The Hindu Business Line : Rising volume and falling market

Chennai, Nov. 12 The presence of “day-traders” in large numbers is clouding any conclusion of the end of a “bear phase” in the stock market, despite the contrary signals emanating from the daily trading volumes in the last few days in the F&O segment, say analysts.

The period saw trading volumes rise on the days when prices fell. In contrast, volumes were muted on the days when prices rose.Generally, in the cash segment, rising trading volume with sharp spurt in price is considered as representing a bull market. In contrast, falling volumes accompanies by a drop in prices is a feature of a bear market.

Trends

In the case of derivatives (contracts in the future values of individual stocks and indices) segment, however, trends in the volume of open interest (outstanding sale/purchase contracts which have not been closed out at the end of the day) will also have to be factored in. On days when the market fell, while volumes have risen, open interest positions have also witnessed a drop.

The fall in both open interest and prices suggests, on the face of it, the potential for a trend reversal or an upward movement in price in the days ahead. This also happen to synchronise with a climax of exit by bears who had until then had a negative outlook on prices and who are now closing out their positions by becoming purchasers of stocks/derivatives of stocks and hence the rise in trading volumes. Logically, then, this should clear the way of the market to move up or, in other words, the end of the bear market.

However, market participants do not think that our market has bottomed out yet. They attribute the evidence of the market registering a large trading volume even as prices are falling and open interest declining to the phenomenon of day-trading activity.

Day traders are going short on the market at the beginning of the day and closing out the position by end of the day and booking a neat profit. Equally, they are quick to take the opposite view at the slightest sign of a reversal of market sentiment. The rise in volumes is thus not reflecting the beliefs of investors with a reasonable medium-term outlook on stock prices.

According to Mr Siddharth Bhamre, Fund Mangager, Derivative & Equities, Angel Broking, traders are now comfortable in shorting. “During uncertain period, they don’t want to rollover their long positions. On each rally, they are unwinding their long positions and creating fresh short positions, which increase the overall trading activity in the market on falling day.” This trading pattern would be in short-term nature, till clear trend emerges, he added.

Rising market

Mr Bhamre further added that, in a rising market generally individual stocks attract more activity than the index and vice-versa happens in the falling market.

Even though trading volumes moved up in the F&O segment on the NSE, the cash segment did not see any such correlations. In fact, the trading volume in the cash segment has been on the declining trend. Daily turnover has dwindled from a high of Rs 13,041 crore (on November 5) to Rs 8,821.63 crore (on November 11).

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