Sentiment Update

It was hard to find any extreme data readings but here are a few charts. The advance-decline ratio based on a 20-day average has been down since the budget. While it has not gone back to the red line it has picked up a bit from there but not significantly. It is hard to say whether a further decline is required or we can get another round of broad-based participation. Clearly, an improvement in breadth is overdue if the move higher as to continue.

Once again call options writers became more aggressive in the recent week. Swings in the put-call ratio have become more violent after weekly options came in. Otherwise, the changes in the pattern only occurred after the monthly expiration or in between but not more than once a month. The data shows 26,982 crores more call options than put options are open. The readings between 20,000 and 40,000 crores have been associated with short-term market bottoms. The only time this does not work is during a bear market when such readings will continue to persist throughout the decline.

Foreign institutional investors have been visibly absent since January in the index futures. Previously they have been slowly adding positions on every rally and then giving them back. During the most recent rally after the budget, they don't seem to have participated at all, and this has led to a negative divergence between the index and the outstanding open interest by FIIs. So this shows a neutral position in the market at the highs but also a negative view.

Lastly, the nifty futures premium, the difference between the support and the futures price plotted on a daily basis. The chart below shows a 30 day average of this data which as you remember was at an extremely low in July because the discount reflected a continued short position in the market. The trend is reversed and we do see a 20 point average premium. The recent high in the indicator is not as high as probably seen in 2018 but a fair enough level where you have to think about what is going on. Between the Jan top and the post-budget top, there is a negative divergence in the average premium as shown by the pink line. It shows that traders are not willing to be very aggressive on the market at higher levels.