Opening Bell 04.05.2015

Your world at 9am

world.2015-05-04

Equities

Major
DAX(DEU) +0.19%
CAC(FRA) +0.14%
UKX(GBR) +0.36%
NKY(JPN) +0.06%
SPX(USA) +1.09%
MINTs
JCI(IDN) +1.10%
INMEX(MEX) -0.61%
NGSEINDX(NGA) +1.93%
XU030(TUR) -2.54%
BRICS
IBOV(BRA) +1.63%
SHCOMP(CHN) +0.65%
NIFTY(IND) -0.71%
INDEXCF(RUS) +1.04%
TOP40(ZAF) -0.21%

Commodities

Energy
WTI Crude Oil -0.10%
Ethanol -0.99%
Brent Crude Oil -0.09%
Natural Gas -0.25%
Heating Oil +0.02%
RBOB Gasoline -0.26%
Metals
Gold 100oz +0.64%
Palladium +0.14%
Copper -1.01%
Platinum +0.38%
Silver 5000oz +0.77%

Currencies

USDEUR:+0.07% USDJPY:-0.10%

MINTs
USDIDR(IDN) +0.58%
USDMXN(MEX) +0.01%
USDNGN(NGA) -0.48%
USDTRY(TUR) +0.36%
BRICS
USDBRL(BRA) +1.80%
USDCNY(CHN) +0.00%
USDINR(IND) +0.18%
USDRUB(RUS) -2.31%
USDZAR(ZAF) -0.06%
Agricultural
Cattle -6.33%
Feeder Cattle -1.85%
Cocoa +0.00%
Coffee (Arabica) -3.77%
Corn -0.35%
Lean Hogs -1.90%
White Sugar +0.00%
Coffee (Robusta) +0.00%
Soybeans +0.65%
Sugar #11 -1.97%
Wheat +0.27%
Cotton +0.00%
Lumber -0.04%
Orange Juice +3.29%
Soybean Meal +0.13%

Credit Indices

Index Change
Markit CDX EM -0.37%
Markit CDX NA HY -0.21%
Markit CDX NA IG +1.59%
Markit iTraxx Asia ex-Japan IG -0.06%
Markit iTraxx Australia +1.10%
Markit iTraxx Europe +0.33%
Markit iTraxx Europe Crossover +5.50%
Markit iTraxx Japan +2.28%
Markit iTraxx SovX Western Europe -0.17%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +1.46%
Will we see a short-covering rally today? Also, worried about May? Don’t be!

Must reads

The apparel businesses of group holding company Aditya Birla Nuvo Ltd and of another group firm Madura Garments would be demerged, and then merged into listed firm Pantaloons. The combined entity would probably be worth Rs 12,000 crore – “the largest pure-play fashion company by far” in India. (DNA) ABIRLANUVO 1,769.00 201.00 (12.82%) PFRL 137.55 22.90 (19.97%)

Minimum alternate tax demand on foreign investors may total Rs 7,000 crore. This is getting to be a joke. (TOI)

Rs. 2 Lakh Crore NCD scam? (AM, #SEBI)

While we might want to become like China, the odds are high that we might actually end up becoming more like Mexico. (LiveMint, #economy)

Good luck!

Options Daily 04.05.2015

Summary: May NIFTY 8500 calls added 880,375 contracts while 9500 calls shed 100,175. On the Put side of the equation, the 8000 strike added 499,100 while the 8300’s shed 107,850.

Our trend model indicates a SHORT on the NIFTY and LONG on the BANKNIFTY.

APR NIFTY OI

APR NIFTY OI chart

APR BANKNIFTY OI

APR BANKNIFTY OI chart

MAY NIFTY OI

MAY NIFTY OI chart

MAY BANKNIFTY OI

MAY BANKNIFTY OI chart

MAY NIFTY Volatility

MAY NIFTY Volatility chart

MAY BANKNIFTY Volatility

MAY BANKNIFTY Volatility chart
Dotted lines indicated actual underlying volatility. Solid lines are IVs.

Basis Trades using Futures

Introduction

When we discussed cash-futures basis, it was pointed out that the fair value of a futures contract is a function of the underlying price, interest rates, dividends and time to expiration. The same logic applies to the fair value of contracts across expiration dates. For example, as of close on April 30, 2015, NIFTY futures contracts had the following values: 8177.35 (April), 8244.05 (May), 8275.30 (June).

Some of our clients wanted us to check if this basis can be traded. Is it possible to profit from going long the near contract and short the far contract on a consistent basis? Before we look at profitability, lets chart the basis.

The basis

Here is how the basis between different contracts look (2000 through now):

NIFTY.futures.basis

Here is the summary statistic of the basis:

summary statistics

Here is the same data with futures expiry dates removed:

summary statistics

With the extreme values removed, we can now check if we can trade the nearest expiry contract with the farthest.

50-day Average Basis Trade Back-Test

Lets take a look at the Near vs. Farthest basis and draw a 50-dma through it:

NIFTY.futures.basis.50dma

The basis is not stable and what’s worse, it appears to be trending. Lets try our simple trading rule: go long the basis if it is above 50-dma and short if otherwise.

Here’s how the back-test works out (2005 through now):

NIFTY.futures.basis.50dma.trade.2005

Lets check the back-test on a smaller subset (2010 through now):

NIFTY.futures.basis.50dma.trade.2010

A ~20% profit in a 10 year time-frame is barely enough to cover transaction costs. Besides, it looks like the strategy hit a wall in 2010.

