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K.S. Badri Narayanan

DESPITE the onset of the earnings season, trading activity dipped sharply at the derivative segment on the NSE.

Concern over rising oil prices and profit booking could have kept the market participants on the sidelines. With the tech majors - Infosys, Tata Consultancy Services and Wipro coming out with better-than-expected numbers, activity shifted to old-economy stocks during the latter part of the week.

Nifty outlook: Last week, we had presented a negative outlook for Nifty. As anticipated, the NSE Nifty turned weak and closed below the psychological level of 1800. This week also the downtrend is expected to continue as sentiment indicators such as put/call ratio, implied volatility and the basis between futures-spot on Nifty point towards the likelihood of further weakness and may turn volatile with earnings season.

Volatility view: The implied volatility (IV) of Nifty calls declined to 17 per cent from the previous week level of 20 per cent. The same for puts remained firm around 19 per cent levels. A drop in the implied volatility of calls and the firmness in puts implied volatility indicate the possibility of further weakness in Nifty. The drop in calls IV widened the gap between calls and puts IV; last week, the IV levels for puts and calls ruled almost at equal level.

However, only a further firmness in puts implied volatility and a drop in calls implied volatility would confirm the weakness of the market.

Put/call ratio: The put/call ratio on Nifty also point to the likelihood of weakness in the Nifty. While the volume put/call ratio remained around the previous week levels, open positions put/call ratio jumped to 1.21 (1.13).

The open positions PCR continued to remained above the psychological one-point mark indicating that traders expect a further downturn in Nifty. While traders added their puts positions, they did not go long on calls when the market fell last week in anticipation of further fall in Nifty.

Basis: The backwardation of Nifty futures also points a negative, as traders are not willing to pay premium for carry forwarding their contracts. Though the open interest positions on Nifty October futures improved week-on-week basis marginally, it was not a steady build up.

Cost-of-carry: The cost-of-carry also remained in the negative zone indicating the possibility of downtrend.

Index movement: The NSE's S&P CNX Nifty opened the week at 1817.85 and moved between a high of 1829.45 and a low of 1773 before settling for the week at 1795, a drop of 1.25 per cent over the previous week close.

Nifty futures: The Nifty October futures closed at 1791.35, a discount of 3.65 points to the spot close. Open interest positions improved to 55,559 contracts from last weekend position of 54,739 contracts. However, traders shed some positions on Monday and Thursday.

The Nifty November contracts closed at 1791.20, a discount of 3.8 points to the spot close; open positions improved to 1,251 contracts (809 contracts)

Stock futures: Activity picked up relatively in individual stock futures ahead of result season.

Infosys and TCS attracted market attention in earlier part of the week while Reliance and Tata Steel remained in focus during latter part of the week.

However, Tata Motors, Satyam SBI, ACC, Maruti, ONGC and Polaris also witnessed keen activity.

* The discount/premium of the several individual stock futures also showed some sign of weakness with quite a few counters turning into discount in respect their respective spot close or quoting at reduced premium.

* i-flex Solutions, HDFC, Bajaj Auto, M&M, Satyam Computer, Hindalco and Dr. Reddy's Lab are quoting at a premium. On the other hand, HCL Tech, Gail (India), Infosys and HLL are trailing their spot.

* Implied volatility presents a mixed view for index heavyweights. While puts IV gained for Infosys and Satyam, they fell in the case of Maruti, Reliance and SBI. However, calls IV for index heavyweights dropped barring Satyam Computer.

* Put/call ratio for many index heavy weights jumped both on volume-wise and on open-positions indicating a bearish outlook.

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