Indian Equity Indices - From The Desk Of Research

Indian equity indices went through a turbulent week as they failed to negotiate a close above the neutral line for even a single session and eventually snapped the week with a cut of over two percent. The week largely remained characterized by choppiness because investors were reluctant to pile up positions and indulged largely in stock specific activities as corporate India continued to divulge their fourth quarterly report card. Volatility gradually accelerated session after session as the April series Futures and Options settlement neared while quarterly earnings' announcements by RIL,Wipro,Bank of Baroda, Ambuja Cement,

Crompton Greaves, TVS Motors were punished badly as they remained below Street's expectations.On one hand spiraling international crude oil prices become the headache of policymakers while on the other, worries over global economic recovery loomed large, given the fact that world's biggest economy continues to grow at a tepid pace. The April series F&O settlement day turned out to be another pathetic trading session for the Indian stock markets as the selling pressure gathered greater momentum after government released the disappointing food inflation numbers which stayed absolutely flat at 8.76% on annual basis during week-ended April 16 compared with 8.74% recorded in the previous week. Rate sensitive counters like Real Estate and Bankex witnessed relentless selling pressure through the week ahead of the RBI's annual monetary policy review meet on May 3rd where it is expected to bite the bullet and hike rates by 50 bps to cool the spiraling inflation which has vehemently hovered at uncomfortable levels on the back of crude oil prices which have skyrocketed by over 50% in last six months. The Foreign Institutional Investors on the other hand ploughed back their money from the local markets to the extent of Rs 2,703 crore in the week on expectations that deteriorating domestic macro headwinds will have adverse impacts on the companies' earnings thereby reducing the returns on investment. The Bombay Stock Exchange (BSE) Sensex lost 466.27 points or 2.38% to 19,135.96 during the week ended April 29, 2011. The BSE Mid-cap index declined by 141.07 points or 1.95% to 7,094.23 and the Small-cap index shed 163.26 points or 1.84% to 8,715.31. On the sectoral front, Reality lost 201.17 points or 8.45% to 2180.10,

Capital Goods (CG) shed 607.16 points or 4.45% to 13,036.91, Bankex declined by 468.163 points or 3.46% to 13545.13, Oil & Gas tumbled by 301 points or 2.92% to 10,008.27 and Metal index down by 467.98 points or 2.81% to 16,190.59,were the top losers on the BSE, while Health Care(HC) adding 74.77 points or 1.21% to 6232.55 and FMCG advanced 24.78 points or 0.66% to 3755.16 were the only gainers on the sectoral space. The S&P CNX Nifty trimmed 135.20 points or 2.30% to 5750. On the National Stock Exchange (NSE), Bank Nifty lost 3.46% to 11,483.75, CNX mid-cap shed 1.36% to 8,200.95, CNX Nifty Junior declined by 1.35% to 11,376.70 and CNX IT tumbled by 0.92% to 6718.35. Conclusively we expect slightly range bound scenario between 5555-5960 though sentiments remain subdued for the upcoming sessions. Any closing above this 5960 with substantial volumes for at least 2 consecutive days may generate another 2-3% return and we might see 6070-6080 in the short term.HAPPY TRADING......

Read more about  Stock Market Monthly Report By Mansukh

Trade In Crude Being Extra Alert Mansukh Monthly Report

Crude oil price still appears to go up but how long this bullishness will sustain is very difficult to predict. So do trade in crude but being very active & cautious.

A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt's ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across North Africa and the Middle East. And oil has surged above $111. Little wonder. The region provides 35% of the world's oil. Libya, the scene of growing violence this week, produces 1.7m of the world's 88m barrels a day. So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil companies operating in Libya would stop some production and that the country's ports had temporarily closed. As we think, oil prices are driven both by current conditions and by future expectations.

Oil markets don't like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world's oil) have added 16% to oil
prices. But the big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq's invasion of Kuwait. Oil is now more global than it was during those previous crises. In the 1970s production was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil has hit markets from fields in Latin America, West Africa and beyond. Russia overtook Saudi Arabia as the world's biggest crude supplier in 2009; OPEC's share of production has gone from around 54% in the mid- 1970s to just over 40% now.

If Libya's oil stopped flowing importers would look to Saudi Arabia to make up the shortfall. The oil could probably flow to fill the gap in Europe, Libya's main market, in a matter of weeks. That is ample to plug a Libyan gap but would hasten the day when growing world demand sucks up all spare production capacity and sends oil prices rocketing. Despite rising prices, Saudi Arabia has so far been reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with oil and seems content with a price around $100 a barrel. Traders hope that Saudi Arabia will boost production stealthily or that OPEC will call a special meeting to raise quotas and calm markets.

