friday. The number of rises and declines were quite balanced.

Among the Nifty shares, exactly half of the shares witnessed a rising trend, while the remaining half declined during the week.

Dr Reddys, HDFC Bank, Hero Honda, Sun Pharma and M&M were among the top gainers while ICICI Bank, Wipro, Castrol, Shipping Corporation and Zee Telefilms were the laggards. HDFC Bank showed some activity after prevailing at nearly 52-week low for quite sometime.

The derivative market took a breather in volume terms as the total turnover declined by almost 15 per cent during the week. The average daily volume was little over Rs 2,500 crore with stock futures segment driving almost 64 per cent of the turnover. Most of the trading volumes were driven by the investors waiting for some market correction.

Index Futures
Though trading volume declined, the outstanding positions rose in Nifty future contracts. This increase in open interest was witnessed both in the December expiry and January contracts.

It clearly indicates that investors have preferred to remain with the Nifty futures for the expiry week.

Once again the cost of carry in Nifty futures has slumped in the negative territory and remained so during the entire week. It was extremely low, i.e. around 23 per cent (negative) on annualised basis, on Wednesday. It seems that futures market players are waiting for some correction to happen in last week.

Index Options
A total number of 10,974 Nifty option contracts were traded in this segment, a fall of around 19 per cent as compared to the last week. On the other hand, the open interest rose consistently during the week. The implied volatility for Nifty puts was high on Monday but fell later on. Given the fact that market didnt move much, it seems that investors have written some out-of-the-money options so that they can pocket the premium at the contract expiry next week. Now on, the premium would fall sharply in December contracts as they are approaching the maturity.

Options On Individual Shares
Apart from the top line shares in this segment namely, Satyam, Reliance, Infosys, HPCL and BPCL, significant volumes were observed in SBI as well as some of the old economy counters like Tisco, Telco and HLL. The open interest also rose in almost all the shares as some option writers found it lucrative to write options just before the expiry week.

Like the range-bound sentiments prevailing in the cash market, there was not much movement in the implied volatility of calls and puts.

Some activity has been seen in the options on Dr Reddys counter in the back of movement seen in the stock this week. The put call ratio also moved in a narrow range during the last two days of the week on the major shares. All this supports the share price movement in narrow zone.

Futures On Individual Shares
Though overall volume in this segment declined, it was still quite reasonable at 2,74,578 contracts this week. There was a sharp increase in volume of trading, more than 25 per cent, on the counters like L&T, Dr Reddys, M&M, Ranbaxy, SBI and Tisco. This trading interest was witnessed due to the sharp movements seen in cash market for some of these counters.

The cost of carry remained high, mostly in double digit on annualised basis, on almost all of the top traded shares. Part reason for the same is the approaching maturity of these contracts. Overall, the positions have started building up in the January expiry contract and some arbitrage opportunities can also be seen in this segment. Investors would need to buy in the cash market and sell in the futures market.

Outlook For Future
After the Gujarat elections, there has been some respite with regard to the future direction of the government policies at center. Though nothing can be said with certainty, still the sentiment is positive. This weeks trading can rightly be characterised as healthy correction in some of the stocks and it was due for quite sometime.

The foreign institutional investors (FIIs) have been the net buyers. On the other hand, mutual funds continued their selling spree.

From here, the market looks to be range-bound for the coming week with few stocks ruling the trading interest. There may be a slightly cautious trading nearing Christmas and new year eve as foreign fund managers would be busy in celebrations. Overall, this is a good time to invest in those shares, where investors are expecting healthy quarterly results in January. Banking and technology sector looks attractive, however, the entry price should be watched carefully. Happy Christmas!

(The writer is faculty member at the Lal Bahadur Shastri Institute of Management, Delhi and can be contacted at sandeep1973@hotmail.com.)