STOCK MARKET ANALYSIS

On Friday the markets showed extreme volatility, the Sensex shedding 574 points. As with every cloud, this one has come with the standard issue silver lining – after six consecutive weeks in the red, the markets ended last week firmly in the green.
Traders in the market seem to be in no need for a directional change though. The markets had to deal with three big pieces of news on Friday- the 3 is, Infosys, Inflation & Industrial Output. Traders gave sold into each of these triggers.
When Infosys Technologies announced first quarter net profit at Rs. 1302 cr and Earnings per share above Rs. 100, the markets reacted with a gap up opening. The move was pure sleight of hand and Infosys Technologies and the IT pack lost between 7 and 9% at the end of the trading day. Some of this can be attributed to the long build-up we had seen in IT ahead of the results. A gap up opening gave traders the opportunity to unwind these positions, putting immense selling pressure on the technology pack. But a close look at the rest of the technology pack indicates fresh short positions towards the end of Friday so there is continuing pessimism in IT. Satyam, TCS & Wipro come out with results later this week and each of them is seeing short buildup, with traders expecting these stock prices to correct further. The pain as far as technology stocks in the futures and options side are concerned is far from over. With 7% erosion in its stock price Infosys Technologies has added 6.4 lakh shares in Open Interest. That’s roughly an 18% addition in Open Interest and it’s safe to assume most of these positions are on the short side. TCS has also seen an Open Interest addition of 8% and a majority of these positions are on the short side.
The other piece of news that the market sold into on Friday was IIP coming in at a shocking 3.8% Vs the 10.6% registered last year. The market had discounted for a slowdown to the extent of 7% which is what a Reuters’ poll put the IIP number at. A closer look at the IIP numbers showed that the Capital Goods sector was the biggest laggard and this sparked off a huge selling rally. Even as we go into trade this morning the Capital Goods space is showing tremendous weakness. Capital goods major L&T July Futures have added close the 3 lakh shares in Open Interest, that an 18% rise in Open Interest while the stock is down 6% in the cash market.
The forecast then in for the Nifty to be extremely volatile with the 3900 level acting a s a strong downside resistance. Some long build-up in the banking pack ahead of results this week and heavy short build-up in the IT pack seems to be the theme this week.

BY BHUVAN

MEMBER JAB WE MET CA