Market seen drifting even lower

Nifty seen heading to 7,800, say derivatives analysts

The benchmark indices, down five per cent this month, are likely to correct further if the trends in the future and options (F&O) market are any indication.

Foreign institutional investors (FIIs) have built up large short positions in the derivatives market, anticipating weakness, amid uncertainty over Greece and nervousness ahead of the US Federal Reserve meeting on June 16-17, say derivatives analysts, who see the National Stock Exchange (NSE)'s Nifty slipping below 7,800.

The index has already lost 450 points, or 5.3 per cent, to 7,983 from 8,434 so far in June, due to growing concerns over a deficient monsoon, prolonged pause in further monetary easing and revival in corporate earnings.

"Last week, we saw shorts getting built up in Nifty futures and Bank Nifty futures. With the market closing below the psychological level of 8,000, participants have turned skeptical. The benchmark indices will head even lower from these levels, with the Nifty targeting 7,730. We believe the June series will be very weak," said Yogesh Radke, head of quantitative research, Edelweiss Securities.

If fears of the market correcting further are true, June could be the worst month for stocks in a little more than two years. The Nifty had earlier corrected more than five per cent in a month was in February 2013.

"The market will continue to trade volatile. There aren't too many participants who want to go long at this juncture and most foreign institutional investors (FIIs) have already unwound their long positions," said Siddharth Bhamre, head of equity derivatives and technical at Angel Broking, adding the Nifty could go down to 7,800 and the upside will be capped at 8,250.

"Despite the Nifty falling below 8,000, there hasn't been any meaningful increase in implied volatility. It is a sign of a lackluster market. The Nifty is likely to trade in the range between 7,850 and 8,200 for the June series," said Hemant Nahata, senior derivatives analyst, IIFL.

Certain foreign investors are making stock-specific bets in the F&O market, even as the continue selling in the cash market. So far this month, FIIs have sold shares worth nearly Rs 4,000 crore in the cash segment.

"Foreign investors are buying into stock futures rather than the cash market. The investment rationale is buying for the short term. Typically, for the long term an investor does cash-based buying," said Nahata.

Analysts said most stock futures are trading at a discount to the cash market price due to lack of buying interest. Also, the cost of buying in the F&O market is less compared to the cash market, making such trades compelling for some investors.

The pessimism seen in the market is across the board with no sector able to survive the bear onslaught, say market players.

Sunil Garg, head of international equity research, JPMorgan in a note last week said the Nifty index had formed a "head & shoulder" top with an 8,000 "neckline" and "a break below this has a measuring implication of 1,100 points downside. "For now, 8,000 is a critical level for the index although our base case is bearish with meaningful downside," the note added.

"There is definitely a case to go short even at this level. However, the market is fast approaching the zone of extreme pessimism. Therefore, it is better to take a neutral stand at this juncture," said Bhavin Desai, equity derivatives analyst, Motilal Oswal Securities.

Added Radke, "Participants are staying on the sidelines with the market witnessing sharp swings. The market will look forward for cues from the advancement of monsoon and on the global front, outcome of the US Fed meet will be keenly watched."