F&O tracker: Lower cash volumes hint at lack of strength

By Hemant Nahata, IIFL

MUMBAI: Nifty staged a smart pull back (4.4%) from Tuesday's low of 7540. The rally has been broad-based with most of the beaten down sectors like Auto, Banks and other rate sensitive exhibiting buying momentum. However, we believe the rally may not have legs to stretch; our view is due to a) drop in cash volume during pull back period, b) dip in % delivery volumes and c) no visibility of any short covering.

The daily average NSE volumes for 2015 stands at 18,100cr, while last 5 days average cash volume has been to the tune of ~15,000cr (20% lesser than the ytd average). In fact, over the past two trading sessions where market has seen bulk of traction, volumes have further dipped to 13,000cr. The cash volume figures indicate current up move in the market are not supported by higher participation and thereby the strength in the current trend is lacking.

Nifty options data skew suggest heavy protection is being bought with OTM puts trading at ~40-45 IVs, while ATM puts are priced at ~29-30 levels ahead of the Fed policy event. VIX is trading at 25 levels. Any surprise from the Fed policy event could see the VIX inch towards recent highs of 32. Options build-up looks scattered both on the call front (8000-8500) as well as on put front (7800-7500) indicating no trading bias being visible.

We expect recent optimism might fade off post the CPI numbers and the market may start to mirror global market movement over the week. Stocks like Tata Chemicals and Bharat Forge, which have been under pressure despite the recent up-move in the market are likely to see further selling in case off Nifty failing to move any higher.