Chaos, and smooth sailing till Budget

Musicians improve by doing riyaz — playing endless sets of scales and melodies over and over again. Market analysts compare sets of numbers until patterns (often spurious patterns!) seem to emerge from endless rows of data.

One of the standard five-finger exercises for an analyst is to compare US index movements with Indian index moves to look for possible correlations. The first problem you run into is the time-difference. America may be a more advanced economy but it runs half-a-day behind India.

Once you’ve cracked that, you run into the issue of holidays. Americans work harder or at least, they show up at work more often. In an average year, there are 230-odd days of trading on the Nasdaq and NYSE. There are at least 10 extra annual holidays in India.

Synchronising the data is a useful five-finger exercise in itself, as well as being a pointer to different cultural attitudes vis-a-vis work.

This year, Republic Day happens to fall on the last Thursday of January, when the derivatives settlement would normally take place. So, the settlement has been moved forward to Wednesday leaving us with just three sessions of concentrated chaos. It will be chaos through early next week I think. There’s been a huge build-up of open interest in derivatives.

The Nifty has jumped up some 1.75% in the last week.

A lot of people will be aiming to carryover their January positions into February. The process of ulta-sauda followed by opening a February position means massive volumes across the F&O market and since quite a lot of F&O positions are linked to spot-market positions, there will be inevitable volatility in the cash market.

It looks as though the market is likely to stay bound inside the range of Nifty 2875-2930 until Wednesday at least. It will probably twitch across this entire 50-60 point range during that period.

The intra-day volatility will be caused by continuous switching of trading interest between heavyweight counters.  I’m not saying that this will be a well-coordinated effort by some cartel. It’s simply the way the data suggests things are likely to pan out.

There’s a massive January long call position open at 2930 Nifty and it is very much in the interests of the option-sellers to ensure that the market doesn’t push past that point. You can’t trade the Nifty directly. But you can hammer big index stocks to keep things from going out of control.

At different points of time, different pivotal stocks will get hammered. At the level of specific stocks, not too many index heavyweights look madly bullish anyhow. Tata Motors, Maruti, HDFC and Wipro, perhaps. The rest of the Nifty and F&O population looks neutral or maybe, mildly bullish.

Once the settlement is through, we’re probably headed for a period of bullishness through February. If the trading range is broken with a surge past 2930, the market’s probably going to head past 3050 before it takes a breather.

Key sectors which had exhibited bearishness through early January appear to have bottomed out. For example, PSU banks are no longer losing value as a set.

Refiners seem to have bottomed out as well. Some IT / ITES stocks (Mphasis and Polaris) are finding buyers while TCS and Infosys seem to have ridden out the storm after releasing average Q3 results.

Most of all, there’s clarity on the Reliance front and everybody expects Q4 to be better in terms of actual workings for the standalone refinery business. Until the Budget at least, there are no apparent causes for worry. That event forces most institutions to stay net buyers through February.

So February is always a month when institutions buy in tandem. There’s never been a February when FII and domestic mutuals have been net sellers. If you’re assured institutional support and there are no apparently weak sectors, everything should be hunky-dory post-settlement.

The IPO scam does have the power to knock the bulls off course but it’ll take another few months before the full dimensions are apparent. Until the Budget then, the market is likely to set new records.