By Anand James
If the clearing of 18,000 on the last working day of April hogged the limelight, the central character of April for the month was VIX. While FPIs’ short covering as well as net inflows into stocks by FIIs, kept boosting positive sentiments, the most vital shift in dynamics unfolded in the second half of April, in terms of volatility, when Nifty started slipping from the interim peak of 17,863. VIX, which had already slipped to 12.2, refused to rise, even as Nifty collapsed over 1200 points, as VIX is usually negatively correlated to Nifty. The subsequent consolidation in the 200 DMA vicinity on multiple days, gave the most visible sign of strength that would finally catapult prices above 18,000.
Last fortnight apparently kept attracting bearish bets, during the day, as there was always mild rise in intraday volatility, but VIX was seen settling by close, leading to retention of positivity, and net addition to Nifty day after day. In other words, many traders could not shake off the negativity that persisted uncharacteristically for the previous three months, and the slow conversion from bears to bulls also added further legs to the rally. It is not certain if the particular trading dynamics that have come to dominate in the second half of April has led to artificial suppression of VIX and thereby positivity in VIX, or if it worked the other way around with advance in stocks influencing the Nifty option trading and thereby resulting in low VIX.
The main difference between the rise of October to record peak, from 16,800 vicinity, and April’s rise from similar levels, is VIX. On the first instance, VIX was 22, and on the latter, 18. So, during April, by the time, Nifty met an interim resistance of 17,800 before slipping, VIX had already slipped to 12 levels, which was even below the 14 levels where VIX was. Nifty tested the record peak on the bounce from October lows. This is perhaps another reason why VIX failed to expand at all through April. Now, by design or chance, low VIX has come to be, and as is, stocks are yet to show froth, that would otherwise force a turn.
Level wise, we now find ourselves within the 17,976-18,300 objectives that we had set out with, last week. Favoured view sees prospects of continuation of uptrend aiming at 18,600, but sees a fair potential for consolidation first, once in the 18,110-18,300 band. Hence, brace for consolidation or a turn lower this week, but with VIX below 11, it could take a longer period of consolidation before VIX rises substantially enough to gather momentum for downsides. We will keep our downside marker at 17,885 or at 17,700 until then.
(Anand James, Chief Market Strategist, Geojit Financial Services. Views expressed are author’s own. Please consult your financial advisor before investing.)