Over-Sentiments Play in Indian Capital Market

Monday morning witnessed unusual opening drama in Indian Capital Market. Saturday, when the election results were announced, India Inc. expected that SENSEX may gain by 800 points. But beyond their expectations, the SENSEX went up by 2110.79 points (17.34%) and touched 14284.21 and Nifty went up by 17.74% and touched 4323.15. Consequently both the markets were closed for the day for the rest of the day at 10.30 am since the 20% circuit breaker level prescribed by SEBi was crossed. The sentiments played heavily because of the overwhelming victory achieved by the UPA at the Centre and the assurance that the government lead by Dr. Manmohan Singh would continue to rule India. Market were also relieved when the results that the Leftists could play no role in reform process and Dr.Singh will have free hand to re-shape the economy. This became a great solace to the investors. Hopefully demand for shares increased heavily, but those who were holding the scrips were not ready to part with it hoping to reap a higher profit expecting a further upward rally. This sentiment, tough not permanent, is not expected to melt down overnight. If the sentiments sustains and FIIs become more vigorously active in the mrket, I feel that the SENSEX may touch even 18000 and Nifty may cross 4600 by this weak end . Hence I am of the view that it is better to book the profit and take a new position. Since the market is expected to be volatile in the coming days, keeping a long position will be too risky. If the market goes up as expected the Mutual Funds may be able to offer a better NAV and it is advisable to redeem the MFs as and when the NAV crosses the break-even level. Following over-sentiments will not be advisable at this moment.

Indians Prefer Spot Trading than Futures Trading

After 7th year of introduction of equities futures and options, the maximum traded volume has seen only in the near month contracts. Far month contracts are either illiquid or less active. The National Stock Exchange has started long term options, which has wide popularity in other world markets, has attracted very few investors in India. Even the middle month contract usually get investors attention only after the mid of the contract month. This anomaly is partly due to low participation of FIIs and DIIs due to legal constraints. Here one has to think about the usefulness of derivatives, which is used to find the future price of an underlying asset.

In the commodities market too, we have this problem, the near month contracts are having higher volumes than far month contracts. If the buyer and sellers are very strong (powerful), then this trading pattern will have severe negative impact on the price.

The international commodity market (we are discussing on TOCOM Rubber) will guide us a lot to solve this anomaly. There (in TOCOM) a broker who is holding October futures of rubber 100 tones, is allotted to hold only 20 tons in June, 40 tons in July, 60 tones in Aug, 80 tons in September and so on. By doing so future contract of the far month will have higher volumes and higher open interest. In this situation brokers will always advise investors to create big positions in the far month contracts. Near month contracts will have less volume and open interest, but all contracts become liquid.

SEBI and FMC should take necessary steps to implement a trading system in equities and commodities market then only investors can trade more wisely than the present state. To solve this issue, SEBI and FMC can follow the following method. For example now in equities market we have May, June and July futures made available. If a broker holds Rs. 9000 crores worth position in July, then the broker can hold Rs. 3000 crores worth contracts in May and Rs. 6000 crores worth position in June. By doing so, arbitragers will look after the price discrepancies.

The article illustrates only the necessity of having higher volumes in equities and commodities derivative market, rather than activities confined to only the near month. By implementing this, volumes will also grow substantially due to arbitragers, which will bring more transparency to the market. If no regulatory reform would not taken place in near future it is better stop this futures market for equities and commodities.

Research Team,
Derivative Research Forum (www.derivativeforum.com)
Centre for Resource Development and Research,
Aluva 683 108. Kerala. India

FEVERISH STOCK MARKET

“The outbreak of swine flu in Mexico killed 150 people and spread to nations as far as Spain and New Zealand” I was scanning through the News Paper and my eyes struck on this news clipping. I was eager to know more and voraciously read the whole story. The news clipping also described the swine flu as the major epidemic after mad cow and avian influenza. I found that world financial market reacted immediately and the bench mark indices of France, Germany and U.K were down by 1.9 to 2.54 per cent. Among the Asian indices Seoul Composite went down by 2.95 per cent and Nikkei 225 slumped by 2.67 percent. I learned that Swine has entered the borders of already sick US also. Our Sensex lost 370 points and Nifty lost 108 points. Oops! I lost around Rs.5000! I should have wound up my position at least at the opening rates. But I didn’t know that the market can catch fever.

Suddenly I remembered what I read in a web article. The market acts on current information. So any sentiment can create a wave in the market. So the swine fever also can play sentiments in the market. The sentiment here was fear of epidemic. If an epidemic outbreaks, the country may have to spend substantially on curative as well preventive actions. The expenditure will be passed on to the public in the form additional taxes or surcharge and the cost of companies can go up. The epidemic also can reduce consumption thereby a reduction in sale which will pull down the bottomline of manufacturers. The importing countries will be cautious in buying goods form other countries which will affect the exports; a loss of foreign exchange. So the swine fever can pull down the economic activities in the country, if it spreads to our territory also. Fortunately, it did not happen and the government still assures us that there are no cases of swine fever in India. Still we must be cautious as any passenger from Mexico, Spain or New Zealand can import the virus to India at no cost to them, but will turn costly to our economy later.

Thus the whole week passed under the pressure of fever and at the end I was relieved when the market closed at SENSEX 11403 and Nifty 3473. That was a great relief for me. At last I can recover what I lost. But I relief did not last, when I found from the calendar that the market was spending holidays for the next 4 days. Friday night, before going to bed I prayed to God “Oh! Me Lord! Please recover the market from the fever and keep it healthy!”