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K.S. Badri Narayanan

EQUITIES showed a firm trend, before getting spooked by the inflation numbers in Friday's trading. There was an improvement in trading volumes. The average daily trading turnover was Rs 8,113 crore last week as compared to the level of about Rs 8,000 crore in July. With the earnings season drawing to a close, activity was restricted to a few contracts. For the first time in several months, the near-month Nifty futures traded at a premium with respect to the spot close. The increase in put/call ratio and decline in the open interest position on Friday were the other highlights of last week.

Nifty outlook: Last week, we had indicated the prospect of a bullish trend in the Nifty. In line with our prediction, the Nifty began on a promising note and climbed to an intra-week high of 1658.7 in Thursday's trading. Concerns about the high inflation numbers affected the sentiment on Friday and a part of gains through the week were shed.

For the week ahead, we expect the market to be range-bound with a slight upward bias. Sentiment indicators such as implied volatility and cost-of-carry indicate the likelihood of a positive trend. The fluctuation in the build-up of open interest positions, coupled with a marginal increase in put/call ratio, may, however, moderate any upward trend.

Volatility view: The implied volatility for the Nifty calls declined marginally to 29 per cent from the previous weekend level of 31 per cent; for Nifty puts, it remained around the same level of 25 per cent. The calls implied volatility, despite a drop of two percentage points, still remains higher than that of puts; this points to a positive bias for the Nifty. With the IV of puts remaining firm, only a sharp rise in calls' implied volatility and a drop in puts' IV would confirm the uptrend in the Nifty.

Put/call ratio: The put/call ratio, however, tells a different tale. Volume's PCR inched up to 0.73 (0.71) and open position's PCR improved to 0.87 (0.76). The increase in open position's PCR indicates that traders booked profits on their call positions on Thursday when the stocks rose sharply and went long on puts when the Nifty slumped on Friday. Though a higher PCR indicates a bearish signal, it appears that the marginal increase could be due to hedging by a few traders.

Basis: Nifty futures, which were trading at a discount for about six months, started trading at a premium to the spot Nifty during the week. On Thursday, the Nifty August futures closed at 1659 against the spot close of 1654.95, a premium of about four points. On Friday, the futures and the spot were quoting at the same level of 1633.40 points. This is a positive as it indicates that buyers are willing to pay a premium for carrying forward long positions.

Cost-of-carry: The cost-of-carry also turned into positive zone for the first time after several months, confirming the positive bias of the market.

Nifty spot: The S&P CNX Nifty closed last week at 1633.40 points against the previous week close of 1632.30. During the week, it touched a high of 1658.70 and a low of 1618.20 points.

Nifty futures: The Nifty August futures closed at 1633.35 against the spot close of 1633.40. Open interest positions improved to 46,861 contracts (45,221 contracts). The build-up was, however, not a smooth one, as the open positions declined on Thursday, Wednesday and Friday.

The Nifty September futures closed at 1630.15, still at a discount of 3.25 points to the spot close. The discount has, however, narrowed down considerably against the previous week discount of 17.1 points. OI positions also saw a steady build-up to 874 contracts (352 contracts).

Stock futures: Tata Steel, Tata Motors, Reliance, Satyam, Infosys, Maruti, SBI and ACC were the most actively traded contracts.

Discounts turned into premium on several contracts, indicating a positive outlook. In contrast to the broad trend, for HPCL, Dr. Reddy's Lab and Ranbaxy, the discount widened.

Though implied volatility on calls for the active strikes declined, it remained on a par with that of puts.

As in the case of Nifty, the PCR for heavyweights inched up marginally (both volume and open positions wise).

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