Nifty ends Oct series with 8% loss

Worst F&O month in five years; experts see pullback after back-to-back decline

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After an overnight slump in US markets, the Nifty fell 1 per cent on Thursday, the expiry day for the month’s derivatives contracts. The index, which tracks the share price performance of 50 blue chip companies, ended the October derivative series with a loss of nearly 8 per cent.

This was the worst performance for a derivative month since August 2013, when the index declined 8.4 per cent. Nifty is the most-traded futures and options (F&O) contract in the domestic markets.

Since the start of the September series, the Nifty has declined 14 per cent — its worst two-month rolling return in seven years. In the September series, the index had declined 6 per cent.

Last month’s fall was primarily on account of deterioration in macroeconomic conditions, while the latest correction was on account of the rout in global equities.

In the past, derivatives analysts say, the markets have seen a strong pullback after two straight months of sharp losses.

“Since 2011, whenever the Nifty has given two months of negative returns of more than 12 per cent back-to-back, the following month has been a bumper-return month. If history holds true and hopefully we are not in a 2008-like phase, November could be a stellar month,” says Yogesh Radke, Associate Director (institutional equities) at Edelweiss Securities.

Experts say the Nifty is hovering close to its strong support zone, which is around 10,000. In the past 12 months, the index has seen sharp bounce-backs from this level. The index is currently at 10,125, only 127 points or 1.3 per cent, above its 52-week low of 9,998 as seen on March 23.

“For the Nifty, 10,000 remains an important level. If it manages to recover above 10,250, it can even head to 10,400-10,500. Many stocks are near the support zone and there is a strong possibility of a recovery,” says Sneha Seth, derivatives research analyst at Angel Broking.

“On the positive side, Bank Nifty has managed to hold its ground this month.”

The Bank Nifty index — the secondmost traded derivative contract — fell less than 1 per cent during the October series. In the previous month, it had fallen 11 per cent —its worst monthly performance in 31 months.

Given the high weightage of banking stocks in the benchmark indices, experts say it is critical for them to rally if there has to be a meaningful pullback.

Meanwhile, rollover of Nifty contracts stood at 74 per cent, the highest in two years. In comparison, the Nifty rollover in the previous month was just 60 per cent. The market-wide rollover after the October series expiry was also high at 84 per cent.

Analysts said the high rollover doesn’t clearly indicate if the markets could fall further if there is a bounce.

“There are two ways to look at it. High rollover means investors are hedging their positions, which doesn’t necessarily mean the market will fall. However, it could also mean traders are holding on to their short positions, anticipating further downside,” said an analyst. Asian stocks have entered a bear market, and even a technical level that often anticipates rebounds is little consolation for traders who have seen more than $4.9 trillion of equity values vanish this year.

The plunge hit hard — the MSCI Asia Pacific Index has slumped 11 per cent this month, its biggest slide since the height of the financial crisis a decade ago. Markets from Tokyo to Hong Kong and Seoul are down more than 10 per cent, and most are in oversold territory.

The indicator that signals losses might have gone too far too quickly — known as the relative strength index — has fallen below the 30 limit for eight of 15 major Asian national gauges. While chart watchers often point to that key level as a reason to regain hope in anticipation of the asset breaching the 30 level again, this time is different.

“On a convincing rebound, it could trigger the crowded trade mentality effect, when everyone realises they have the same short position and sentiment shifts,” said Stephen Innes, head of trading (Asia Pacific) at Oanda Corp in Singapore. “However, I’m too bearish. While we will see periods of retracement from oversold positions, I think these will offer excellent opportunities to sell risk again. Risk aversion has a much stronger grip on markets than risk-on does.”

Concerns over peaking earnings growth, the US-China trade war, rising rates and a strong US dollar are converging to create a toxic cocktail that’s making investors run for the exit. Asian equity indexes stand out as some of the world’s top losers this year, and foreigners have pulled en massefrom funds tracking the region’s emerging markets.