The Week Ahead 26/03/2007 – 30/03/2007

First of all, I should say sorry to my readers since these days I am coming up with very less amount of posts. Professional commitments are major factors. I will try my best to post regularly.

Introduction of financial derivatives is undoubtedly the major financial milestone of last century. The idea of derivative instrument was common in commodity market since historic age. But this was applied first in financial market only in the middle of 20th century. Since then, use and variety of application has increased in many folds. This has, in one hand, made way for leveraged speculation and on the other side added complexity in the scenario. Breadth and width of the financial markets have also increased. Today global investors, with better risk appetite, regularly use derivatives to gain from global market trends. As these instruments are highly leveraged, they service these positions with highly analytical stance. For any change in the parameters (like interest rate, market variance in any country and many others) if their risk management model indicates slightest trend reversal, they do unwind their positions. These often make the market volatile.

In recent days we have experienced two such cases – unwind of yen-carry trades and crash in US sub-prime lending market. In both of the cases, over leveraged market positions reacted badly and concern was same for them and that is rising interest rate.

These two global practices have created ripples in Indian equity market, both directly and indirectly. Unwind of yen-carry-trades has affected India directly by pushing the Japanese capital out of the country while sub-prime lending market mishap has weakened the global sentiment.

After several weeks’ down trend, Sensex closed positive in weekly chart. For last quite a few days, I remained bearish over the market, but the major incident that I had discounted is phase of f&o contract rollover. Through out the month nifty future remained in discount. So large amount of short positions were open. Even 60% rollover of the total open shorts can push the market up and that’s what happened in the market last week. Huge volume in F&O segment simply indicates the fact. Over 300 points of rally from the bottom in Nifty50 has been experienced. And it closed pretty above my decisive level of 3850. This is a strong signal. But there is no strong news around. Besides, inflation counter is not in much good shape. It’s still clocking at near 6.5%, which is pretty higher then the rate (5-5.5%) targeted by RBI. Even with a bonus of Rs. 100/- per 100 kg, government remained unsuccessful in convincing farmers to sell their wheat to the government. Public distribution can potentially get a hard hit. And if inflation number take any more jump, monetary authority can come up with more tightening. That would undoubtedly spoil the investors’ sentiment.

So, concern regarding further down side is not completely wiped out. Consistency above 3850 will indicate a consolidation in a range of 3750-4000 for Nifty50. And if my doubt emerges as a fact then we can expect more downside. I am extremely sorry if I am hurting your bullishness.