>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty May series witnessed an unwinding of 8.88lakh shares in OI with rise in futures price by 1.41% depicting some short covering in the Nifty. The premium slipped into a discount since participants were hesitant to carry overnight position on account of‘Stress Test Result’ in the US

• The options data shows humongous addition of OI in the 3800 Call amounting to 18267 contracts with rise in volume and drop in IV from 49 to 47.56. This has now made the 3800 Call the largest Call option base with3.94 million shares in OI. Additions in the range of 2500-4000 contracts were seen in Call options ranging from 3900 to 4200. On the other hand, the 3600 Put added 10700 contracts followed by nearly 6500 contracts addition in 3500 and 3700 Puts individually. Call writing continues in the 3800 Call suggesting strong resistance for the Nifty at this level. Put writers were seen active in 3600 as well as some in the 3700 strike price. This further suggests the market may find support at 3600 for a couple of sessions to come on a closing basis

• The FII Index options data shows net sale of Rs 327 crore with a rise in OI by 3.93% Nifty Options OI Distribution Nifty OI vs. Futures Price.


To see full report: DERIVATIVES 080509

>Daily Calls (ICICI Direct)

To see report: CALLS 080509

>Daily Market & Technical Outlook (ICICI Direct)

Key points

• Market outlook — Open flat with a negative bias
• Positive — FIIs buying consistently
• Negative — Crude rising again, MF selling

Market outlook

■ Indian markets are likely to open flat and trade with a negative sentiment. Some profit booking cannot be ruled out later in the day. The announcement on the stress case needs some more clarity and markets may trade range bound for the next few sessions till the fullimpact is calculated. We advise against taking aggressive trading positions till clarity emerges or the market breaks from the trading range of 3500-3750 on the Nifty

■ The Sensex has supports at 11900 and 11730 and resistances at 12270 and 12550. The Nifty has supports at 3640 and 3600 and resistances at 3730 and 3760

■ Asian markets were trading flat to negative in the morning session

■ US stocks slid on Thursday as investors took profits from the technology sector’s recent surge, while analyst downgrades hurt telecoms and a tepid response to a government bond auction raised fears about public finances. However, stock index futures rose after the official government results were released that said leading banks would raise $74.6 billion to build a capital cushion. Officials hope this will restore faith in financial firms and set a course out of the deepest recession in decades. Shares of several major banks, includingCitigroup rose after the bell, with Citi gaining 6.6% to $4.0 after regulators said the bank’s capital need was $5.5 billion. Citi had ended the regular session down 1.3%. There was no major negative surprise from the stress results

■ Stocks in news: Reliance, Essar Steel, DLF, Religare

Technical Outlook

We said, "profit-booking may prove temporary if candle's low at 11899 gets protected today, though the shadow area remains a challenge on the upper side." The day saw a volatile trade holding 11899, but not crossing the shadow area. The 8% gains in Metals aided Sensex to finish 1.3% higher. A/D ratio turned +ve 5:1.

The action formed a small bull candle retracing 61.8% of Wednesday's bear candle. Failure to trade strongly above the day’s high of 12144 would prove the corrective nature of yesterday's action and test the lower range of the sideways action of the past three days. It will be positive otherwise.

To see full report: OPENING BELL 080509

>Le Grand Fromage (FIRST GLOBAL)

After the fling…the Pregnancy Test

All of us have been really naughty last few weeks. We have done unspeakable things with the unmentionables. And have done these with highly unsafe practices.

So I though it a good idea to do the right thing and administer a pregnancy test to ascertain whether there is indeed a bull embryo somewhere inside this rally.

So how does one perform a pregnancy test on a rally, to figure out whether it is a bear market rally or an incipient bull market?

Well, the medical approach is to pee on the rally, and see if the color or some such thing changes. I have pee-ed on the rally last 20 days and its color hasn’t changed (well, it has changed a bit in the developed world, but not so much in Emerging Markets.)

So the medical approach has to be discarded in favor of a more financial approach.

And here’s what I decided to do:

The Pregnancy Test for the Rally

Let’s first pay our devoirs to the rally. It has killed both the bulls and the bears, in a salute to the resurgence of Communism. It has leveled the playing field, making everybody poor. The bears have been cleaned out, and surprisingly, even the bulls (like the Long-only funds) haven’t fared too well at all, because they were all overweight “quality”, and “quality” has been an absolute dog.

Quality has been an absolute dog…

Now, there is something in this statement that’s making me think: how can “quality” be a dog in what is supposed to be a bull market?

Let’s start with this central theme and commence our Pregnancy Test (medically-inclined folks can still take a pee).

I asked my quantitative guys to run the following back-tests for the period April 2002 to October 2003. This is the period in which we saw the last bear market wend its way slowly to a global equity market trough in March-April 2003, and then the famous bull market began…yes, the same one that led us to this sorry mess.

The objective of the investigation was simple: does the trade change when a bear market metamorphoses into a bull market? That is, do the countries or sectors, that you are long/overweight, short/underweight, need to be changed in your portfolio composition, when a bear market ends and a bull market begins? In other words, do you have to undergo a wholesale reshuffle of your portfolio, in fact, turn it upside down, when a bear market truly ends, and a bull market truly begins?

The thought for this investigation came from listening to the pain of clients: even the smart guys on hedge fund side who went net long on March 9, still hurt badly…they either remained flat for this period, or made a bit of money, or worse still, even dropped a bit of money.

Even the long-only guys hurt badly, for they were weighted in favor of “quality” or defensives…the consumer plays, the utilities, the healthcare/pharmaceuticals, etc. all of these hurt performance big as the performance disparity between them and the “junk” was nearly two times, in most cases.

So we decided to do a bit of snooping around. Nothing very arduous, mind you, for at my age, the mere act of stirring from my analyst armchair is quite enough exercise. But just enough to get a clue as to whether this is indeed an incipient bull market, or merely a tarted-up bear market rally, painted knees and all.

We did this at multiple levels: Emerging Markets country bets, ie, if you were long the best performing emerging markets in the 12 months preceding April 2003, and short the worst ones, in the same period (essentially the last one year of the previous bear market), how would your performance have been in the 3 months, 6 months, 9 months and 12 months after the start of the last bull market, assuming you made no change to your portfolio in that period?

The same question was asked for Europe: if you were long the best performing countries in the bear market and short the worst ones, made no change to your portfolio when the bear market transitioned into the bull market, in April 2003, how did you do?

For the US, we asked the same question, except that we did it on a sectoral basis: what if you were long the best performing sectors of the bear market, made no change to your portfolio in April 2003, then how did you do in the early stages of the bull market.

We asked the same question, as we did for the US, of an Emerging Market called India. The rationale being that India has a vast number of sectors, like the US, and unlike most other EMs, which are dominated a handful of sectors.(The long only funds can simply replace the terms “Long” and “Short” with “Overweight” and “Underweight”. Separately, the base of the analysis was either sectors or countries, and not stocks.The reasoning behind this was that stocks can undergo very fundamental changes in a cycle, through mergers, divestitures, change of strategy, etc, which can make comparisons across periods difficult, and prone to wrong conclusions.)

To see full report: LE GRAND FROMAGE