Conclusion

It appears that the basis trade described above is not profitable enough after considering transaction costs and taxes. Also, whatever meager profits were there seem to have been arbitraged away lately.

Is there a correlation between USDINR and Tech stocks?

tl;dr

No.

The Myth

Regular viewers of CNBC might have heard the refrain that “IT stocks went up because the rupee went down.” But it turns out that it is the classic case of the journalist/reporter/anchor going in search of a reason to explain a random market event. If there is such a correlation, then a scatter plot of USDINR returns vs. CNX IT index returns should unearth it.

Scatter Plots of Returns

Weekly:
CNX IT.USDINR.scatter.weekly

Daily:
CNX IT.USDINR.scatter.daily

As you can see, there is no obvious link between USDINR and technology stocks. But what if the effect manifests after a lag?

Cross-Correlation Plots of Returns with Lag

Weekly:
CNX IT.USDINR.ccf.weekly

Daily:
CNX IT.USDINR.ccf.daily

Conclusion

Currency moves alone cannot be your go-to explanation for fluctuations in tech stocks.

Monthly Recap: Good investing hurts

world.2015-03-31.2015-04-30

Equities

Major
DAX(DEU) -4.28%
CAC(FRA) +0.26%
UKX(GBR) +3.14%
NKY(JPN) +1.69%
SPX(USA) +1.41%
MINTs
JCI(IDN) -7.83%
INMEX(MEX) +1.82%
NGSEINDX(NGA) +9.31%
XU030(TUR) +3.34%
BRICS
IBOV(BRA) +9.54%
SHCOMP(CHN) +18.51%
NIFTY(IND) -3.65%
INDEXCF(RUS) +3.82%
TOP40(ZAF) +4.73%

Commodities

Energy
WTI Crude Oil +23.33%
Ethanol +7.84%
Heating Oil +15.86%
RBOB Gasoline +14.75%
Brent Crude Oil +19.90%
Natural Gas +4.57%
Metals
Copper +6.91%
Palladium +5.40%
Gold 100oz -0.37%
Silver 5000oz -3.01%
Platinum -0.82%

Currencies

USDEUR:-4.08% USDJPY:+0.18%

MINTs
USDIDR(IDN) -0.96%
USDMXN(MEX) +1.88%
USDNGN(NGA) -0.62%
USDTRY(TUR) +4.23%
BRICS
USDBRL(BRA) -6.36%
USDCNY(CHN) +0.06%
USDINR(IND) +1.48%
USDRUB(RUS) -10.79%
USDZAR(ZAF) -0.61%
Agricultural
Cocoa +4.00%
Coffee (Arabica) -0.94%
Coffee (Robusta) +1.94%
Cotton +4.63%
Soybean Meal -3.44%
Corn -4.25%
Lean Hogs +22.47%
Lumber -8.52%
Orange Juice -8.61%
Soybeans -0.44%
Sugar #11 +7.58%
Feeder Cattle -2.02%
Wheat -8.19%
Cattle -7.48%
White Sugar +4.89%

Credit Indices

Index Change
Markit CDX EM +3.58%
Markit CDX NA HY -0.55%
Markit CDX NA IG -2.44%
Markit iTraxx Asia ex-Japan IG +7.09%
Markit iTraxx Australia +6.74%
Markit iTraxx Europe +9.57%
Markit iTraxx Europe Crossover +1.39%
Markit iTraxx Japan -3.23%
Markit iTraxx SovX Western Europe +2.17%
Markit LCDX (Loan CDS) -0.11%
Markit MCDX (Municipal CDS) +1.70%
Both the NIFTY and the rupee put in performances that they sooner forget. Stretched evaluations met a tepid earnings season and retroactive tax demands on FIIs. May will see more firms coming out earnings and we expect the markets to remain choppy.

Nifty Heatmap

CNX NIFTY.2015-03-31.2015-04-30

Index Returns

For a deeper dive into indices, check out our weekly Index Update.
index performance.2015-03-31.2015-04-30

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) +3.97% 82/50
2 +10.85% 82/49
3 +7.66% 78/53
4 +6.24% 68/64
5 +4.32% 72/59
6 +2.89% 68/63
7 +2.84% 71/61
8 -2.06% 66/65
9 -3.55% 64/67
10 (mega) -2.64% 58/74
This doesn’t make any sense…

Top Winners and Losers

UPL +10.97%
GLENMARK +13.25%
TATASTEEL +13.76%
APOLLOHOSP -16.95%
WIPRO -14.35%
SRTRANSFIN -12.97%
A smorgasbord of performance…

ETF Performance

GOLDBEES +3.56%
PSUBNKBEES +2.07%
BANKBEES +1.54%
JUNIORBEES -0.62%
CPSEETF -2.15%
NIFTYBEES -3.29%
INFRABEES -5.49%
Infrastructure got whipped…

Yield Curve

yield Curve.2015-03-31.2015-04-30

Bond Indices

Sub Index Change in YTM Total Return(%)
GSEC TB -0.09 +0.66%
GSEC SUB 1-3 -0.60 +0.25%
GSEC SUB 3-8 +0.04 +0.20%
GSEC SUB 8 +0.16 -0.07%
Listless…

Investment Theme Performance

Equity Mutual Funds

Bond Mutual Funds

Thought to sum up the month

Good investing hurts. Investors pay a high price for comfort and get paid a high price for doing what few others will. That will always be the case.

Source: This Was Never Easy