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K.S. Badri Narayanan

THANKS to the Finance Minster's modifications on turnover tax proposals, trading volumes picked up in the derivative segment on the NSE. According to the FM's new proposal, derivative transactions would now attract a tax on turnover of 0.01 per cent as against the initially proposed 0.15 per cent.

Strong quarterly financial performances from Indian Inc also led the market momentum. As a result, average daily turnover on the NSE shot up last week to Rs 7,364 crore against the preceding week figure of Rs 5,998 crore.

Nifty outlook: The outlook for Nifty has turned bearish. Sentiment indicators such as put/call ratio, implied volatility and cost-of-carry point to a negative bias. In this backdrop, any upward trend in the Nifty can be used to book profits; shorting futures can also be considered. Traders should, however, have tight stop-loss in positions.

We had mentioned in the previous week column a positive bias for the market with range-bound movement likely. The market ended on a firm note; prices move in a wider band than we expected; this was due to the FM announcement on transaction tax.

Volatility view: While the calls implied volatility saw a steep fall, the same for puts relatively remained firm around the previous week levels. The steep fall in calls volatility widened the gap between implied volatility of calls and that of puts; the calls IV fell to 23 per cent from the previous week's level of 34 per cent; for the puts the IV was around 30 per cent (34 per cent).

Implied volatility (IV) is the market's perception of the volatility of the underlying security. The drop in calls implied volatility and stability in puts implied volatility provide a bearish signal.

Put/Call ratio: While the volume put/call ratio declined sharply to 0.49 from the preceding week levels of 0.65, the open interest put/call ratio jumped sharply to 0.93 (0.79). While the drop in put/call ratio generally perceived to be bullish signal, the carry over of put open positions, as suggested by OI put/call ratio, indicates that traders have a negative view of the price trends.

Cost-of-carry: The cost-of-carry of Nifty futures, which has been in negative territory for several weeks, widened last week; this indicates the possibility of markets drifting to lower levels.

Nifty movement: Last week, the Nifty, pierced the 1600-mark and closed at 1601.60 against the previous week close of 1558.80. During the week, it moved in a wide range of 55.5 points between the high of 1610.85 and a low of 1555.55 points.

Nifty futures: The Nifty July futures closed the week at 1595.20, a discount of 6.20 points to the spot close. (Previous week, the discount was 10.35 points.). Open interest positions improved to 55,997 contracts (52,663 contracts).

Much cannot be read into the convergence of July futures price with Nifty spot price as the prices tend to converge, when the contract approaches expiry. The July series expire on Thursday.

The Nifty August futures closed at 1583.05, a discount of 18.55 points (20.25 points) to the spot close. Open positions improved sharply to 5,873 contracts (1,398 contracts).

The firm backwardation in Nifty August futures also points towards the possibility of weakness in the Nifty.

Stock futures: Despite this being the earnings season, trading activity was cantered around only a few contracts such as Tata Motors, Tata Steel, Reliance, Satyam Computer, Maruti, Infosys, Mahindra & Mahindra, SBI and ACC.

* The backwardation in several counters remained around the previous week levels;

* It has widened for a few contracts such as BHEL, BPCL, IOC, ONGC, the CNX-IT Index, Bharat Electronics and Punjab National Bank;

* In the case of Hindalco, ITC and Satyam Computer, the discount narrowed considerably. Hindalco August futures now trade on a par with its underlying equity while Satyam trades in premium of one point to its underlying close;

* Implied volatility for puts in most contracts remained relatively firm; the same for calls dropped sharply. Fr Tata Steel, implied volatility of puts, however, dropped sharply while that for calls jumped sharply pointing to bullish trends.

* While, volume put/call ratio for most contracts declined, the same on open-position wise improved sharply signalling negative bias.

FII activity: The sharp rise in volumes suggests increased retail participation as foreign institutional investors' cumulative position as a percentage of total gross market position declined to 19 per cent.

They were net sellers to the tune of Rs 30 crore during the week and were not as active as they have been in the past.

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