Trading Guide: A bounce back could be in offing! Keep an eye on India VIX; here’s why?

It is the first time in more than a year that we are entering the last week of expiry with VIX near 22.

Last month too we had seen a high VIX in the last week, but unlike that instance, where the rise in VIX was sharp, having seen a level around 14 in mid-January, this time around, and the high VIX has been around for almost through this month.

Anand James, Chief Market Strategist at Geojit Financial Services decodes factors that could lead to volatility in markets:  

A rise in India VIX suggests that traders are prepared to see even higher volatility.

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This build-up of volatility expectation is two-pronged. One stems from the fear of Liquidity getting dried up due to:

1. Upcoming implementation of 50:50 cash-stock margin.
2. LIC IPO expected to attract high retail subscription
3. Fiscal Year-end prompting traders go slow on large bets

Other factors which could is leading to uncertainty is due to:

1. Fed meet on March with elevated expectations of a 100bps rate hike
2. State Elections and the prospects of set back
3. Russia Ukraine impasse and prospects of a war
4. Rising Oil, and the prospects of US-Iran Nuclear deal

This turn of events has started to show in the derivative space, by making straddles more expensive. The Nifty straddles, which were fetching 100-250 on an average in January, began to be seen trading in the 250-400 region since the last week of January.

Stocks reflected differently meanwhile. Around 75% of the NSE 500stocks continued to have trading of inside -2% to 2% throughout January and February, but while around 70% of these stocks gave a return of 0 to 2% in January, only around 30% gave similar return in February.

If VIX were to move further above 22 in March, which we feel is possible, then straddles are likely to get more expensive, while more stocks are likely to break out of the -2 to 2 % daily trading band.

In other words, a majority of the stocks are probably running through a bearish exhaustion scenario. This is evident from the fact that 84.8% and 87.6% of NSE 500 stocks are trading below 20 DSMA and 5 DSMA respectively.

Moreover, delivery volumes have declined, with more than 50% of the stocks recording a delivery volume of less than 40%, suggesting that investors are on the sidelines waiting for directional cues.

All these things point out to the fact that the market is ripe for a bounce, despite the odds.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)