Negative returns looming over market due to overbought conditions and excessive risk being taken: Rohit Shrivastava

The Indian equity market witnessed a lackluster opening to Tuesday’s trading session with the benchmark index remaining in a slender range.

On Monday, the Nifty50 index settled the day with a cut of 0.41 percent at 22,122.05. On the derivatives front, the highest concentration of Open Interest (OI) is observed at the 22,000 put strike, indicating strong support for the monthly expiry. On the higher end, 22,200-22,300 call strikes have a decent piling of OI, indicating nearby resistance for Nifty. Foreign Institutional Investors (FIIs) added longs in index futures, and the long-short ratio slightly advanced to 45 from 44 percent.

Technical chart of Nifty showing price performance in comparison with Nifty futures open interest build up| Source: web.strikemoney.com

From a technical perspective, Rohit Shrivastava, Founder of Strike Money Analytics and Indiacharts, highlights that, during the last two months,  Nifty has been attempting to surpass 21,130. “It failed the first two times, and the third time this month, it went above that for just two days. However, in the same time, the Futures open interest in the market, the total of index futures and stock futures, ended up at an all-time record high, increasing by 50 thousand crores in value. This is because the crowd continues to lap up futures contracts, especially stock futures, at a record pace.”

Read more: Nifty signals subdued sessions ahead: Key technical indicators show index overbought, raise caution

He emphasises that negative returns are now expected to follow due to extreme overbought conditions in the market, as the current value of futures contracts at Rs 4,03,619 crore is 18 times the value of the index. “The last three times that happened, the markets topped out, and negative returns followed.”

Historically, as per Shrivastava, the Nifty fell between 16-59 percent in the coming years before another bull market could start. The big difference between now and 2008, however, is that in 2008, the futures open interest was 75 percent of the total market-wide OI [futures+options], today options consume 85 percent of the OI, and the numbers below are just 15 percent of the OI.

Excessive risk is being taken in the market; caution is advised.

“Even then, at 18 times the index, it is comparable to the past, and the recent surge in buying at any level is a clear signal that people are taking too much risk, and the smallest scare can send prices reeling to the downside. Traders should be careful of leveraged positions that can quickly erode their cash,” said Shrivastava.

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