Realty, auto stocks near bottom

Traders remained hesitant in the short week though the indices moved up by almost 2%. The increase in trading interest was evident from the churn, with profits being booked in outperforming sectors like realty, auto, cement and infrastructure.

I believe the broader market is going through consolidation phase. A lot of stocks are quoting at prices more or less around levels seen in the last month. This is characteristic of a movement after a sharp rally. The good thing is, instead of the rally being narrow — which can put it under threat — it is becoming broadbased.

The banking stocks were going through long consolidation phase, but witnessed a breakout last week. The strength of mid-sized banks such as Indian Overseas Bank and Oriental Bank of Commerce indicated long-term interest from investors.

At the last expiry, we saw the Nifty cost of carry being somewhat elevated, indicating an impending correction. When the cost of carry rises, it indicates increased optimism. And, as it reaches above-normal levels, the markets normally give contra moves.

Last week, the Nifty cost of carry moved to a discount of 15 points from a premium of 10-12 points, indicating increase in hedging activity. So, as the broader markets moved up by 2%, Nifty futures gained only 1%. The options too saw build ups in 5000 and 4900 put series, indicating expectation of an increase in volatility by traders.

The global markets corrected last week, which may put increase pressure on domestic markets. A sharp volatile down session of 2-3% cannot be ruled out this week. The results season from second week may provide a cushion against a big fall as expectations from the results are good. Moreover, open interest in Nifty or stock futures do not indicate too much of an overbought situation.

Realty, power and auto sector stocks may be bottoming out and could show stability even if the overall market declines. Overall the open interest in power sector stocks moved up by 3%. In the metals space, Tata Steel is showing signs of bottoming out around Rs 500. It may attract fresh longs if it declines further.
Cement has witnessed short build-ups and may remain subdued for the next couple of trading sessions.

Pharma has witnessed short covering. This may continue and stocks like Ranbaxy, Dr Reddy’s, Biocon and Orchid may move up further. Oil and gas has witnessed some profit-booking post the Oil India listing, but GAIL India has witnessed fresh longs.  In telecom, RCom and Bharti witnessed interest on the long side and may continue to do so as their recent underperformance may help them do well when the rest of the market witnesses churn.

Overall, the market may witness increase in volatility with more volumes by traders rather than long-term investors. The downside band looks to be 4850-4950 as the put-call ratio of the 4900 series is above 2. The upward trend may resume as we approach the second fortnight of expiry and fresh build-up cues emerge as results start trickling in.

The writer is head, derivatives and strategy,  PINC Research