The worst-case scenario for oil prices would be some kind of disruption to Saudi supply itself. That concern has become livelier given the unrest in neighboring Bahrain. The tiny island kingdom produces little oil but is of vital strategic importance in the Persian Gulf, a seaway that carries 18% of the world's oil. America's 5th Fleet, which polices the Gulf against troublemakers (i.e. Iran), uses the country as a base.

The Saudis may also fear that protests by Bahrain's Shia population could spill over their own borders. Saudi Arabia's eastern provinces are home to both its oil industry and most of its Shias, who may also have cause for grievance with their Sunni rulers. One crumb of comfort is that oil facilities across the region are generally located far from the population centers, where protests tend to be concentrated, and are well defended against anything but a concerted military assault.

The impact of a crisis would therefore depend on how much oil production was lost and for how long. Even seismic shocks in oil- producing countries might not cut off supplies for very long. Yet the example of Iran shows what can go wrong. The world could probably weather a short-lived crisis. But the damage if oil prices spiked and stayed high for a long time could be great for the recovering economies of the rich world. As for the prospects of reducing the importance of the Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean that OPEC's share of oil production rises again as it pumps extra output eastward. A troubled region's capacity to cause trouble will not diminish.

India’s domestic Oil production is insufficient (at 0.8 million barrels per day), to meet with growing demand of oil in the country. India is hugely depends on the OPEC countries for his requirements. Instability in political scenario and some rise in crude oil prices will also affect National Stock Exchange and Bombay Stock Exchange. Equity market and commodity and exchange market, seems to get most affected from this.

Tips To Make Better Options Trades

Buying options by the traders is always being considered while keeping the focus on the premium paid rather than the potential returns. Whereas this is important information in terms of making a calculated trade, many options traders tend to lose sight of the probability of the market reaching and exceeding its position's strike. The average monthly range of the market number provides perspective on two important elements of an options trade: whether volatility is expanding or contracting and whether the market has a chance of reaching and exceeding the breakeven point of the position.

What Is The Probability?
It is commonly said that the majority of options expire worthless. If that is a true statement and you are trading a position that is long premium (i.e. buying a call or a put), you need the market to have a chance of reaching a price that will make your option position profitable. When considering an option position, it is important to consider if it is probable that the market will reach that point. Just because the premium paid is cheap or under priced does not make the trade a good one, especially if the market has little or no probability of reaching that goal.

Calculate the Average Monthly Range
To calculate the average monthly range, all you need is access to reliable historical prices. For any stock, you can get historical open, high, low and closing prices for a given date range. This will give you all the key numbers that will be used in the calculation - the high and the low for each trading day. To calculate this average for a given period of time, subtract the low from the high for each month to get that month's range. For the time frame, add up each month's range and divide by the number of months.

Select a Time Period
Generally, it pays to look at a time frame of twice the length of the option position you are considering, and then break this up into two separate blocks of time. For example, if the option you are considering has three months of time to expiration, look at the average monthly range of the last three months, the three months prior to that and the last six months.

Apply the Strategy
Generally, an Option Strategy involves the simultaneous purchase and/or sale of different option contracts, also known as an Option Combination. There are such a wide variety of option strategies that
use multiple legs as their structure, however, even a one legged (Long Call Option) can be viewed as an option strategy. That is, if a trader thought that Coca Cola's share price was going to increase over the next month a simple way to profit from this move while limiting his/her risk is to buy a call option. Of course, s/he could also sell a put option. If the market price of an option contract implies that it is 50% more expensive than the historical prices for the same characteristics, then you may decide against buying into this option and hence make a move to sell it instead.

Words of Caution
In certain markets and at certain times, by using the average monthly range to choose options strikes, we may find that the implied volatility has pushed the option premiums to unreasonable levels. This causes smaller traders to buy strikes that are too far out of the money, simply because they want to be in a given market and have limited capital. In these cases, the use of the average monthly range should be telling you to either avoid that market, or to use a strategy that can get you closer to the current market price, such as a debit spread (bull call spread or bear put spread).

The Debit Spread
In certain market conditions, the debit spread gives the investor a limited risk position and gets closer to the current market than buying an option outright. In exchange, the investor sacrifices unlimited gains for a limited, but defined, maximum gain. This is often a favorable tradeoff, and will keep the investor grounded in the reality of what the market is more likely to do. The advantage of
unlimited gains is normally only effective if the market were to make a rare historic move.

Option Trading Tactics:
Option trading is still one of the safest methods of trading although it considered risky by many. Although, there are credit ratings of different firms based on the liquidity of options. Being an underlying asset, buyer of the option gains the right, but not the obligation. In India, the biggest player in options trading is National Stock Exchange and Bombay Stock Exchange. Since options listed in NSE & BSE separately, it results in tough competition from each other. Exchange having more volume will have more liquidity. So keep these things in mind while trading in Options.

Turning Point Of Gold: Remain Bullish

January has been a tough month for gold. From its year-end 2010 price of $1,420 an ounce to its recent low just over $1,320, gold has lost some $100 - about seven percent.

