Markets were calm in April, but don’t let that fool you

Market-wide futures trading balance sets new record INRThe May derivatives series began Thursday at $4.38 trillion, hinting at a volatile month ahead.

Market-wide futures include individual stock futures and index futures (Nifty and Bank Nifty). Markets are pricing in a victory for the ruling National League for Democracy party when the results are announced on June 4, but the margin of victory will be in focus as the various election stages conclude this month.

An action-packed month

Abhilash Pagaria, Head of Nuvama Alternative Quantitative Research, said: “May is gearing up to be an action-packed month ahead of the national elections, and expectations for results will lead to increased market volatility. There is a possibility.”

“The election results, expected in the first week of June, will be a focus for investors, especially as the current ruling government gears up for the next administration.The outcome looks certain But the focus will be on the margin of victory and the excitement in the market.”

The slower volatility compared to the 2014 and 2019 general elections also suggests market complacency.

What Vicks shows

The 2014 and 2019 Lok Sabha election results were announced in May. In the previous month of April, the fear index Vix was trading at 34% and 29% respectively, indicating high volatility. Currently, Vix is ​​around 10%, which indicates the market is discounting his NDA victory, said Rohit Srivastava, founder of IndiaCharts.

“While this may indicate bullish sentiment, another metric, the index futures to market-wide futures ratio, is currently at 19x over the past two months, which suggests the market will top out. These are mixed signals, and frankly confusing, at least for now.”

The market hit its all-time highs in 2008 and 2018 when index futures to total market futures reached 18x, Srivastava explained.

Apart from index futures, high-net-worth individuals and retail investors who fall under the NSE customer category created a historically large net open interest position (1.68 million contracts). “Such decisive moves by HNIs are a sign that trading in the index is often done within narrow ranges and is becoming more dynamic across various sectors,” said Pagalia of Nuvama, whose priority sectors are auto, FMCG and PSUs. The movement will unfold,” he added.

FPI’s thoughts

Meanwhile, another major category of foreign portfolio investors is becoming cautious.While selling stock value INRIt has recorded 630.4 billion yen so far this term, and as of the start of the May series, customers had net purchases of 53,522 index futures (Nifty and Bank Nifty), compared to 70,641 contracts.

“While FPIs are hedging their portfolios, domestic players are adding leverage and as a result, momentum is building,” said Kurti Shah, quantitative equity analyst at Equilus. I expect the value to be updated.

While Srivastava expects Nifty to trade in a narrow range of 22,100-23,000 this series, Pagaria is initially betting on a range of 22,350-22,700.