June series can be tight; buy Axis, HDFC: PhillipCap

Foreign institutional investors have built short position to the tune of USD 700 million in last four trading sessions of June series, which signals they foresee weaker levels ahead, says Vineet Bhatnagar, MD, PhillipCapital. The Nifty could face resistance at 5800-5850. The upside for Nifty in this series is limited at 5950-5960, he said in an interview to CNBC-TV18.

He pointed out that more short positions are seen building in the index than specific stocks. Those looking to play this series can adopt a bull spread strategy by buying 1 call of 6000 strike and sell 2 calls of 6100 strike, he recommended. From the banking space, Canara Bank has seen some strength while Syndicate Bank and Union Bank of India continue to remain weak in this series until now. Among heavy weights, ACC, Bajaj Auto and SBI continue to remain weak. On the other hand, stocks like LIC Housing, Idea Cellular, RCom and Tata Global are performing well. Bhatnagar cautions that IT stocks, which are showing some correction may continue to fall. He is bullish on Axis Bank and HDFC Bank in the private banking space. He is avoiding PSU banks now. Also Read: Edelweiss bets on IT, pharma; sees Nifty swinging 600 pts Below is the edited transcript of Vineet Bhatnagar’s interview with CNBC-TV18. Q: Consistent long unwinding by the Foreign Institutional Investors (FIIs), what have you made of that and what kind of direction do you expect the market to take in terms of levels you think it could be moving towards? A: Quite right. Actually what we have seen last week when the expiry occurred on Thursday that the FIIs were actually long in index future to the extent of as much as about USD 1.4 billion in notional value. In the last four trading sessions alone including yesterday they have actually built short positions which are equivalent to about USD 700 million. So, the speed with which they have actually built or reduced their net long position is something that is indicative of the fact that they are also looking at weaker levels, but for the moment our own assessment is that 5850-5860 should hold as a resistance. On the other hand if it were to giveaway as a support then I think we are looking at numbers below 5800. Q: Is this long unwinding also coming attendant with a buildup in short positions or are they just clearing positions out of the market? A: There is a selective short buildup that is visible, but in conjunction with what we are seeing also in the underlying cash market where they have cumulatively sold only about Rs 400 crore till date after the expiry last week. It is fair to say that some of the long positions have actually come in for the square off as far as the index future is concerned by the FIIs. _PAGEBREAK_ Q: Is there a sense that the market correction could get restricted to this 5850 levels that you were talking about in the June series or after the kind of movement that you have seen in the Futures and Options market in the last couple of days perhaps the cut could be deeper as well through the course of this series? A: What is looking clearer to us is that the upside is perhaps more certainly limited at about 5950 or 5960. Now as far as the downside is concerned and whether it will stop at 5850 or go down further is I guess a function of the fact as to what kind of news is going to be out there in the market as far as the external markets or US markets in particular are concerned. One is tempted to believe that while no news in the domestic front may perhaps be good news, but bad news in the west markets is certainly a bad news even for India and other emerging markets. Q: Where are the highest amounts of short positions getting built up in terms of individual stocks or sectors now? A: There is no clarity in terms of where sectoral short buildup is visible. We saw some short covering in the oil and gas sector yesterday led by Reliance Industries, Bharat Petroleum Corporation (BPCL), Oil and Natural Gas Corporation (ONGC) and GAIL. The shorts are quite selective and visible in banking and that is the reason why on a net basis the Bank Nifty is not showing any movement at all. Some shorts are visible in a very sporadic manner in some auto and IT names. That is the way the data is looking at this point in time. Q: Have you seen enough to take a call on how you think this series is trending, would you take a positional call on this series now with regards to the index? A: As a strategy because we are still looking at 5850-5860 to hold and the headwinds relating to the western markets are to fade away sooner than later. Our attempt is to prescribe to a bull spread strategy, which is hinting towards a bias towards higher levels or no dramatic crack in Nifty per se. We are advising a ratio bull spread of buy one call of 6000 strike and sell two calls of 6100 strike. Because the Nifty Option distribution, it is quite concentrated still at about 5800 and 5900 strikes and therefore the reason for looking at 5860 as a support. Q: If the market were to break 5850 where would you say the next logical stop for it would be? A: It will be 5750 or 5760. So it is about 100 points lower if 5860 were to give way. Q: Have the domestics as well built up short positions right now or this is just FII activity that you have noticed on the market? A: We have tracked the FII data more closely because they are the ones who move in quite quickly to change the colour of their books in terms of volatility or sudden change in the trends. So we have looked at that data more closely. Q: In the Bank Nifty are there any specific banking names that stand out where you have either seen a big churn or a big draw out of long positions or a buildup of short positions? A: From the F&O data, we were able to understand some strength is visible in Canara Bank and weakness in Syndicate Bank and Union Bank of India. Q: From the heavyweight pockets now both in terms of oil and gas or even banking from the frontliners which are the most vulnerable stocks at this point? A: State Bank of India (SBI) continues to be on the losing side. There is pressure on that counter. As far as other heavyweights are concerned, there is weakness in cement like ACC. Bajaj Auto is looking weak. As far as the strength is concerned it was visible in very small pockets like LIC Housing Finance, Idea Cellular, Reliance Communications, Oracle Financial Services Software, JSW Steel and Tata Global Beverages.

