Banks to blame if Nifty breaks 5850: Mutha of HSBC Direct

In an interview to CNBC-TV18, Karun Mutha, HSBC Invest Direct advises investors to be cautious on banks while taking long positions. While public sector banks have underperformed falling 15-17 percent, private sector banks too have moved down 5-7 percent. He warns that if Nifty breaks 5850 level, the banking sector has to shoulder a large chunk of the blame.

He also pointed out that FIIs have been net sellers in the F&O market in the beginning of June series. He believes that FIIs may be resorting to long unwinding, but it was expected in a market that had ran quite high. He advised buying Nifty at 5,900 levels and wait for a small rally. "IT stocks are the best to remain invested if the Nifty rallies from hereon," Mutha said. Mutha Below is the verbatim transcript of his interview to CNBC-TV18 Q: There has been quite a bit of selling on the Nifty Futures positions in Futures and Options (F&O) market. Is it coming attendant with a big short build-up or are institutional investors just getting cautious on the market and unwinding their longs? A: If one looks at the June series, the prices have corrected and we have seen some kind of selling in the futures market. For the past three days if one accumulates the foreign institutional investors (FII) data, they have been net sellers of 3,300 crore. However, that has been only accompanied by a decrease in open interest. This is the evident that we have no cues of fresh shorts being build-up at these levels. There maybe some long unwinding, which is quite natural to happen looking at the run up which the market have seen. Probably 5,900 area is a good area to accumulate from hereon for a small rally on the upward side. Today the 5,900 Puts, which have seen the largest accumulation in the June series, have been around 58 lakh. The average premium for the Put writers should have been around Rs 52-55. Therefore, they would like to keep breakeven stop loss of around 5,850. I would rather keep that stop loss and go long as synthetic Futures by buying 6,000 Call and selling 5,800 Put virtually of negligible premium outflow and would play on the long side for a small upside up to 6,050 levels. Q: What is happening with the Bank Nifty and any specific stocks within that where you are seeing a big pile up of short position or long unwinding? A: Incidentally that is one of the sectors wherein it was evident that fresh shorts were seen. If one look at the Bank Nifty and particularly the strike of 12,000, which has seen the largest accumulation of Put in a single day and that was around 5 lakh units for the 12,000 strike. This shows that there have been concerns on this sector. The public sector undertaking (PSU) banking sector has corrected 15 percent- 17 percent vis-à-vis the private sector which has corrected 5-7 percent. I see the Nifty, if it breaks 5,850 level, then that would be the largest fall to be accompanied in this sector. So, it has to be cautious at this sector while taking long positions. Not to mention of the fact that since it has the largest weightage on the Nifty, a small upside would probably be a good trading bet to play on the upside. However, one has to be cautious while trading long positions on the banking sector at this point of time. Q: There seem to be some incremental strength on IT as a space, any specific stocks that stand out from there or any pare trades that you guys are playing in the technology space? A: IT has been a clear winner over the past couple of trading sessions that we have seen. The stock prices have not seen that kind of damage which the other stocks have seen. In fact there has been an open interest accumulation of almost 10 percent on the frontline IT stocks. I would rather play for the frontline IT stocks for a marginal jump on the upside if the Nifty tries to move up from these levels and they have been defensive. Therefore, frontline IT stocks would be the best stocks to remain if the Nifty rallies from hereon. Of course the Nifty stops would be 5,850. Q: What would you do with some of the pharmaceutical names now where there was a bit of short covering yesterday? A: Pharma and fast moving consumer goods (FMCG) have been among the defensive bets. Probably if I stay mandated to remain in the market then they are the best stocks to remain invested at this point of time.