July series started with FIIs holding 85% of their index future positions as shorts. This constitutes 35% of the total short positions held by all participants in the index future segment. This is eerily similar to the February 2020 levels, prior to the covid collapse. However, what is different is, in 2020, VIX was benign in the 10-11 vicinity and the sharp rise in VIX there after took markets by a big surprise, exacerbating the speed and extent of the collapse. In stark contrast, VIX is at 22, suggesting that market is way more prepared than 2020 to handle surprises. However, this is still way lower than March peaks, even though Nifty has largely declined during the March-June period. This is unusual, since VIX shares a strong but inverse relationship with Nifty. Meanwhile, the July series has started with OTM CEs and PEs seeing short build up. This along with relatively lower VIX, point to the potential for a sideways trading, or could be seen as a sign that traders are adopting premium scalping strategies rather than expecting directional moves, even as charts are pointing to a move higher.
Among sectors, Autos showed the highest long rolls, continuing similar bias of last month as well. This is a positive sign, with M&M moving to a new 52W high. Meanwhile, short rollovers were the highest in capital goods, financials, consumer durables, metals and oil & gas, most of which also had found FPI selling in cash.
With these in perspective, our first leg of the base case scenario sees Nifty heading to the 15850-16200 band in the coming week followed by consolidation. This could be followed by the second leg that aims 15000-14700, where PE short build is the highest. And thereafter 14000. But this leg will depend entirely on how VIX fares in the 15850-16200 region. If VIX continues to ease, we could see a surprise move higher. It would be revealing to note how 16500 performs for the success of such a move, because that is where OTM CEs were sold the most last week. If 16200 is cleared, we may expect to see FPIs starting to cover their abnormally high shorts, which in turn could add more legs to upsides. Clearing of this mark could open floodgates for 17000 which would complete a 68% retracement of the down move which started in April 2022. This is our optimistic scenario.
The article appeared in Financial Express