Implied volatility is still not very high and options are not very expensive as of now.
Markets were weak in the March series led by the Bank Nifty. On a series-on-series basis, the Nifty futures reduced open interest (OI), indicating unwinding of long positions, whereas the Bank Nifty futures more than doubled their open interest, clearly showing the aggressive formation of shorts. This led to the Nifty correcting around 5 percent and Bank Nifty shedding 9 percent on a series-on-series basis.
Rising US 10-year bond yields, which have been a concern for all global markets, have taken a pause and are consolidating between 1.60-1.75 levels.
However, the dollar index (DXY), which mostly has an inverse correlation with riskier asset classes, has continued its upward trend and is now comfortably sitting around 92.80 levels. Note: Strong DXY is not positive for equity markets.
Any trend whether up or down doesn’t continue in a straight line and initial data points indicate that there can be some bounce.
Firstly, though the Bank Nifty has seen the formation of shorts, the Nifty didn’t. Also, components of the Bank Nifty haven’t seen any major short positions.
Historically, in a bear market, we see both indices form shorts and even large-cap names form aggressive short positionsm which is not the case now.
Secondly, on the first day of April series, we saw a blend of short-covering and fresh long formation by FIIs in the index futures. FIIs have been shorting index futures throughout the March series.
Market-wide rollovers in terms of open interest have been low and many large-cap names reduced long positions due to correction in the market.
FMCG and technology heavyweight reduced open interest as stocks gave positive returns in the March series on the back of short-covering.
But, if defensives continue to show buying interest now with the formation of longs, then this can be read as a sign of caution for the market as funds move into these names when a correction is expected to continue.
How should market participants position themselves?
We mentioned a fortnight back that long-term investors can add some hedging elements to their portfolios to ensure the beta of their portfolio reduces in a market that is depicting high volatility.
Interestingly, implied volatility is still not very high and options are not very expensive as of now.
Since defensives have been performing well because of which the Nifty outperformed the Bank Nifty, these traders, depending on their orientation, should check-in the index accordingly. So far, it’s Nifty for the bulls and the Bank Nifty for the bears.
If you are a trader who likes to close positions within two-four trading sessions, then life has been a bit difficult. Implied volatility (IV) for the Nifty calls dropped below 19 percent on March 26. If you are anticipating bounce back then use calls to trade instead of futures.
(The author is Director-Alternate Investments & Research, InCred Capital)Disclaimer
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