Markets give up expiry-led gains on Friday

Nifty down 1.6% to 8809 points led by financials as corporate earnings continue to be a mixed bag; Coal India issue sucks out liquidity from the market too

The 50-share CNX Nifty fell 1.6 per cent on Friday, the first day of the new futures and options (F&O) series, to close at 8808. The 30-share Sensex fell 499 points. The market's fall on Friday has ended the 10-day upmove of the markets, which strategists believe was anyway a stretch. Sahaj Agrawal, deputy vice president- derivatives research, Kotak Securities, said: "Expiry day (Thursday) started on a negative note on account of global cues but as Nifty approached expiry, buying was seen in frontline stocks pushing the index towards 8950 to end the series with gains of 9.8 per cent."  Strategists believe that one of the reasons why the markets fell on Friday was also to adjust for the unexpected spurt on Thursday, thanks to expiration of the January F&O series. 

 
Nitin Jain, president and head global asset management and capital markets at Edelweiss is of the opinion that Thursday's one per cent upmove of the Nifty was largely expiry-led and that the markets have formed a top in January. The clean-up had to happen and the correction was largely technical in nature. "I suspect we may have formed the top for January as corporate earnings are not as good as expected. It will take another quarter or two before upside surprises start and rerating happens," said Jain.

The market was beginning to appear significantly stretched in the face of earnings not keeping pace with expectations. Bank stocks came under selling pressure, as results of two key banks didn't meet expectations. PSU banking major Bank of Baroda reported disappointing third quarter earnings. SBI and PNB were down 4-5% each. Bank of Baroda slumped over 11% after reporting a sharp 68% year on year (YoY) drop in net profit at Rs 334 crore for the third quarter ended December 2014  due to higher provisions for stressed loans and tax provisions.

Private sector banking leader ICICI Bank dipped over 5% to Rs 358 on National Stock Exchange after the bank said that its net non performing assets (NPA) for the quarter ended December 2014 (Q3) stood at 1.27 per cent against 1.09 per cent in September quarter. The gross NPA was at 3.40 per cent as against 3.12 per cent a quarter ago. Given the mixed trend in corporate earnings, markets are not ready for a re-rating and any further rise in the benchmarks would make the markets stretched.

The BSE Bankex plunged by over 3 per cent followed by other indices such as consumer durables, metal, capital goods, FMCG, healthcare and oil & gas, all dropping by 1 per cent each. However, realty, IT and power sectors ended in positive zone.

Another reason for the sharp movement in the benchmarks on both sides (upwards and downwards) is because retail investors and traders are back and so also is leverage. At the first sign of a disappointment, traders tend to move out. Indian markets, like other global markets, have seen very little volatility over the last three years. Thus, any bout of selling can cause fluctuations. Analysts, however, believe it is not such a bad thing. A 3-4 per cent correction in the market is healthy and can prove to be a buying opportunity. Even from a technical point of view, Sahaj Agarwal of Kotak believes the Nifty continues to remain in an uptrend with support seen at 8775 levels. "On the higher side 9300-9350 can be tested. Options open interest build up is seen at 9000 calls and 8800 put options indicating a narrow range for the initial few trading sessions. Breach of 8775 is expected to invite significant selling pressure," he says.

Also, Friday also saw a big issue like Coal India hit the market, which has sucked out some of the liquidity from the market. The issue has been oversubscribed, which suggests that there is appetite in the market. Any correction of up to 4-5 per cent is healthy says Nitin Jain of Edelweiss.