Nifty may swing 100-250pts in next 6-8 sessions: CK Narayan

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 10/02/12 Are Mutual Funds betting on Nifty?

With the Indian bourses displaying a robust rally, experts believe that the uptrend will continue. "Historically, the markets don't make lows in the month of September. The volatility is likely to continue and thus breaking below 5,350 may not happen this month. However, the Nifty breaking out on the higher side too looks difficult," CK Narayan of Sharyans Resources told CNBC-TV18s Managing Editor, Udayan Mukherjee, adding that the Nifty may swing another 100-250 points in the next six to eight sessions.

Below is a verbatim transcript. Also watch the accompanying video.

Q: Volatility has picked up in the last few days. Do you think 5,350 as a floor will hold out for the Nifty?

A: At the moment that is what we are looking at. The market is in a range where it is quite unwilling to go down. But at the same time, those tabs at the higher levels are not really meeting up with far too much follow-throughs. We are in for a bout of volatility. We have seen a lot of volatility across last few days. Such a situation is likely to last across the next eight-10 sessions also. It is just going to get swung around with 100-250 points on the Nifty across successive days.

Q: Eventually which way do you see it giving? September and October tend to be quite large swing months, at least history suggest that. Do you see 5,550 being pierced on the way up convincingly or the 5,350 support giving way?

A: Let us look upon the history part a little. If you look at the history of our Index you will find that September is never a month where the market makes a low. You will really find except for 2001 when we had the 9/11 attack, other than that September is never a favoured month for a low. Going by history alone, we can see that the lower end of the level is not going to break this month. October is a much more fancied month for either highs or lows. I would think that if we have to go down then we would probably do it in October and not really in September.

As far as whether we will break the high, I think that has become a bit of an iffy issue because mainly owing to valuations and reluctance among the larger players to chase the stocks on the higher side. We had the Index being lead up by the banking stocks for quite a while. Now they seem to be taking a risk because there is a feeling or growing consensus right now that public sector undertaking (PSU) banking stocks are not really as attractive as they were looking a while ago. If banking also has sort of given up on the upside burst, then we will really need to have some other sector stepping up to the crease and starting to bat for the bulls.

At the moment since it is not visible, I do not think really going to breakout much on the upward. So September seems to be a ranging month with probability of the lows being broken sometime in October.

Q: The problem is that people are quite fearful about a breakdown in the US indices which might have some collateral damage out here. How is that set up looking, charts like S&P, Dow etc?

A: That area is really flummoxing the minds of most people. Typically you have the situation where, if you compare the equity markets with the bonds, they give you a decent handle on what is likely to happen. But if you examine the data in the US over the last six months or more, the bonds yields on the ten year US treasury, has been having a huge run.

It was down to about 2.47%. You are having this big run on the bond yields and at the same time, the equity prices are not really cracking, as they would generally be expected to do. It is flummoxing most minds right now. History has shown us that whenever there is a tussle between the bond markets and equity markets, it is always the bond markets which win. It is several times the size of the equity markets and that is where the mind of the market is pointing towards.

If you take that and transport that same thing into India, we have an exact kind of reverse situation. Here you have the ten year bonds moving up to 8% plus and the equity markets are also doing as well. We have a situation where if the bond markets in India are going to be yielding about 8% I do not see any which way that the money flowing into India is really going to dry up. Even if the US were to soften, the situation here will not really alter I do not see how the fund flow aspect will change in any significant manner to alter the trend status.

More than looking at equity markets only, we should be now looking at a correlative set of studies between the bond markets and the equity markets in the US, Europe as well as in India. I think the job has got a little more complicated. All the older correlations as we knew them to exist seem to be sort of going out of whack a bit. I do not think anybody really has a clear answer on what is going to affect which one first and how things are really going to pan out.

We are just simply taking a pot shot at it with what we know. Every thing is a new norm here. We never had a year of ranging markets with about 8-10% between highs and lows which is what we have been seeing since last year, September-October and we are almost a year into the whole thing. We are still ranging with no signs of showing any willingness to break out of this range.

A lot of things have been new or getting redefined. We need to learn or rather relearn as we go along. Everybody is doing that, which is why there are no clear answers about emerging about markets as such. Since there is no weakness anywhere, everybody is quite happy to let things be as they are and hoping for the best. All of us want a bull market situation. That is what helps business along so everybody is happy to let things be.

Q: The fear is that the series of these shallow dips that we have seen over the last one year and this periodic going down by 5-6% but never quite cracking and then bouncing back to reclaim all the lost ground, would one of these dips turn out not to be so shallow and give a much more meaningful crack or do you think the skeptics will keep waiting but the market will just not give you that major dip that people are talking about?

A: I think the skeptics are waiting. A lot of people are hiding in cash or very long term equity. Both are a form of hiding. Lots of people have been taking off profits. You go around the street and every second guy or the third guy would probably say to you that the market is going to crack. Recently there were reports of someone out of the US saying that there is going to be a huge decline. The interesting thing about declines is that you either have a panic or you have a collapse. The collapses generally happen from high price levels and the panics happen from low price levels.

