Lame April F&O expiry; Sell in May and go away

Riken Mehta

Lame is the best word to describe the April F&O expiry.

Nifty, the barometer index of stocks, ended the expiry with modest gains of 0.3%. Bank Nifty, the second most traded index in the F&O market, outperformed the Nifty with 1.9% gains. However, the upside was restricted after rating agency S&P downgraded 10 major Indian banks on Wednesday.

Adding to the market woes, FIIs have turned net sellers for the April series to the tune of Rs 800 crore. FIIs had bought stocks worth Rs 40,000 crore in Jan-Mar period.

Surprisingly, the Nifty VIX closed at 18.74 down around 1%, unusual for an expiry day. On the whole, it was a tepid F&O expiry.

Star performers

April series left traders with mixed feelings, with two heavyweight stocks hogging limelight.

News of JLR IPO, coupled with eye popping monthly sales, took the Tata Motors to an all-time high, giving a cool 15% return for traders in the series.

On the flip side, Infosys left traders in doldrums after the IT major reported another set of disappointing quarterly results.

Poor FY13 guidance, muted growth in Q4 and management’s inability to use huge piles of cash to generate extra income resulted in a 15.5% decline in stock price.

What lies ahead?

With the policy paralysis continuing to plague North Block, traders will closely monitor the ongoing fourth quarter earnings season all through the May series. 

In this backdrop, chances of the Wall Street phenomenon known as "Sell in May and go away" might hold true for Indian markets also. 

Nifty (71.86%) rollovers were strong compared to last month’s percentage rollover of 58.46%. But if one closely analyses absolute open interest in Nifty May series and compare it with similar OI witnessed in Jan 2011 and Aug 2011 series, then both of these expiries saw market retracing significantly from start of the series.

The overall market saw a rollover of 85.00% against its three-month average of 78.50% on the back of average cost-of-carry of 8.90%.

Bank Nifty (70.68%) rollovers were in-line with its average but substantial addition in open interest signals short positions were created at higher levels following S&P downgrade.

Shifting focus to Nifty options data, Open Interest buildup indicates range for the Nifty from 5000 to 5600. Nifty historical volatility shrinks to 21.52% from 22.77%. Nifty put and call options Implied Volatility (IV) were down to 18.75% and 18.42% from 26.36% and 28.22% respectively. Market-wide, most of the rollover seems to be on the short side. Nifty Open Interest Put Call Ratio at the beginning of May series was 1.1. Important to note that May expiry is prolonged one and coupled with low implied volatility is a bearish sign. Angel Broking advises traders to buy at the money puts. The broking firm believes Nifty will not be able to hold 5150-5200 support. 

A quick analysis of how Nifty performed in May series in last 10 years. In 2009, the market was locked at upper circuit for 2 consecutive days after UPA came into power, not sure we will witness the same reaction in 2014. Barring 2009, Nifty has lost more than 3% in May series in last 4 years. 

Year	Open	High	Low	Close	% Chg
2011	5766	5775	5328	5570	-3.40
2010	5278	5279	4842	5086	-3.64
2009	3479	4509	3479	4449	27.89
2008	5265	5299	4802	4870	-7.50
2007	4089	4307	3981	4295	5.03
2006	3558	3774	2996	3071	-13.68
2005	1903	2092	1898	2087	9.67
2004	1796	1838	1292	1484	-17.39
2003	931	1014	931	1007	8.15
2002	1085	1137	1020	1029	-5.16

Why you should buy your wife a silver spoon than a gold bar

Sagar Salvi & Riken Mehta
moneycontrol.com

"Buy yourself some silver chopsticks or some silver cutlery...you will be very rich in 5 or 10 years." Well, that was investment guru Jim Rogers' call at the start of 2011. Rogers is chairman of Rogers Holdings. 

In 2011, however, silver prices remained somewhat flat as oppose to 2010, when prices surged 77%. Last year, though inflation had remained high, commodity prices could not take off due to government's all out efforts to rein in inflation. In addition, absence of the much-anticipated QE3 from US Federal Reserve Bank has taken the sheen off precious metals further, especially in the short-term.

Nevertheless, a strong bullish case can still be made for silver over the long-term (read: next 3-5 years) on simple demand and supply factors. A major underlying aspect, which will drive up silver prices, is its industrial uses. In some cases, the widely used raw material cannot be recovered, which makes it that much dearer.      

Moreover, we do not have an alternative to gold and silver for now.

Gold Vs Silver

Silver performed much better than gold in 2010 with prices rising by an astounding 80% which is two and half times the rise in price of gold. Along with being deemed a safe investment, the relatively low supply of the metal as compared to the high demand has also contributed to the steady increase in price. In the first three months of 2012, silver price increased at a steady 13.9% compared to gold's 4.8% jump. Historically silver has outperformed gold year-after-year, with a high risk-reward ratio.

* Annual returns based on USD Gold and Silver prices

3 scenarios when Gold/Silver rally

1) When US dollar (dominant currency) declines, gold and silver prices see moderate gains-inverse correlation.
2) When US dollar strengthens, rupee falls, which leads to firming up of gold/silver prices domestically.
3) When demand for precious metals rise due to festive/social demand, prices escalate.

Recently, China has outpaced India in terms of gold consumption. So there is a fair chance that even if the US economy comes out of its recessionary-type situation leading to a stronger dollar, the growing Chinese consumption may keep prices of precious metals up.

Gold-Silver ratio

To better understand the potential for rise in silver prices, we need to take a look at the gold-silver price ratio. For most of the nineteenth century, the white metal traded at a ratio of 15.5:1 (in USD terms).

Over a century or so the mean gold-silver ratio has been 45.69 :1  and at present the ratio is 52:1 (Gold price/Silver price)

Based on this assumption, here's how gold-silver ratio pans out at various gold prices.

If Gold prices touch USD 10,000 per ounce, then silver price may touch USD 192, USD 222 and USD 645 per ounce with respect to Gold-Silver ratio of 52:1, 45:1 and 15.5:1. The above table indicates that silver is currently undervalued compared to gold and is in a position to generate returns substantially greater than investing in the yellow metal.

However, this is not a bearish indicator for gold, but a strongly bullish sign for silver. Even if gold prices were to fall by 20%, and even if silver assumed a 20:1 ratio instead of 15.5:1, this would still mean silver will rally more than 100%  from its current price.

Therefore, it makes sense to stock up on that silver cutlery your wife always wanted!