On Wednesday, the World Gold Council published its annual Gold Investment Digest for the fourth quarter and full-year 2010 with some interesting insights.

According to the World Gold Council last year’s price performance was driven by developments in key gold markets:

• China saw increased investment activity, driven in part by innovative new gold investment vehicles offering improved access to the gold market.
• Jewelry consumption rebounded in India, the world’s largest gold market.
• Globally, investors remained concerned about uncertainty in the macro-economic environment and turned to gold to hedge against weakness in the US dollar and rising inflation in many economies.

We find the last point particularly interesting, as the USD Index finished the year slightly higher than was the case in 2009. However as we have observed, after 2006 things are much more complicated than simply USD up = gold down and vice-versa.

For the past two weeks we have experienced the risks that we might all face in 2011 and mentioned the problems caused by rising food prices and the social unrest they might unleash. We didn’t expect it to happen so soon.

After Tunisia’s revolution and the ouster of its president after 23 years of rule, Egypt seems to be next on the North African crisis list. One of the main grievances of the protesters in Egypt, just as it has been in Tunisia, has been the soaring price of food in the shops. The crisis and food shortages may spread to other Arab countries and no one knows where that can lead. We only know one thing—in times of crisis and uncertainty, people turn to gold for a safe haven.

The sentiment for the USD Index is short-term bullish which also has bullish implications for gold and silver. Recall that during the past few months, the USD has been leading the precious metals and here could very well ignite a turnaround for the metals.

In this daily short-term chart, we see that once again a cyclical turning point has come into play Summing up, gold appears bullish in the short-term; however the sentiment for the medium-term is mixed. Much depends on how the resistance levels hold the next short-term rally. If they hold and stop the uptrend, then it may very well be prudent to exit a portion of one's long-term positions.

MECHANISM OF DERIVATIVES PART-III OPEN INTEREST

After providing the best possible tutorials in our last two sessions on mechanism of derivatives now we will discuss about some more dynamics of derivatives. Derivatives are either used for hedging or for speculation and if you would like to be an active player in the derivatives market than “open interest" is also an important market indicator that could lead you in the right direction. By definition, Open interest refers to the total number of derivative contracts, like futures and options that have not been settled in the immediately previous time period for a specific underlying security. A large open interest indicates more activity and liquidity for the contract. For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered 'open'.

What is Open Interest?
Every trade in the exchange would have an impact on the open interest for that day. Say, for example, `A' buys one contract of Nifty on Monday while `B' buys two on the same day. Open interest at the end of the day will be three. On Tuesday, while `A' sells his one contract to `C', `B' buys another Nifty contract. The open interest at the end of the day is now four. In other words, if both parties to the trade initiated a new position, it increases the open interest by one contract. But if the traders square off their existing positions, open interest will decrease by the same number of contracts. However, if one of the parties to the transaction squares off his position while the other creates one open interest will remain unchanged. Open interest, thus, mirrors the flow of money into the derivatives market, which makes it a vital indicator of market direction. Here is how you interpret open interest.

Advantage of Monitoring Open Interest
By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day's activity can be drawn

Rising Market with Increase in Open Interest
If the markets are on an uptrend and open interest is also increasing, it is a bullish signal. It implies the entry of new players into the market, which are creating fresh long positions and suggests the flow of extra money into the market.

Rising Market with Decrease in Open Interest
If despite a rise in market, the open interest decreases, it can be interpreted as a precursor to a trend reversal. The lack of additions to open interest shows that the markets are rising on the back of short-sellers covering their existing positions. This also implies that money is flowing out of the market, given that open interest is decreasing.

Falling Market with Increase in Open Interest
When open interest records an increase in value amidst a falling market, it could be a bearish signal. Though a rise in open interest means that new trading positions are being created and fresh money is getting routed into the market, the new money is probably being used for creating fresh short positions, which will lead to a further downtrend.

Falling Market with Decrease in Open Interest
If open interest decreases in a falling market, it can be attributed to the forced squaring-off of long-positions by traders. It, thus, represents a trend reversal, since the downtrend in the market is likely to reverse after the long positions have been squared off. Thus, in a falling market, a declining open interest can be considered a signal indicating the strengthening of the market.

Sideways Market with Increase in Open Interest
When the market is range-bound and there is marked rise in the open interest, we can expect a significant movement in the National Stock Exchange and Bombay Stock Exchange. However, the direction of the move cannot be predicted.

Sideways Market with Decrease in Open Interest
If the open interest decreases in a sideways market, we can say that flat market trends will continue for some more time. A decrease in open interest only represents the squaring-off of old positions and lack of any new positions might result in a sideways or weak trends in the market. Though open interest is a good barometer of where the markets are heading; it is only an indicator that helps us trade intelligently; it cannot be considered foolproof.