April was calm for markets, but don’t let that fool you

Outstanding positions in marketwide futures hit a record ₹4.38 trillion on Thursday when the May series of derivatives began, pointing to a volatile month ahead.

Marketwide futures include single stock futures and index futures (Nifty and Bank Nifty). While the market has priced in a victory for the ruling National Democratic Alliance when the results are announced on June 4, the focus will be on the victory margins, as various election phases conclude during the month.

Action-packed month

“May is gearing up to be an action-packed month with national elections on the horizon, and the anticipation of outcomes could lead to heightened volatility in the market,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.

“Election results, expected in the first week of June, will likely be a focal point for investors, particularly with the current ruling government poised for another term. While the outcome seems certain, attention will shift to the margin of victory, which could spark market excitement.”

Muted volatility in comparison to the 2014 and 2019 general elections also suggests complacency in the market.

What Vix shows

In 2014 and 2019, Lok Sabha election results were announced in May. In the preceding month, April, fear gauge Vix traded at 34% and 29% respectively, signaling high volatility. Currently, the Vix is ​​around 10%, which shows the market has discounted the NDA victory, said Rohit Srivastava, founder of IndiaCharts.

“While that could signal bullish sentiment, another parameter, which is the ratio of index futures to marketwide futures currently has been ruling at 19 times for the past two months, which is a signal of the market topping out. These are mixed signals and frankly are confusing, at least for now.”

In 2008 and 2018, when the index futures to marketwide futures hit 18X, the market had topped out, Srivastava explained.

Apart from index futures, high net worth individuals and retail investors, who come under NSE’s Client category, have created historic high net open interest positions — 1.68 million contracts. “Such a decisive move by HNIs often results in the index trading within a narrow range, with more dynamic action unfolding across various sectors,” added Pagaria of Nuvama, for whom auto, FMCG and PSUs are preferred sectors.

What FPIs think

Meanwhile, the other dominant category — foreign portfolio investors — have turned cautious. While net selling shares worth ₹6,304 crore so far this fiscal, they are net short on index futures (Nifty and Bank Nifty) to the extent of 53,522 contracts at the beginning of the May series, against net long of 70,641 contracts by Client.

“FPIs are hedging their portfolios, but the domestic players are adding leverage and consequently increasing momentum,” said Kruti Shah, quant equity analyst at Equirus, who expects fresh highs for Nifty in the coming sessions.

Srivastava expects the Nifty to trade in a narrow range of 22,100-23,000 in the current series, while Pagaria is betting on a 22,350-22,700 range initially.