Volumes still a cause for worry

Anup Menon

Overall Trends: The past week saw some positive sentiment emanating from the stock markets.

The broad markets have been trading in the positive region for most part of the week. On a week-on-week basis, the BSE Sensex has moved up by around 3.7 per cent.

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The S&P CNX Nifty also gained close to 3.6 per cent during the week. The futures prices moved in sympathy with the cash markets. The Sensex August maturity moved up by 2.9 per cent on a week-on-week basis. Similarly, the same maturity on the Nifty moved by 3.6 per cent indicating a high degree of correlation between the spot and futures markets on the NSE.

However, the upward movement in the markets have taken a toll on volumes. This is perhaps an indicator that market players tend to use the futures market mainly for the purpose of hedging.

Trading statistics: Volumes in the BSE and NSE tumbled as the cash markets registered gains. The longer end maturities failed to attract market interest during the week. Overall volumes on the Sensex contracts declined with total volumes of 845 contracts as compared to 1,227 contracts recorded the week before. The impact on the Nifty contracts was worse with total volumes tumbling by around 43 per cent to 331 contracts during the week as compared to 767 contracts in the previous week.

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Nifty August: The Nifty August continued to be the most favoured contract in the Nifty series. The contract matures in a couple of weeks. The contract continues to trade close to its fair value. For instance, the spread between the fair value and the actual futures price on Friday works out to around 1.6 index points. The implied carrying cost on the contract works out around 13 per cent. Investors can avoid taking fresh exposures at current valuations.

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Nifty September/October: Trading in the longer end maturities, especially the September contract, registered improvements on a week-on-week basis. Volumes improved from 94 contracts in the previous week to 118 contracts. The spreads between the cash index and the futures index continues to be narrow.

For instance, the implied cost of carry for the September maturity based on Friday's close works out to around 8 per cent. Post transaction costs, the scope for arbitrage is virtually non-existent. Since the contract will soon move into the one-month maturity slot, improvement in volumes can be expected. Fresh investments in the September contract need not be considered.

Trading in the October contract was lacklustre. Apart from being constrained by a lack of liquidity, the valuation of the contract does not give investors opportunities to book profits. Hence, fresh investments can be avoided.

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Sensex August: Though volumes declined over the week, the Sensex August contract still remains the most actively traded contract. Volumes in the contract was down to 663 contracts as compared to 1,197 contracts the week before. The valuation of the contract gives investors a small window of opportunity. The implied cost of carry based on Friday's close works out to around 16 per cent. With close to two weeks remaining to maturity, investors can consider selling the contract short at present levels.

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Sensex September/October: The longer maturities showed some signs of improvement during the week. However, the interest was confined to the September contract with volumes of around 182 contracts as compared to 30 contracts the week before. The Sensex October contract has not been traded on a single day for the last three weeks.

The implied cost of carry for the Sensex September contracts works out to be around 6.5 per cent. Investors with a penchant for risk can consider taking a long position in the contract with a very small time-frame in mind.