June Expiry Review | Markets set for a bounce from highly oversold levels

US benchmark index S&P 500 closed its worst first half of a year since 1970 with a drop of 20.6 percent. The Nasdaq Composite finished the first half down 29.5 percent and notched its worst first-half performance on record. The MSCI global stock index was down 20.9 percent for the first half of 2022, its biggest first-half of a year percentage drop on record.

Back home, markets are also grinding lower. The Nifty ended the month of June 5 percent lower and 9.4 percent lower for the quarter as FPIs continue to be sellers on almost all days.

The Nifty has ended the third consecutive expiry in the red where it ended June series with the losses of 2.41 percent. The Nifty witnessed sharp sell off from the start of the June series and touched the low of 15183 level but towards the end Nifty recovered by almost 700 points. Most of the fall in the Nifty is contributed by metals, pharma and realty sectors which have fallen the most in June series.

Bank Nifty, after its outperformance for the last two series, underperformed for the June series, where it fell by 4.76 percent. If we compare performance of last one year, Bank Nifty is down by 4 percent as against 0.20 percent gain in NIfty.

Experience taught us that higher open interest (OI) acts as a milestone around the neck of the market and sinks it lower when any risks materialises. In the stock futures’ segment, open interest of 459 crore shares is far lower than the all-time high open interest we have seen in February 2018.

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Devarsh Vakil

Deputy Head of Research|HDFC Securities

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At the beginning of July series Nifty future OI at 1.28 crore shares is still far lower compared to the last 15-year average OI of 2.2 crore shares.

Foreigners are heavily short on the markets in Index Futures. At the beginning of the July series the ratio of their long to short positions is at 0.17.

We have never witnessed such large short positions from foreigners ever in history of India’s derivative markets. Such large short position calls for a prudence and cautious approach in building long positions, though on the flip side, it should keep bears on the tenterhooks. Any positive development on the macroeconomic front or a rally in global markets after recent slump can result in sharp short covering rally in Indian derivative markets.

Maximum open interest in the Nifty Monthly Put options (28 July expiry) is at 15,000 strike (26.33 lakh shares) and maximum open interest in call options (28 July expiry) is at 16,500 (19.86 Lakh shares) followed by 17,000 (19.70 lakh shares).

Markets have found support at multiple occasions near 15,200 levels, and that level should be 'Lakshman Rekha' for the bulls. I am told that oscillators are quite oversold and markets are posed for a short covering bounce. All long bets should be relinquished below that key support. 16,500 is the temporary roof for the markets. Do lighten your long commitments if the Nifty were to come near those levels in July.

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