BULLS BEWARE, BEARS HAVE THE KNIVES OUT

Thursday should reaffirm the extent of the bear market India is going through. I know a lot of people would think I looked at some other screen since the Sensex was up 400 points and the Nifty rallied 100 points. But to me the internals matter – and the internal that stood out yesterday was FIIs selling Rs 1278 cr in cash markets. This is more selling than they have done on really bad days.

I raised this point yesterday during my show on CNBC-TV18, before this data was out – if you are a bull you don’t want to see FII net sell figure on a day like yesterday, and that’s precisely what happened. So essentially, in a shallow market, the FIIs are now selling on any good day, and yesterday was as good a day as any with so many large caps rising 4-5% or more in certain cases.

Refer to my last post where I spoke of the market mayhem and raised the possibility of FIIs selling in the last remaining safe bastions. That’s starting to happen – so far FIIs have been protected with their investments in IT, Pharma and to a certain degree some FMCG names, but the currency is fast eating whatever limited gains they have made. And this is in a relative world, where the US markets are trading pretty close to all time highs and investors have options to park their money somewhere else.

Now, next week assumes extreme significance. The bears are in firm control and they have so much ammunition at their hand that any rallies like yesterday would give them fodder to feed on, in this case bull’s meat to feed on. Also, look at the options data in non conventional way – the way deep out of money August Puts have added Open Interest, yesterday clearly looks like another bear trap.

I know the market is deeply oversold and almost everyone is bearish and normally that’s the signal of the bottom. But the last stage of bottom formation is always the most painful and results in most wealth erosion for bulls. That may just be around the corner.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his employers as part of his compensation. All views expressed in this blog are my personal views and my channel does not subscribe to the same.

MAKING SENSE OF MARKET MAYHEM

So finally the market is capitulating. But what really is happening out there? Who is selling and what should the market be weary of?

The internal that would worry me the most is that FIIs have actually invested $12.7 bn in cash markets this year. And the Nifty is down 8% despite that. In fact the Dollar Nifty is down 16% year to date. Where exactly has this money gone and what happens if even 10% of this money has to go out?

Well let’s look at the Nifty internals. You would be amazed that only 8 Nifty stocks are in the green this year, but those who are have actually been money spinners. For example, at number 8 is ITC with 9% gains, HUL is up 12%, Dr Reddy’s 17%, Lupin 28%, Infosys 30%, Sun Pharma and TCS are up 40% and the biggest of them, HCL Tech is up over 50%

On the other end of spectrum, the 42 Nifty stocks that have fallen – 33 of them have fallen more than 10% - within that 15 have actually fallen over 30%, 7 over 40%, 2 over 50% and a poor soul by the name of JP Associates nearly 70%. And I am not going into the Nifty Junior and midcaps because you know what’s coming there.

So with some of the erstwhile FII favourites likes SBI, BoB, L&T, ICICI Bank decimated, the key concern should now be what happens to the likes of IT stocks and the pharma stocks. And if that has to happen, will it finally lead to an FII exodus. Keep in mind, even if this market was flat, an FII would have seen 8% erosion purely because of currency.

The other angle that’s scaring me is the absolute low levels of cash market volumes and hence the depth of the market. 96% turnover is being generated in the derivative market with lion’s shares coming out of Index options, which has become a gambler’s den. Even if someone has to sell $10 m of stocks, that would lead to big price damage. Factor this, on Friday, FIIs sold less than $100 m in cash markets, DIIs more than bought that and still the Sensex ended with near 800 point collapse.

And while the consensus is that this market is only headed down, that has been the consensus for some time now. And when a consensus trade is so right, sometimes the bravado of approaching the market with contra views an be painful, unless of course you have deep pockets and a really long term view. Somehow the internals of the market and most importantly the ticker is telling us that there is more to come.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his employers as part of his compensation. All views expressed in this blog are my personal views and my channel does not subscribe to the same.