Open interest in stock futures drops sharply to signal lacklustre phase ahead

Open interest in stock futures drops sharply to signal lacklustre phase ahead

After a momentous Budget and RBI’s rate-setting meeting, the market has opened with the residual firepower, but slowed down and consolidated for most of the week. Despite this, Nifty50 attained high of 15,257 for the first time in history. Nifty took around 18 years to reach the 7,000 mark, but did the next 8,000 points only in seven. This shows the aggression of inflows to Dalal Street and the progress our economy has made, which builds confidence among the FPIs to continue to invest in India.

After the pandemic barring September, FPIs have been net buyers of equities in India right since May, even when DIIs have been net sellers. Even in the first two weeks of February, FPIs continued to invest while DIIs sold.

In a strange development, open interest on many largecap stock futures have nearly halved from their October-November 2020 peak. This indicates that traders are refraining from keeping their positions open and are unwilling to commit at such higher levels. Therefore, it appears that neither the bulls nor the bears are inclined to take the lead in this market, implying a lacklustre phase ahead.

Moreover, SIP inflows for January have shown a decline of nearly 5% month-on-month, while equity mutual funds have seen outflows for seven consecutive months now. This continued outflows from equity funds could be because of profit taking by retail individuals at higher levels. It would be interesting to observe when this aberration in mutual fund flows ceases and domestic investors once again choose the mutual fund route to expose themselves to the equity market.

Event of the Week

Brent crude has been making headlines after a stellar start to the week, when it touched the high mark of $60 a barrel after almost a year. It has been on an uptrend and risen over 50% in just three months. This massive rise was mainly because Saudi Arabia pledged to deepen production cuts and there was renewed optimism around fuel consumption, as virus infections slowed amid vaccine rollout and the cold weather. But India being an importer of crude oil, it has been witnessing an increase in import bill, and petrol and diesel prices have been seeing a sharp rise. As an importer, if the upward journey for oil continues at the same rate, our trade deficit would see a huge jump and the rupee may come under pressure.

Technical Outlook

Nifty50 closed the week on a flat note and traded in a narrow range. The market witnessed a brief tug of war between the bulls and the bears, as the latter pushed the index lower to 14,970 level, but could not hold it there. The market has become overbought for the short term, and is trading at accelerated channel resistance, which is why the bulls are getting tired and lacking the demand needed to push the prices higher.

A similar slowdown in momentum is seen in many sectoral indices, such as Banking and Pharma as well as global indices like S&P500. The market is now confined within the immediate support and resistance of 14,970 and 15,250 level, respectively, and a breach on either side will dictate the trend for the coming weeks.

Expectations for the Week

As the market has discounted all the major events, it could experience a slow consolidation in the week ahead and may even see a short correction. December quarter corporate earnings have reached its final leg, as majority of the top companies have already announced their numbers. In all, the earnings quarter has turned out to be a bullish one for Dalal Street, as cost-reduction measures boosted PAT and a pickup in demand after the opening up of the economy aided top lines. There could be a tussle between the bulls and bears in the short term to gain clout, but investors should maintain a buy-on-dips strategy.

Nifty closed the week at 15,163, up 1.6 per cent.

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