By Anand James
Persistent decline through the week followed by Friday’s positive close indicating a recovery phase this week speaks nothing about the ordeal that Nifty traders had to endure through this period. Prime reason has been how VIX has been behaving. Infact the decoupling of VIX has been a key discussion point last month too, with VIX failing to rise above March peaks despite Nifty going through sharp falls. This would mean that the systematic decline in VIX since March, has only found more momentum in July, registering a fall of 21.5% since the start of this month. But curiously, while VIX had large ebbs and flows through the last week, on all days except for Friday VIX ended on a flat note. This hurt all directional traders, who held positions overnight, as most intraday gains in premia were shaved off towards close, irrespective of the direction.
Long straddles too were bleeding, unless repairs were done exactly at turnaround point, which called for great luck and pluck, which does not coincide often on a regular day.
Data thin week ahead
With Indian CPI numbers already out, earnings numbers could dominate the proceedings until FOMC’s rate decision on the 27th. UK inflation data and ECB rate decision are scheduled for the 20th and 21st respectively. UK’s June inflation readings are likely to beat the May CPI numbers of 9.1%, upping the chance of an August rate hike by 50bps, but this will not surprise markets, given how the reaction to last week’s surprise US CPI numbers have panned out.
Prospects for rise in volatility
There is a low chance of a dramatic rise in VIX, at least in the early part of the week, with few triggers to influence next Wednesday’s rate decision expectations. Carry forward decision on Friday, would rely on expectations on US PMI readings, which is not expected to be a major driver, unless a sharp fall below 50 is seen. The odds of a 100 bps hike had risen sharply to 80% at one point last week, but it has thereafter fallen to less than 30%, with a 75bps hike almost a given, when FOMC meets on the 27th. Since we do not have anything with the magnitude of US CPI numbers to force a rethink on Fed hike, volatility expectations are benign, unless China’s covid scare escalates.
Failure to close below 15900 last week, despite a few intraday scares, helped fit the ongoing pattern as a broadening wedge, encouraging us to look for 16800 as the near term objective in an optimistic scenario. This is consistent with our view of the last two weeks. We will begin by eying 16370 for the week, with a modest 16150 as the first objective, but with an inclination of doubling up on longs should Nifty clear the wall of worry at 16200. Downside marker for this view may be placed at 15970
(Anand James, Chief Market Strategist at Geojit Financial Services. Views expressed are the author’s own.)