Nifty staring at sharp losses; historical futures, options data shows excessive risk in market now

NSE Nifty 50 has failed to either surpass or sustain above the trendline top of 22,130 over the last two months, whereas fresh buying in the index futures has reached historically high risk levels. The excessive risk has potentially set up the benchmark index for a sharp fall, said Rohit Shrivastava, Founder of Strike Money Analytics and Indiacharts.

“The current value of futures contracts at Rs 4.04 lakh crore is 18 times the value of the index; the last three times that happened the markets topped out and negative returns followed,” said Rohit Shrivastava. “The Nifty fell 16-59 percent in the coming years before another bull market could start,” he added.

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

The total of index futures and stock futures have increased by Rs 50,000 crore during the time Nifty has failed to sustain above 22,130. “This is because the crowd continues to lap up futures contracts, especially stock futures, at a record pace,” said Shrivastava. This shows extreme overbought conditions and excessive risk in the market.

“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,” he said.

One big difference between now and 2008 is that in 2008 the futures open interest was 75 percent of the total market-wide OI [futures+options]. Whereas today, options consume 85 percent of the OI. “Even then, at 18 times the index, it is comparable to the past.”

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

Traders should be careful of leveraged positions that can quickly erode their cash, said Shrivastava.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.