MUMBAI: Signs of a short-term strain have emerged in the market, with the Sensex ending down on Friday after six continuous sessions of gains till Thursday.
A major short-term worry is that that market breadth had been negative on a number of occasions recently when the Sensex rose. This means that if one leaves aside the 30 Sensex stocks, there have been more declines than advances.
“There is obvious heaviness in the market. Advance decline ratio being less than 1 at a time when the Sensex is rising, means that there is some amount of index management happening,” said Jayant Manglik, senior vice-president of RR Equity Brokers. “This is a cause for worry for investors entering the markets,” he added.
But Vijay Bhambwani, CEO of BSPLindia.com said since the capitalisation of the breadth is positive, there is no negativity emerging. This means that the value of advancing stocks is higher than the value of declining stocks.
“It only indicates an institutionalisation of the markets, wherein institutional investors prefer to buy into large-cap counters, while retail players, seeing prices come to around the early May levels, are exiting their small- and mid-cap picks,” he said.
Another indication of fault lines emerged mid-week when there was a trend reversal in Nifty futures. One Wednesday and Thursday, Nifty futures closed at a discount to the underlying index, after a record 23 sessions (barring one day) for which they had ended at a premium to the Nifty.
The last time this phenomenon occurred in the past three years was for 19 days between January 7 and February 4, 2004, with there being one day in the interim in which it ended at a discount.
On Friday, however, it was back to a premium.
A discount means that people are taking a negative call on the Nifty, which could come in for some correction in the immediate term. On Friday, the Nifty ended down 0.62% at 3852.80 points. Meanwhile, the Sensex was down 0.57% (76.41 points), closing the day at 13,429.48 points.
Meanwhile, open interest in the derivatives segment was Rs 53,490 crore on Wednesday, almost close to the highest Rs 53,520 crore it had touched on May 10, 2006, before the markets plunged. “Unless the markets tank, this build-up is not a cause for concern,” said Bhambwani.
Index management
Advance decline ratio being less than 1 at a time when the Sensex is rising, means that there is some amount of index management
This may also indicate that while institutional investors prefer to buy into large-cap counters, retail players are exiting their small- and mid-cap picks
Another indication of fault lines emerged mid-week, when Nifty futures closed at a discount
