May Expiration Data Hints at Strong Bull Run

The stock market is considered a barometer of the economy. If the trading activity in the Indian stock market is any indicator then one can firmly forecast that the Indian market is poised for a stronger and secular bull run going ahead. An indication of this effect was available from the recently concluded May series of Futures and Options (F&O) that ended last Thursday.

The National Stock Exchange (NSE), which is the world’s largest derivatives stock exchange, gives participant wise open interest (OI) data. OI is the unsettled position in the market taken by the investor and forms part of the overall exposure the investor has taken in the market. The exchange divides the participants into clients, foreign portfolio investors (FPIs), Domestic Institutional Investors (DIIs), and proprietary books (trades undertaken by the brokers in their personal capacity).

As per the data provided by the NSE, the clients which are predominantly directional investors, have a net long OI which is the highest in the last 3.5 years.

“This shows that there is extreme bullish sentiment prevailing in the market. This is also borne out by the spreads prevailing in the market which was upwards of 7 per cent annualised”, said Deepak Gupta, VP- Derivative Sales, Emkay Global Financial Services.

Nifty May series settled with the gains of 2.97 per cent as it closed at 15,337 compared to April close of 14,894 levels. It continued the formation of higher high-higher lows in all four weeks of the series and moved in between 14,400 to 15,400 zones.

“Now, till Nifty holds above 15,150 zones, we are expecting a fresh move towards 15,500 and 15,800 zones,” said Chandan Taparia, Derivative and Technical Analyst, Motilal Oswal Financial Services Ltd (MOFSL).

India VIX fell down by 14.55 per cent in series from 23.30 to 19.91 zones and lower volatility with a higher market base indicates that bulls are likely to keep their tight grip on the market, Taparia said.

Another indication of why markets are expected to scale new highs going ahead is that despite FPIs, who were until recently were the prime movers of the markets have turned net sellers in the cash market in the last two months to the tune of more than Rs 21,000 crore. “This selling has been absorbed by retail buying and the market has continued to move higher,”Gupta of Emkay Financial said.

Sometimes such extreme bullishness can serve as a contra indicator and signal that the market is peaking out. But until some other indicators also signal peaking-out scenario, “We will assume that the current bullish sentiments will continue to take the markets higher,” Gupta opined.

On the option front, maximum put OI is at 14,000 followed by 14,500 strike while maximum call OI is at 16,000 followed by 15,800 strike.

Call writing is seen at 15,300 and 15,800 strike while put writing is seen at 15,000 then 14,700 strike. Option data suggests a trading range in between 15,000 to 15,800 zones for Nifty.

Taparia said, “Higher rollover compared to last three-month average, rising put-call ratio and falling volatility indicates that bulls are likely to hold command to take the indices on new lifetime high zones.”

Naveen Kulkarni, CIO, Axis Securities, said, “We could see some profit booking, as Nifty has crossed its previous high, but the long-term structural story is intact for the Indian market. Broader market looks attractive at the current level and the sector rotation will play a crucial role to generate alpha in the near term."

Though market mood has turned bullish, expressing a word of caution, Gupta said, many of the stocks are currently trading in overbought zone and “We suggest that one follows a stock-specific approach while investing. A case in point is the metals index where the stocks were very overbought and there was a sharp correction this month,” he said.