Q: In the Futures and Options space, we have been seeing a lot of lower level Puts seeing action, the 5500 put has added quite a bit, 5700 Put as well. What is the indication that you are getting and what kind of strategy would you advocate now in the Options side of things? A: As far as maximum concentration is concerned, it is indicative of the conviction that the market as a whole may be demonstrating and is still visible at 5800 and 5900. However, as we have seen even in the past, traders or smart money does try to protect the downside in volatile times at even lower levels. So, there is some amount of buildup that is visible at 5500 and 5600 but that is half as much as what is seen in 5800 and 5900. Therefore, if 5860 were to give way, the speed with which the buildup on 5700 and 5655 will come about will be remarkable then. _PAGEBREAK_ Q: Are most of these short positions built on the index or on individual stocks at this point? The reason I ask is that the last time the market fell it didn’t quite have a short hedge or short cushion in place. A: We are seeing that mostly in the index as the instrument where the short buildup is visible and therefore, it is the index instrument which is perhaps going to cause that particular stress. However, at the same time very weak momentum as far as the index heavyweight individual stocks are concerned is also visible. So, the domestic money is not chasing buying of any of these index heavy weights whereas the overseas money as far as the traders are concerned are concentrating their book more on the Nifty Futures on the sell side.

Q: During this week some of the erstwhile stronger sectors like pharmaceuticals or technology have begun to weaken. Have you seen any specific action on the names over there? A: In the beginning of the week or late last week, we were seeing across the board euphoria in the pharma sector. Almost all of the heavy weights as well as the second line stocks in the pharma sector were up even as late as Monday and Tuesday this week. What has started coming out is a more selective strength in names like Cadila Health and even Lupin. Therefore, across the sector euphoria which perhaps may have been more motivated by a defensive nature of that particular sector seems to be dying out. Quite likely but with a different characteristic IT was also displaying a similar kind of across the board strength sometime ago. It was in April where it started displaying the characteristic of a defensive sector. In the last four-six weeks, even the frontline stocks have come for a more volatile trading session whether it be the Tata Consultancy Services (TCS) which was looking strong on the evening of the announcement of results but all of them have started showing some level of correction. It is more importantly based from the weaker western market or the US market data as far as the recovery is concerned. This is quite contradictory to the weak rupee, which is the simplistic view that most of us take about IT gaining from a weaker rupee due to the export services. Q: If the market were to break the levels you were talking about earlier, would that be a clear indication to put out a naked short on the market? Do you think that would be the level to start accumulating a bit on index positions? A: We would still look at this particular period of correction even over the next few months as one, where we would like to accumulate stocks as far as the portfolio is concerned. For tactical reason, for weekly trades, if people were to take position in the index future or index Options for that matter for the short-term view that is a different mindset altogether. However, taking a call on macro improvement in the economy two quarters away from now is only indicative of this simple approach that this could be the time when people should be looking to accumulate equities in their portfolio. Q: In the last couple of weeks the rate sensitive's have been hit really hard, autos, real estate and even banks. Within these three spaces which is the prime shorting candidate right now as we head towards the end of this series? A: As far as banking is concerned, we will still lean with a negative bias towards the PSU banks. Therefore, we will always be inclined to accumulate names like Axis Bank and HDFC Bank, Indus Ind Bank in the private sector space. By the very process of elimination the other names in the PSUs would come in for no accumulation or no selection. One is not necessarily looking at shorting the PSU banks for the portfolio investors. One is only looking to find out which are the names that put you in good stead year or year and half from now.