Market sentiment at its lowest in 5 years, suggests rally ahead

PALAK SHAH | | Updated on: Nov 28, 2021

Data show that last Friday, the PCR touched 0.68 to breach the earlier low of 0.71 in November 2016

Data show that last Friday, the PCR touched 0.68 to breach the earlier low of 0.71 in November 2016

Markets have traditionally staged a recovery after Put-Call Ratio plummets

Mood in India’s stock markets is the most bearish in the last five years since the 2016 demonetisation of high value currency notes, if one were to go by the derivatives market Put-Call Ratio (PCR), a key technical indicator that captures investor sentiment. Put and Call are high risk derivative options contracts and history shows that the stock markets have staged a strong recovery or rallied in the following weeks and months each time the PCR hit a new low.

Sign of pessimism

A declining PCR is a sign of pessimism. Data provided by Indiacharts show that last Friday the PCR touched 0.68 to breach the earlier low of 0.71 in November 2016, a level which was recorded just days after the demonetisation announcement by Prime Minister Narendra Modi. In November 2016, the Nifty and Sensex had crashed by 11.73 per cent from their peak post Modi’s announcement. This month, the Nifty and Sensex fell by 8.7 per cent from their peak and much of the decline came post Modi’s announcement of the repeal of the three farm laws and news of another likely Covid wave.

Historical comparison

“History shows that markets have rallied strongly when PCR reaches an extreme level. It is all about historical comparison and interpretation. The PCR tends to move up and down with the market, and therefore, low readings show oversold market situation and a high means peak optimism,” said Rohit Srivastava, Chief Strategist, Indiacharts.

Srivastava says that the current data show wider market traders are more bearish now than they were post demonetisation. “Such negative sentiment should be a contrarian indicator for the markets that is overdue for a complete reversal and ripe for a strong rally,” said Srivastava.

Indiacharts data shows that the net OI (open interest), which is the value of outstanding Calls minus that of the Puts after the November month derivative expiry was still at ₹1,10,390 crore, indicating that the positions were not fully reversed. The same was at ₹90,882 crore on March 17 this year when the Nifty and the Sensex had declined sharply. After months of rally, the OI touched a high of ₹135,793 crore on July 29 and the same stood at all time high of ₹185,478 crore in November this year.

“What each new record at higher levels signifies is the confidence to short (sell) the market. But as the PCR is at a low, markets have always followed up with a rally,” said Srivastava.

Published on November 28, 2021

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