Skyrocketed SENSEX : A Mirage

This post is meant for the novice investors who would have sudden jump in SENSEX and NIFTY and would have concluded end of the bear market. Suddenly one can see people talking again of SENSEX reaching 20000. Popular TV channels creating the excitement and hype around the frenzy market. At this moment I would like everyone to introspect and understand what has suddenly changed so much that we see such confidence. We must understand what this index numbers suggest.

First let us remove the misconception if anyone has that these numbers are real number. On NSE website one can get following statistics about the equity market:-

Number of trades        29279
Traded Qty. (lakh shares)     84.3
Traded Value (Rs. crores)     170.32

This numbers should ring bell in anyone's mind. They clearly suggest that hardly any trading took place on NSE. Thus the stock prices at end of the day are some random prices which got matched. It might be just one trade which took place at that valuation and subsequently there were no buyers at that price.

Second let's look at other important data about the activities of DII's (domestic institutional investors)

DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)

Category     Date     Buy Value     Sell Value     Net Value
DII     18-May-2009     41.62         50.03         -8.41

This clearly suggests the intention of the institutional buyers. They were invested in the markets during the bear phase and booked profits today i.e. buy at low price and sell at high price.

Now let's look at NSE F&O market statistics

Index Futures and Index Options

Index futures saw a trading volume of Rs.1372.38 crores arising out of 65288 contracts and Index options saw 31003 contracts getting traded at a notional value of Rs.599.21 crores. The total turnover of the Futures & Options segment of the Exchange was around Rs.2599.35 crores.

Options on individual securities

Out of 233 securities, options on 48 underlying securities got traded. The total number of contracts traded was 360 with a notional value of Rs.16.24 crores.

Futures on individual securities

Out of 233 stock futures on 197 underlying securities got traded. The total number of contracts traded was 12467 with a traded value of Rs.611.51 crores.

This data suggest the same thing that hardly any trading took place. But now most important thing to look at is the open interest at end of trading hrs:-

Index Futures

Symbol	Open interest (Qty.) as at end of trading hrs.
NIFTY	39342850
MINIFTY	1268460
BANKNIFTY	961650
CNXIT	8400

Index Options

Symbol	Open interest (Qty.) as at end of trading hrs.
NIFTY	82245650
MINIFTY	10800
BANKNIFTY	8400
CNXIT	0

It is these huge open positions which people are trying to cover up which led to this sudden jump in the market. It was general expectation that people would elect hung house and thus speculators had taken positions in the market accordingly. But with the people mandate for single alliance without support of Left clearly raised hopes for reforms and more possibility of foreign investment pouring in. So in order to avoid huge losses speculators started to cover up positions. These open positions also suggest that such activity can be seen even tomorrow or in near future but this does not indicate any long term trend.

I know many of you would be against entire explanation of mine. You may say that markets are leading indicators and they reflect the future health of the Indian economy. Stable non-Left government indicates possibility of reforms and high growth. However my answer to all this explanation is that nothing has change in the neither global economy nor Indian economy in a day. The impact of the action which we speculate would be taken by government in near future can be seen only after a year or so at earliest. Further the valuation of any company cannot change by more than 30% in a day. The fundamentals haven't changed to that significant level. There is liquidity crunch at global level, less demand and a change in government cannot impact this in a day or a month or so. If we go by theory then the information of change in government is known to everyone and by efficient market hypothesis we cannot make profits because of this publicly know fact.

Thus its right market to sell and book profit or get out of bad investment. That's my advice.