The Hindu Business Line : Benchmarks may shrivel a bit

THE short-term outlook for the stock market this week seems quite clouded. Though benchmark indices made recoveries on Wednesday and Friday, they do not appear to be strong enough to overcome vigorous bear hammering that may ensue.

The settlement of derivatives contracts on September 29 is not only to induce additional volatility, but may exert downward pressure on cash segment.

According to a school of thought, large players have gone short on the Nifty futures and hedged their position through buying in heavyweights in the cash last week. The total outstanding at the weekend was at Rs 30,045 crore. Thus, derivatives settlement may force a reversal at the cost of cash segment in the form of substantial selling.

This theory depends on two planks - those particular FIIs, who have gone short in futures, have bought in the cash segment may resort to selling in the cash market and square off their derivatives positions.

Another school seems to think that though some FIIs have purchased in the cash segment and certain overseas funds have gone short in the derivatives segment, this does not necessarily mean those two are co-related by way of hedging positions. It could simply be buying at lower levels by a separate set of overseas funds without any bearing on any derivative position.

The FIIs till Thursday were net buyers in the cash segment. In fact, their net investment on Thursday was at Rs 514 crore, one of the largest in September. On the other hand, local mutual funds have reduced net investment in the cash market as the volatility increased.

There is ample evidence to suggest that different market players may take a divergent view on the trading strategy this week in terms of benchmarks and their constituents.

The crosscurrents may put the Sensex and the Nifty on a roller coaster till Thursday purely on short-term consideration. However, it is unlikely that they would breach their support levels and go into a long-term bearish mode.

Buyers at lower levels are likely to put up resistance against a steep decline in the Sensex and the Nifty stocks. Similarly, ahead of the next quarterly results, market players would not like to place very heavy premium on their current prices, which would limit the upside.

For many small stocks, this week may witness a temporary end to their galloping price rise spell. An overall mood for caution is likely to continue the profit taking.

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