We are not at a low price by any kind of yardstick, so you can rule out the panic part. As far as the collapse from high price it generally happens when there is a very large involvement or participation by retail traders in particular. I think our markets have not really seen a very large participation by retail. There is no huge commitment to positions.

If you look at futures options position, there has been some amount of increase in stock future but I do not think it is of a size and dimension which would indicate that people are very gung-ho in trading and have a lot of their money committed. If you do not have people with committed positions you are not really going to see big times cracks. If you rule out big time cracks and if you rule out panics what are you left with? You are left with the piece in the middle which will be your normal 8-10%.

This will keep happening until we have some sort of a significant and very overt event. I do not see any event across in India because everything seems to be hunky-dory at the moment. Probably this event has to be from overseas. If you look at the markets movement a lot of it has been fuelled by foreign institutional investors (FIIs) money and we are on record that FII bought four times what the domestic sold in 2010. What I would watch for a crack is anything that will affect or impede the fund flow into India.

Last weeks Emerging Portfolio Fund Research (EPFR) global data said that in the Asia pack region you have a net outflow of USD 289 million. Maybe that is the start of it, maybe there is something else which comes out I do not have clue. There are rumours that a few of the foreign books have been asked not to look to buy India at the high levels which are there. Small trinkets of information coming in from here and there but not really sort of adding up to become a pattern which is large enough for people to sit up and take notice and then take action.

I think the whole market is just waiting for it and until we get an overt event which everybody can recognise, identify and then make a projection on it, I do not think they are going to have a serious crack in this market. It may take a month; it may take six or even 12. I have no clue.

At the moment there isn't anything on the horizon. We would just chug along doing what we are doing. Skeptics will be there. You keep saying that it is too high valuation, too expensive but who wants to sell? I do not see any mutual fund really exiting, they are churning. I think domestics are churning, insurance companies are churning, maybe the foreigners are churning, but then who is exiting, no body as long as nobody exits the market is not going to see a crack.

Q: On the other hand there is a view that this time because of the huge build up in options activity, the market is actually so well hedged that there is no incentive for people to panic and sell, even if there is some global turbulence. Do you see enough evidence to support that view?

A: Absolutely. There is no denying the fact that option trading has really gone through the roof, but its not all lets say protection buying or hedging trades. I think progressively a huge element of trading which has crept into options. The ranging action over the last six months or so has led to a feeling amongst smaller traders or non-professional option traders that shorting options is the easy way to make money. They have made money no doubt and this has actually encouraged a significant transition of the normal day traders to the option side but somewhere along the way this particular edifice is also going to crack.

What you said is correct. People are well hedged in. They are willing to let go of the premium where the volatilities are nice and low. The option prices are not overly expensive. People, particularly holders are fairly comfortable buying those options and paying those options and paying those a percent or two or three to stay hedged, as long as the equities are doing well, they are happy to pay that small price to kind of protect their position.

I think that is what has been happening, which is perhaps another reason why you will not see panic flooding of the gates for the exit if something were to go wrong. If you look at 5300 puts, 5400 puts. We are at the start of the month on September 2. You have a crore of position already in the 5400 puts. We are really cranking up on the option position. I think the market is well hedged that's another reason why we will not have too much more panic. The traders will panic but maybe not the position holders.

Q: Are you getting the feeling that this will continue to be like this or do you think something will happen and all these theories that we are talking about today to back fit this range bound market will go out of the window? Is that a possibility?

A: That's a certainty. What we all end up doing is trying to find reasons to fit the current market activity and thereby make our actions look as rational as possible. We want to justify buying into stocks at this stage because selling stocks has not really paid off. We need to find arguments, if we cannot find valuation arguments we will find logical arguments or something else which fits rationally. That's what we keep doing at every stage. When the event comes we will fit new arguments with the new events. Where are the CDO's now, where is the sovereign debt now?

Greece is already a forgotten story and we always try to fit whatever is the current situation to whatever fits the argument the most and try to run with it, because inherently we all want to seem very rational about what we are doing. We need to explain it to ourselves, we need to explain it to others. All of us spent most of our lives going through reacting and fitting arguments to whatever events happen. Until a new big event happens to which everybody can fit one cogent kind of argument or set of reasoning to it and act on it I don't think the market will really move significant amount on either side.

Maybe we are having a new normal which just says that it's going to be a huge range. You had this huge range in the US from 1965 to 1982 and the constant dollar chart of the Dow, had a breakout only somewhere around 1981 and that was a huge range. In our own markets, we had a range from 1994 to about 2003. If you were to ignore the tech led boom of 2000 but then it was really a very large range which lasted at least about anything ranging from six-nine years.

Markets are no strangers to long ranges. It's only that we have forgotten that ranging action over the last few years when we have had these fantastically sort of robust bull markets. I think may be the market is forcing us to take a relook at history and say that it's not always going to be bull market. Ranging markets are as much a reality as the bull and bear phases are.