The Week Ahead: Expect Vertigo Effect at 7800 With Expiry of Derivatives Adding to Volatility

The week ahead could see higher than normal volatility as we head into an expiry related week with F&O (futures & options) contract expiry on Thursday.

The Nifty closing at a new high has raised expectations among market participants of seeing it hitting the 8000 levels. The rally has been very stock specific with a handful of heavyweights lifting the Nifty, while the broader market was underperforming.

This week we could see the "vertigo effect", as markets scaling new highs with hardly any participation, conviction and poor breadth is making most participants feel that the markets could correct. The expiry of derivative contracts would add to the volatility as foreign flows continue to drive stocks higher.

Nifty ended the week with gains of 1.64 per cent, while the bank nifty ended down 0.43 per cent. The Nifty junior was down 2.27 per cent, while the CNX Midcap 50 was down 2.7 per cent. The outperformance was from the CNX IT which ended the week up 3.96 per cent; the CNX Pharma was up 3.84 per cent and the CNX FMCG was up 3.48 per cent.

The above shows how distorted the week was with select IT, FMCG and pharma stocks driving the Nifty above 7800 while the broader market underperformed.

Global cues were mixed as oil retreated and US bond yields continued to weaken. The Dow Jones index also corrected and closed below 17,000 as profit booking emerged. The Indian rupee was firm and continued to see range bound trade around 60.

Corporate results were mixed with large cap stocks meeting estimates while second tier and PSU banks continuing to disappoint. The week ahead will also see a host of corporate earnings which will be tracked by market participants.

The week ahead will also see fiscal deficit numbers which will indicate the performance of the economy and the expectations ahead, as weak monsoon and inflation fears continue to linger.

Despite profit booking on Friday, Nifty is trading above the resistance of 7750. This indicates that short-term traders need to trade with a positive bias. And more importantly, the new high has been made on back of rally in index heavyweights hence a burst towards 8000 is not ruled out in the short-term.

However, concerning part is lack of participation from the mid-caps space, which raises doubt about the sustenance of current rally at higher levels.

Tracking the top 3 gainers on the Nifty were Asian Paints up 9.8 per cent, HDFC up 8.6 per cent and TCS up 6.7 per cent; while the top 3 losers were Cairn down 10.6 per cent, DLF down 7.4 per cent and IDFC down 5.5 per cent.

With slowly improving economic indicators and lower inflation market participants, expect the central bank to cut rates as early as August which would lower cost of borrowing for most leveraged corporates. Investors would be well advised to buy those cyclical stocks which would gain from the above as valuations after the correction would look compelling.

Sanjeev Bhasin is an independent market analyst. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.