Middle overs get exciting as Sensex swings with Europe

Traders unable to take directional calls as Dow takes a back seat.

The time lag is striking. Two big, local triggers in the form of Q2 results of Infosys and the August Index of Industrial Production numbers came yesterday morning, but the major Sensex move came only after the Europe markets opened. The Sensex eventually ended with gains of 421 points or 2.55 per cent — its sixth largest single-day gain this year. This was in line with gains of CAC-40, DAX-30 and FTSE 100, which gained 2.42 per cent, 2.2 per cent and 1.81 per cent, respectively.

UK’s Footsie, France’s Kak qarant (Cac-40) and the German DAX, the long and much-ignored developed market indices, are becoming the new Dow Jones for Dalal Street traders. The opening of these key European stock markets, which happens at 12.30 pm Indian time, is increasingly becoming a crucial factor in determining the direction of local stock prices and their eventual close at 3.30 pm. This is affecting traders taking directional calls when the market opens. Thus, sleepy middle overs between 12.30 and 2 pm, usually the time for lunch and chit-chat, have become as important and exciting as the two ends of the trading session, say marketmen.
 

RELATIVE MOVEMENT
Sensex-Europe correlation in 2011 (%)

TOP 10 SINGLE-DAY GAINS

DateEurope*Sensex** 29-Aug1.523.58 1-Mar-0.903.50 27-Sep5.022.95 24-Jun-0.022.89 14-Feb0.062.67 12-Oct1.832.55 25-Mar0.202.53 7-Oct0.472.32 13-Apr0.862.25 20-Sep2.122.11 TOP 10 SINGLE-DAY LOSSES 22-Sep-4.96-4.13 24-Feb-0.35-3.00 7-Jan-0.69-2.44 3-May-0.14-2.44 4-Feb0.27-2.39 10-Jan-1.14-2.38 18-Aug-5.26-2.20 5-Aug-2.25-2.19 12-Sep-2.64-2.17 20-Jun-0.40-2.04 ** Over previous day’s close
*Average move of CAC 40, FTSE 100, and Dax 
Data compiled by BS Research Bureau

According to M K Srivatsan, technical analyst, Darashaw Stock Broking, the degree of correlation with Europe has risen manifold in the last three months. “Europe was not much of a factor earlier,” he notes. “But, with governments at the risk of going bankrupt, we cannot dismiss it easily anymore. US markets have taken a back seat.”

Another senior chartist says the trading pattern has changed absolutely in the last few weeks. “Everyday, around 12:30 pm, we have a huge move depending on the opening of Europe markets. US has become secondary.”

According to a BS Research Bureau study, on eight of the 11 days when the Sensex gained two per cent or more this year, France, UK and Germany also gained and ended positive. It was only on one occasion that the Sensex ignored negative close of all these markets to close in the green. On two, it had mixed signals from Europe. Similarly, only once in 10 days when the Sensex ended with losses of two per cent or more, it ignored positive cues from Europe.

The increasing correlation is changing trade patterns in the market, say exchange officials. Until three months ago, trading activity used to be concentrated at both ends of trading session between 9am and 3.30am. Earlier, traders took cues from the US markets and decided the day’s trade, bought or sold stocks in the morning and squared their intra-day positions at the end of session. This was possible as they were able to take cues from the overnight close of Dow Jones and could judge the direction of the market at the beginning of the day, say analysts. But, in the past few months, the emerging Europe correlation has created a mid-day pit-stop for traders.

Even on Thursday, the Sensex opened above 17,000 and was trading in the green till 12.30 pm. However, after seeing the European indices go into the red, it fell sharply and closed at 16,884, down 74 points .

The increasing importance of cues from Europe, driven largely by fears of sovereign defaults, has thrown a spanner in the daily wheel of Dalal Street’s small trader, too.

“For short term players, it’s a big worry,” says Darashaw’s Srivatsan. “Traders who play for small gains either side may get stopped out because of this big mid-day movement.” Beginning late-1990s, during the dotcom boom and the bust thereafter, Indian markets were positively correlated with the US stock markets with most of these portals based there. Similarly, US cues decided the day even during the 2007-2008 crisis.