SUCKER’S RALLY ON – BULLS BEWARE

The word on the street is that the worst is over for Indian markets. Budget coinciding with expiry was seen as a climatic event with selling reaching its exhaustion. There are a few data points which actually support that view.

First, the market has found support at budget day lows and for last 3 days has been closing at day’s high. Secondly Nifty has rebounded from the mid-point of its 100 and 200 DMAs (daily moving averages). Then of course, the midcap screen is looking much better than it had looked all of February.  And the most important one, the pullback from budget day low has been led by Bank Nifty and strong banking stocks which leads one to believe that the market may be a bit more constructive. Even on the F&O side of the market, the Nifty futures have kept pace with the spot and are trading at decent premium. And while stock futures have shed nearly 10 cr shares in Open Interest over last 2 days, that’s only because of NHPC. Excluding NHPC, stock futures have actually added Open Interest.

However, one look at Tuesday’s FII number would suggest that something is amiss. The way Reliance, TCS and ICICI Bank rallied on Tuesday, I was expecting to see an FII buy number of over Rs 1,000 cr. But the number is actually Rs 220 cr. On top of that, DIIs actually sold Rs 245 cr. On a net basis, institutions sold in cash markets. There was no great buying in the futures markets either and that’s where I get most of my cues.

There was big buying by FIIs in Nifty options and if you see the build-up, it was mostly in Puts. Now conventional wisdom would suggest this is Put writing and hence positive for markets – the texture of the market over last few months has changed with a bias of buying options rather than selling them. Even individual stocks are not giving the comfort that they could be bought again.

Also, let’s keep the global setup in mind, the market has been underperforming the globe this year. While most markets are near all time high with US markets actually right there, the Indian market is still a fair distance away from that. The rupee market has not stabilized at all and is giving an indication that a move towards 56 is on.

So the big question – how to trade this market? The best strategy would be to identify weak stocks and keep building your shorts at every minor pullback. Some examples could be the likes of IFCI, Unitech, HDIL, IVRCL, Welspun Corp, Adani Power. Now keep in mind, some of these stocks could have big intra-day bounces and hence the best way to play these stocks would be via Put options, which are very liquid in most of these stocks. As for Nifty, you should ignore the first 3-4 days of a new series in determining a trend, which would emerge next week. My sense, looking at the internals is that another wave of selling is coming our way and the Nifty may head towards 5550, where the mother of all support of 200 DMA comes in.