Feb to be volatile; short if Nifty falls below 5900: HSBC

In an interview with CNBC-TV18, Karun Mutha of HSBC Invest Direct, spoke about his reading of the market and his outlook.

Below is a verbatim transcript: Q: The kind of short pile-up we have seen by foreign institutional investors (FIIs) over the last two days has been quite worrying, how have you read it and what is your trading call on the index? A: If you go back to the retrospect of the last series, the data which has come in is clearly evidencing that there was a weak rollover. The overall market wide rollover was around 72 percent, which normally is around 75-80 percent and in case of Nifty, it was around 45 percent, which generally is beyond 50 percent. That was the first evidence that reflected the weak rollovers. The other factor, which influenced the weak rollovers, was the low cost of carry. We have already seen the premium on Nifty dwindling down to almost 10 points at an intraday low and coming back to around 15-17 points, the rollover premium was roughly around 32-35 points. Here, probably it seems that the FIIs, which have started with a long index futures notes have started accumulating on the short side as well because the figures clearly indicate that 59,691 contracts on the short side increased to around 91,000 contracts. So, there has been a lot of built up on the short side by the FIIs. Broadly, the range has now been broken down from the earlier 6,000-6,200 to now 5,900-6,100 because these are the largest accumulation over the 5,900 Puts and 6,100 Calls that is to be seen. Unless, we see a breakdown of 5,900 on the Nifty, we wouldn't see panic in covering the 5,900 Put options and we would be largely holding onto that level. It is crucial to watch out 5,900 levels from the derivatives data and probably going beyond that would be only the likely trigger to go further on the short side. Q: What are you seeing in terms of a position build up and names from the infrastructure space like Jaiprakash Associates and Bharat Heavy Electricals Ltd (BHEL)? A: I think broadly we will have to classify them into two i.e. the cement and the infrastructure. As the cement part, the under-ownership was clearly seen during the rollovers. The cement sector has seen the lowest of the rollovers in the past couple of series roughly around 38 percent. The lowest rollovers clearly suggest that the correction that was evident in the cement sector was taken overhang and probably the investors did not roll it over to the next series.  As far as the infrastructure is concerned, I think it has been more stock specific wherein it was evident that some shorts were being built up on some of the large-cap infrastructure stocks. I would rather play on cement wherein it has been evident that due to under-ownership probably there would be some accumulation, which is happening in the February series and which is likely to pull up. Probably that is one of the reasons that we have seen a good cost of carry being evident in some of these cement stocks. Q: What are you telling your clients to do now in terms of a trading strategy on the Nifty? A: I think what we have observed is that the volatility index is trying to inch up. We have been seeing it hovering around 14.5 percent -- 14.34 percent to be precise and we do expect the volatility to rise in the current series as we have also the Budget session at the end of this series. So, the implied volatility is on the Put option as well as the Call option would see a huge jump.