Stock-specific trading more likely

Amidst renewed FII selling, mixed earnings from major corporates, concerns over monsoon and a possible rate hike by US Fed in its upcoming policy meeting; the domestic market snapped three-week gaining streak and lost over one per cent during the week ended. Mounting uncertainty in both global and domestic markets has kept Indian equities highly volatile.

BSE Sensex fell 775.94 points or 1.28 per cent to end at 59,655.06 points, while NSE Nifty shed 204 points or 1.14 per cent to end at 17,624 points. However, the broader market showed good resilience and both the Mid-cap and Small-cap indices added 0.5 per cent and 0.3 per cent respectively. It is pertinent to observe that the Mid-cap and Small-cap indices rose 5.8 per cent and 7.7 per cent, respectively, since March 28. After three consecutive weeks of buying, the FIIs turned net sellers this week as they sold equities worth Rs4,643.05 crore. On the other hand, DIIs provided support, as they bought equities worth Rs3,026.27 crore.

In this month till date, FIIs bought equities worth Rs3,16.67 crore and DIIs bought equities worth Rs342.32 crore. More than 40 small caps give double digit return despite market falling one per cent. Experts believe that while interest rates seem to have peaked out, there may not be a runaway rally in mid and small-cap stocks across the board in near future. The movement will mostly be stock specific. A broader rally will happen only if interest rates fall and if investors who have made money in large-cap stocks turn their attention to mid and small-cap names. Indian market observers feel that from an economic perspective, the government has implemented significant policies to ensure that they can support the growth outlook. Bankruptcy reform, streamlining the banking sector, the investment guidelines and the policies related to FDI flows into India, all mark very significant progress. Indian growth can be substantial because of the demographic driver and India is probably the only large country with largest population in the world and still population is growing. Everywhere else, the population is either shrinking or will be shrinking relatively soon and China is the best example of that. But this population or demographic advantage can turn into a demographic curse as well and the key there is employment growth. Mixed signals are emerging from the US, Europe, and Chinese economic data. In the near term, investors will continue to analyse the earnings outcome of the March quarter and closely follow the management commentary of companies for further cues. Besides, the global and domestic factors will continue to dictate the trend of the market.

Listening Post: Are You an Investor or a Gambler? The Stock Market Knows. Small, inexperienced traders are piling into options, which can be a cheap way to hit the jackpot if you know what you’re doing. If you don't, losses can accumulate quickly. You should learn whether you’re an investor or a gambler before the market teaches you the difference. Stock gamblers are on the rise. But sooner or later, they will lose most—if not all—of their recent gains. Just look at options trading, which has been surging. Many traders use options as a cheap way to try hitting the jackpot: stock-market Sikkim Lottery. In late six months, a record 62 per cent of premiums paid for options initiating bets on rising or falling stock prices came from people buying no more than 10 contracts. (The long-term average is 34%). Nearly all such small-fry are inexperienced retail traders say experienced market players who track market sentiment. In the budget week alone, small traders shelled out crores this way—a multi month time high and nine times last year’s average.

Derived from the Latin optio, or choice, an option entitles, but doesn’t obligate you to buy or sell an underlying security at a fixed strike price anytime until the option expires. A call option can pay off if a stock rises; a put, if it falls. Let’s say you’re optimistic about a stock and it rises above the strike price of your call before expiration. You then can sell or exercise the option and earn a bigger profit with a smaller cash outlay than if you had bought the stock outright.

On the other hand, if you expect a stock to fall, and it drops below the strike price before expiration, you can sell your put. You would make more money than if you had bet against the stock by selling it short. Earlier last week, for instance, you could buy a put option on 100 shares of Infosys with a strike price of Rs1,300 per share expiring April 27. Your premium or cost was Rs30 per share. So Infosys would have to hit Rs1,270 by April 27 for you to break even. If Infosys, trading then around Rs1,335, were to fall below Rs1,270 by the end of April, you could sell your option at a quick profit. If Infosys hit Rs1,200, your options contract would be worth that minus the Rs1,300 strike price or Rs100. You paid a Rs30 premium, leaving you a gain of Rs70 per share. That’s a 240% return in less than a month. If Infosys stock doesn’t fall below Rs1,300, the most you could lose is your Rs30 premium. So why doesn’t everybody trade options all the time? Because it’s risky.

