MINDTREE  
   
RETAIL PARTICIPATION SURGES: SIGNS OF A MARKET HIGH?
It has always been held that when the retail segment participation in the market surges, the market is near a high. The greater the surge, the greater the chances of a longer term high.
Mint had an interesting write up on Monday that is worth paying attention to. In the article, they stated the following:
a. Retail traders share of trading in F&O surged to 20.39 trillion in November, which is 58% higher than the average of July-Septermber. The prop trades by local brokers were higher by 38%. As a result, institutional share of the trade fell from 13% in July-Sept to around 8% in November.
b. Share of single stock futures rose from a mean of 58.5% in July-Sept to 65.2% in November. Index options fell from 11% to around 7.7%.
c. Open interest on Index options fell as much as 23% from the average in the September quarter while stock futures in the same period has increased by 42%.
d. Stock exchanges are all set to introduce mini contracts.
Taken collectively, the above statistics indicate the increasing presence of retail participants and the receding activity of Institutions. Since it is mainly the FII who are active in derivatives, this is not good news as strong players are being sidelined and weaker players are getting aggressive.
More evidence is the following from the cash market :
a. The breadth over the recent week to fortnight has been very strong and on Monday was around the highest at about 7:1 for advances.
b. The new high readings have been moving up every day and on Monday was placed at over 900 stocks at the Bse.
c. The Small cap index delivered 9% return in the last week of December compared to 5% for the sensex.
d. Penny stocks are on the move and a large number are at circuit levels (huge, running into many lacs) and they are also the “tips” of the market.
Taken collectively, this shows the strong influx of retail segment as they are lapping up the stocks like there is no tomorrow!
Further evidence from the F&O market :
a. The Put call ratio moved from around 1.05 levels last month to 1.35 levels by end December as more puts were sold compared to calls.
b. The open interest in 5900 puts surged sharply- implying confidence that the market will move higher.
c. Open interest in changes in higher strike calls are not happening- implying an unwillingness to sell.
d. Implied volatility readings are quite low at around 24% compared to earlier months, implying a sense of confidence about market rise.
e. Very high roll costs paid during December rollover (over 100-150 bps), implying high expectations for the coming month.
f. Continued high contango rates available in the current month, implying that retail longs continue to build positions even at the market high.
Taken collectively, it shows that there is a growing consensus leading perhaps to some complacence about the inevitability of the advance. Also, positions have bene rolled forward at high cost and are also being created currently at high prices. This makes the trends vulnerable for any price shock.
Complacence is a dangerous thing. In the past 3-4 reactions the retail segment remained largely unscathed as they did not have much leveraged positions. The last time when a large leveraged position existed in the market was back in May-Jun 2006 and we had a pretty devastating fall. We are seeing a similar build up once again. Are we at the same level? Hell if I know.
But I certainly don’t want to be caught on the wrong side of this market. But that does not mean I will not be participating in this rocking trend either. So I would be liquidating an old position for every new one that I create. That way I will keep my risks under control, hopefully.
CONTRIBUTED BY
This article is contributed by CHARTMAN.Chartman is a veteran Technical Analyst who has vast experience in capital markets. He will bring forth his experience and knowledge through interesting articles.The topics covered will range from politcal to world markets to trading psychology and other esoteric topics like derivative markets.
You can reach Chartman at mindtree@chartadvise.com
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