After opening on a firm note last week the markets slipped in the last two trading sessions. This was something we had expected and expressed in our weekly column. The reasons were rising bond yields and inflationary fears as oil prices jumped overseas.
Oil is a multiplier commodity. Its rise raises inflation in essentials and non-essentials alike. Bond yields jumped from 6.30 percent to 6.34 percent on a week-on-week basis and oil prices jumped 5.21 percent on the MCX. Last week, I had warned of erosion in Call option premia which were in focus on Thursday and Friday as the indices got hammered by bears. Note the basis chart below. The basis is the premium quoted in the futures relative to spot prices.
The futures premium fell sharply on both the indices on Thursday and Friday. That dragged the Call options premia with them.
Qualitatively speaking, the selloffs on Thursday and Friday were not panic-driven. The volumes in both the segments – derivatives and spot did not spike sharply. The NSE market capitalisation stood at Rs 2,06,09,305 crore as against Rs 1,99,63,826 crore last week. That shows the retail segment is holding on to their deliveries.
In terms of action, I feel Bank Nifty may be relatively weaker than the Nifty as the cumulative impact of bond yields, inflation and rising US dollar affects the Bank Nifty faster. This hypothesis is validated by the fact that the Nifty clocked 2.81 percent gains a week-on-week basis but the Bank Nifty gained only 1.22 percent last week.
Check out the impetus chart below:
The impetus is the acceleration or deceleration in price. The Nifty impetus reading seems to appear relatively stable compared to the Bank Nifty which shows a weakening bias. Bank Nifty bulls may get relief if bond yields fall or the dollar eases lower. Till then, the uneasy price moves will continue.
The market-wide position limits (MWPL) rose to 22.65 percent from 18.49 percent in the prior week. Traders are continuing to ramp up their exposure based on hope.
The coming week is far from routine. Thursday, March 11, 2021, is a holiday and therefore weekly expiry will be on Wednesday. This session will behave like a mini weekend due to the impending holiday. Friday again will be a weekend session. That raises the probability of higher statistical ßeta (pure price volatility). This is likely to challenge retail traders. As we approach the middle of the calendar month, options premiums will erode at a faster clip. Bulls need to take note of this aspect.
My view remains unchanged over the previous week for delivery based investors. Protect your portfolios with ‘Tail Risk’ hedges by buying out of money Puts. Since there is no panic as of now, leave your long term holdings intact especially the blue chips. Short term traders should exercise abundant caution and trade light due to the higher volatility expected.
Have a profitable week.
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