No respite seen in June as well

SMARTSHARE

May lived up to its image of a losing month. The Sensex dipped 5.04 per cent in May. The month also continued its bizarre trend of falling in even years which began with the year 1998. It also fell in 2000, 2002, 2004 and 2006. This was the ninth instance of the markets falling in the last 19 years and average loss also seen in May, which was 0.85 per cent till last year, increased to 1 per cent after this fall.

Going by history, June is not scary at all. In fact, it is rock solid. The Sensex has registered a loss in only four out of the last 18 Junes under study. Out of the last nine years, the markets have increased in eight of these Junes and if you consider the last six years alone, the score has been six by six. On average, the month has seen an increase of 2.75 per cent and the last five years' average has been 4.81 per cent.

If the record of June is so immaculate, then why are we prophesying a weak June? The signals emanating out of the derivative segment aren't all that rosy and that's one of the numerically provable reasons behind not being gung ho about the markets.

We are beginning the next series with a carry over open interest (OI) of Rs 58,605 crore, the highest so far since the expiry of December derivatives, when the residual OI was

Rs 94,315 crore with which we began the January series.

In absolute terms, the current OI is 37 per cent lower than the one with which we began the January series. So apparently, this does not seem to be an issue. But this is where one can get misled.

If we now bring the average daily volumes of the derivatives into the picture, the vision gets corrected. The OI of Rs 84,315 crore seen at the closing of the December series is 1.37 times the average daily derivative volumes of December. Compared to that the current OI of Rs 58,605 crore is 1.5 times the average volumes of May. The percentage fall in OI between December 2007 and May 2008 is lower than the volumes which have dipped more.

Though OI at the beginning of the month is seldom an issue, it could become one if the markets develop weak knees again.

Another piece of data that warns of impending danger is a high Put Call Ratio (PCR) at the beginning of a new settlement. The PCR of 2.08 is the highest ever with which we have begun the show in June series. Not at any point in the short history of derivatives trading in India have we seen this high a figure. This high magnitude of PCR indicates that Puts have been bought by wary investors.

Of the total Puts in the June series, 38 per cent of OI is concentrated in the 4,800 series and 15 per cent in the 4,700 series. There is nothing to fear here. This only indicates the support levels. But Puts have been bought for levels as low as 4,100, which account for around 11 per cent of OI.

I normally don't read too much into the last day's gains or losses, but the fall on Thursday of about 1.7 per cent in the Nifty was the highest since October 27, 2005 for a derivative settlement day.

The better-than-expected GDP data for Q1, easing of ECB norms and a fall in crude prices are things that could help the markets breath easy initially in the month of June. The second reading of the QI US GDP has come in better at 0.9 per cent which has allowed hopes to bloom. The Nifty is currently in a very tight 4,800-5,200 range. But the fact that the process of lower top and lower bottom formation has begun does not quite augur well for the month of June which otherwise has a good track record.