No wonder trading can become an addiction. Among the signs that someone is a trading addict: escalating trades to sustain excitement, borrowing money from friends or family to cover losses, lying about losses, and attempting and failing to quit. If this sounds like you, confess to your friends or family and get help before the market cures you the hard way: with massive losses that can wreck your life. As experienced gamblers understand, it’s vital to know what kind of game you’re playing. Some forms of gambling—blackjack and poker are good examples—involve large amounts of skill alongside luck. Others, like the lottery or slot machines or roulette, depend almost entirely on luck. Trading options involves lots of skill if you know what you’re doing—and nothing but luck if you don’t.

Quote of the week: “With a good perspective on history, we can have a better understanding of the past and present and thus a clear vision of the future

— Carlos Slim Helu

It’s far too easy for investors to lose perspective. Whenever something big goes wrong, a lot of people panic and sell their investments. Looking at history, the markets recovered from the 2008 financial crisis, the dotcom crash, Great Depression and even the Covid Pandemic, so they’ll probably get through whatever comes next as well.

F&O / SECTOR WATCH

Ahead of the expiry of monthly futures & options contracts in the week ahead, the tug of war between bulls-bears will continue with markets first reacting to Reliance Industries (RIL) and ICICI Bank quarterly numbers announced over the weekend. After witnessing three weeks of consecutive gains, market players were seen booking profits at higher levels. From the derivatives front, option writers remained active in both Calls & Puts strikes in the absence of any fresh triggers. On the Call side, maximum Call Open Interest was seen at 17,700 strike, followed by 18,500 strike, with writing at 17,700 strike then 17,900 strike, whereas the maximum Put Open Interest was seen at 17,000 strike, followed by 17,700-17,600 strikes, with Put writing at 17,600 strike, then 17,000 strike.

The Implied Volatility (IV) of Calls closed at 11.11 per cent, while that for Put options closed at 12.57 per cent. The Nifty VIX for the week closed at 11.94 per cent. PCR of OI for the week closed at 0.88 lower than the previous week indicates more call writing than put. Trading ranges have narrowed systematically over the last few days. The rate of decline in VIX also has been small enough to keep the theta players frustrated. Expect markets to trade in sideways range with Nifty having strong support zone in the range of 17500-17400, while on the higher side, 17800-17900 zone is likely to protect any sharp upside in prices. Bank Nifty is consolidating in a broad range between 42,000-42,500 and a break on either side will have trending moves. The index if it fails to hold the support of 42,000 on a closing basis will witness further downside toward the 41,500 level. The management commentary from India’s top two IT services companies namely Infosys and TCS has cautioned about customer sentiment across BFSI, technology services, and other verticals, particularly in the US. Over the weekend, Reliance Industries announced healthy growth in operating numbers across segments for the quarter ended March FY23 and the ICICI Bank reported a 30 per cent year-on-year jump in its net profit. Widely tracked companies like InduSind Bank, Nestle, Bajaj Finance, Maruti Suzuki, HUL, Axis Bank, Wipro, Tech Mahindra, Kotak Bank and Bajaj Finserv would be releasing their March quarter report cards this week.Stock futures looking good are Alkem, Bata India, Bajaj Auto, Coal India, DLF, Indigo and Trent. Stock futures looking weak are Coforge, ICICIGI, MFSL, McDowell, Metropolis and Zee Entertainment.

-The author is a senior maket analyst and former vice- chairman, Andhra Pradesh State Planning Board