Markets may remain volatile ahead of Feb F&O expiry

Despite continued heightened volatility over fears of further rate hike by global central banks, higher inflation data and lack of any domestic triggers; the domestic benchmark indices logged modest gains for a third consecutive week. BSE Sensex added 319.87 points or 0.52 percent to close at 61,002.57, while NSE Nifty shed 87.7 points or 0.49 percent to end at 17,944.2. However, the broader market underperformed. Both the BSE Small and Mid-Cap indices fell 0.5 percent each. It is pertinent to observe that after ten weeks, FIIs turned net buyers and bought equities worth Rs4,005.85 crore in the week ended. DIIs continued their buying with purchases of Rs2,735.1 crore. In the month of February, till now, FIIs sold equity worth of Rs 1,408.36crore and DIIs bought equities worth of Rs9,188.15 crore. Observers feel that the slump in ten Adani companies that has now wiped off more than $130 billion from their combined market value may end up being a brief stumbling block in India’s growth story. The scrutiny the nation’s corporate governance scene has faced since the Hindenburg report may end up being a long-term positive rather than its own ‘Lehman moment.’ India now has attracted international attention and investors will realize that the Adani case is an aberration. Foreign fund managers are looking to buy technology, infrastructure and healthcare stocks.

However, not everyone is optimistic and some investors fear the corporate-governance concerns surrounding Adani’s firms may continue to act as a drag on Indian equities, and add to other negatives including expensive valuations and the switch of global funds toward China following its reopening. Lack of major triggers in the domestic market may see the near-term direction of the markets dictated by international crude oil prices, rupee-dollar movement and global sentiments around the monetary tightening.Markets may remain volatile on account of the monthly F&O settlement. Investors are advised to focus on overnight risk management and prefer quality picks.

Listening Post: A checklist for investors is one of the most reliable ways to improve the quality of portfolio. With stocks up in the last two years, many investors might already be struggling to avoid getting greedy and making careless mistakes. By building a checklist—a standardized set of questions you must answer before you commit to any investment decision—you can reduce the risk of making costly errors. The best way to do that is by looking at your past mistakes. That’s true no matter how you invest, even if you don’t buy individual stocks at all. Checklists help fix one of the biggest flaws in the way investors make decisions: inconsistency. How much you pay for a stock matters. But so do the quality of the company's management, how much debt it has, who its customers and competitors are, how easily it can raise prices, and many other variables. So which factors should you emphasize the most? Many investors, including professional money managers, just go with what feels right at the time. Humans are incorrigibly inconsistent in making summary judgments of complex information. Decades’ worth of psychological studies show that people are extremely good at figuring out which information they need for a decision—but do a poor job of using that evidence methodically over time. You are likely to draw divergent conclusions from identical data on different occasions, even when nothing fundamental has changed, because of variations in context, alterations in your mood, shifting demands on your attention and memory, and so forth. Use checklists to combat tendency to make the same type of mistake again and again. That should reduce your odds of being flummoxed by the unexpected. When we look to make an investment, the greed part of the brain is turned on. A checklist is like a circuit breaker that helps prevent the brain from being able to flip that switch.Investors should review their past decisions that lost moneyand can build a customized checklist based on your own history of your own failures.

The flubs made by great investors fall into five groups: valuation, or how cheap an investment is; leverage, or risks associated with borrowing; management and ownership; moats, or how well-fortified business are against competition; and personal biases.

Among the questions to be on list are: How good is management at allocating capital? Is cash flow overstated because of an unsustainable recent boom? Does the company appeal to me because of personal preferences that might be clouding my judgment? How a company makes its customers and suppliers better off. The list, of course, should include only questions you know how to answer; they need only be relevant to your past mistakes and to your current and prospective investments. Ponder what you should have asked to avoid those problems to begin with. Those are the questions to add to your checklist. One of the least appreciated virtues in investing is courage.You can be patient; the pros can't. You don’t have to be part of the herd; they do. Above all, you can be brave; they almost never are. Do not get confused about the difference between an emotional feeling and an intellectual understanding. Patient investors should be able to invert emotions, becoming uninterested when other people are euphoric and then deeply engaged when others are uncertain or fearful.

Quote of the week: The true art of trading lies in the ability to juggle conflicting pieces of evidence and come up with a balanced judgment, superior on average to the collective judgment already rendered in the marketplace

….William Gallacher

F&O / SECTOR WATCH

Ahead of the settlement week, amidst heightened volatility and sharp selling at higher levels; the Nifty managed to close in green. However, the Bank Nifty ended one per cent lower on the back of selling pressure in later part of the week. Sharp stock specific movements continued to unnerve the traders. In the Options segment, Maximum Call open interest was seen at 18,000 strike, followed by 18,500 and 18,100 strikes. Call writing was visible at 18,000, 18,500 and 17,900 strikes. On the Put side, there was Maximum open interest at 18,000 strike, followed by 17,500 and 17,800 strikes. Put writing was seen at 17,900, 17,600 and 17,800 strikes.The significant rise in open interest (OI) build-up at 18,000 strike on both Call and Put sides showcases the tug of war between bulls and bears. Implied volatility (IV) of calls closed at 10.89 per cent, while that for put options, it closed at 11.57%. The Nifty VIX for the week closed at 12.89 per cent. Low PCR in Nifty at 0.89 suggests that Call writers are more aggressive in the current indecisive phase. Going by the available option data, the trading range for the Nifty could be 17,800-18,200 levels for coming sessions. Bank Nifty has a strong resistance around 41800-42000 zone. Sectorally, buying interest was seen in Infra and IT stocks, while banking and pharma stocks remained under pressure. With Q3 results season coming to close, analysts have begun making projections for different sector for coming quarters. IT, banks and auto stocks reported a solid set of numbers. New-age tech companies have reported results that are on track with growth. This is making the investor sentiment positive regarding the space. Banks had a very good quarter reporting robust net interest margin (NIM) and credit growth. Non-performing assets (NPAs) have been on a decline, making them more favourable for the sector. The growth was led by both Private and PSU banks. Auto majors have reported robust earnings due to the demand during the festive season. Project execution has sparked a growth cycle for capital goods companies, which have seen their order books fill up. However, half of the listed companies from different sectors witnessed their margins shrinking showcasing a full-blown impact of the increased input expense. Chemicals and pharma were among the most affected sectors. Global demand had been severely impacted for the companies, which hurt exports. The cost-push pressure also dealt a double blow to the stats at the same time. The quarter has also been disappointing for consumer durables due to a dip on account of the high inflationary costs and low demand. Stock futures looking good are Berger Paints, ITC, M&M, TVS Motors, OFSS, PI Inds and Ultratech. Stock futures looking weak Bata, Coforge,Lupin, Marico, Sun Pharma and Shriram Finance.

(The author is a senior stock market analyst and former vice-chairman of AP Planning Board)