The Indian market continued its dream run as the Nifty and the Bank Nifty inched higher during the week gaining around 1.4 percent and 2.5 percent, respectively.
The comeback of high beta names, rally in the broader markets and cool off in global equity volatility remained the theme for the week.
In the near term, we expect the Nifty to consolidate with strong support emerging near the 14,000-mark, with dips likely to be bought into. We expect banks to outperform as the index is close to its life highs.
The theme of rotation from growth to value is gathering pace as banking and metals remain on traders’ radar. On the open interest front, the Nifty added around 7 percent, while a huge long buildup is seen on the Bank Nifty with additions of around 30 percent seen during the week. The rally is trickling down to Tier II stocks with a huge run-up seen on midcap banks and metals.
Volatility remained under check, with US CBOE VIX down from the 28-mark to 24-mark as the uncertainty around elections ended. The US market is fueling more legs to the rally as Dow tops 31,000-mark and a fierce rally propels the Russell index above 2,000.
We expect ripple effects in our markets, with banking, metals and midcaps outperforming in the near term and headline index consolidating with bouts of profit-booking in the short term.
On the options front, in the next weekly expiry, the Nifty strike 14,200 added around 1 million shares with total OI aggregating to ~1.5 million shares. Call Writing activity is interesting with 14,200 strike calls adding 15 lakh shares with total OI of around 2.5 million. The next week’s setup indicates indices will consolidate within the trading band of 14,400-14,000 with profit booking to emerge at higher levels.
Sector-wise, rotation is seen from IT and pharma to banking and financials, with early signs of near-term exhaustion seen on heavy -weight IT stocks. Higher levels are likely to attract profit-booking in IT stocks ahead of earnings. Strong momentum carry forward is seen on metal stocks, with a fresh breakout on Hindalco and Tata Steel leading the way.
Banking stocks have seen bullish breakouts on the likes of IndusInd Bank, Axis Bank and RBL Bank, while Kotak Mahindra Bank lost mild ground with a hint of long unwinding at higher levels.
FIIs remain joker in the pack
Strong cash-based buying continued from FIIs, while large hedged trade was seen on January 6 as they bought around 8,000 crore worth of options ahead of the binary event of the US poll verdict. Index futures long to short ratio remained on the higher end with ~3.5x levels, while the focus is shifting towards sector rotation with the index likely to find a breather in the current setup.
Strategy for the next week:
Short Strangle (Expiry January 14) 1:1
Sell Nifty strike 14,000 put and Sell 14,400 Call with net outflow ~105 points
Target is 20/10 points on total spread
Stop loss is 159 on total spread
Rationale
We expect consolidation in markets after the recent whipsaw as significant cool off seen on index ATM options.
Now options setup suggests strong support at 14k zone, while the call buildup is hinting that the upside is likely to be capped for the week.
Payoff: Short strangle spread Nifty
The author is Senior Derivatives Analyst – Institutional Equities, YES SECURITIES
Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
