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More pain in store for equities
Vinod K Sharma | June 28, 2008
The agony of investors is likely to continue well into the middle of July. It is not certain how the monsoon precipitation will fare this month, but we are likely to see a dearth of buyers in the markets.
On Thursday when the June series ended, the July Nifty futures were quoting at a massive discount of 70 points to the cash market. This was the highest discount we have ever seen on an expiry day. Such a massive discount means this was a rollover of short positions.
There was more record-breaking data. The Nifty futures saw outstanding positions bloom to a record-breaking 4.8 crore Nifties on the penultimate day of the June expiry.
The third record was that the Nifty open interest as a proportion of the total open interest exceeded 63 per cent, the highest ever in the brief history of derivative markets in India.
The fourth record to be set was that of lowest proportion of stock futures to total futures - around 55 per cent. The preponderance of Nifty contracts indicates investors are hedging their portfolios and lack the confidence to take individual stock bets.
Then we have the issue of redemptions by hedge funds, who are invested across asset classes and geographies, including Indian equity. The redemptions are usually allowed at month or quarter ends.
June 30 is both the end of the month as well as of the quarter. As the markets have faired really badly during the month and the quarter, expect some stocks to feel the heat in the week beginning June 30.
Crude is another concern on the front burner. The increase in prices of petrol and diesel has not had the desired impact on demand for crude.
Prior to the price hike, refineries in China were not finding it remunerative to peddle fuel. China even had to resort to importing petrol. With the hike in end products, the refineries are finding the going better and are now importing more crude than ever.
Secondly, the much publicised meeting of oil producers, consumers and investors in Saudi Arabia was a damp squib with the Saudis serving the stale dessert of a promise to pump 2,00,000 barrels a day.
The US FOMC failed to talk of any firm commitment on rate hikes at its meeting earlier this week. This spooked the dollar, which was already licking its wounds after ECB chief Trichet kept up a hawkish stance.
This, in turn, lit a fire under the crude pot. Some sabre-rattling by the OPEC president and threats by Libya to cut production following the introduction of a bill in the US Congress that would empower Washington to sue OPEC members for cutting supplies, made crude hit an all-time high of $140.05 a barrel on Thursday before closing at $139.64.
In another development, US markets on Thursday made a new 21 month low of 11,453. The Dow has fallen 19.33 per cent from a high mark of 14,198 seen in October 2007. This is within striking distance of the mandatory 20 per cent fall which would qualify the current fall in the US markets as bear market phenomenon and not a normal correction.
On the weekly charts of the Dow, a bearish head and shoulders pattern has made appearance. Consider the 12,795 (20/04/07) level as the left shoulder, the 14,198 level seen in October 2007 as the head and 13,136 (23/05/08) as the right shoulder. The neckline is at 12,000.
The Dow has also broken a trendline that has been in place by joining the 29/10/04 weekly low of 9,704 and the 10,156 low formed in the week ending 14/10/05. But because the trend violation is in tandem with the head and shoulders pattern, we can stick our neck out and give it a level of 10,000.
All this would hold true only if the authorities don't tinker with the margin requirements or other administrative mechanisms to artificially tinker with the Nymex price discovery mechanism for crude, the calls of which are getting louder by the day.