A logjam on the GST front could turn things upside down and turmoil in Gujarat might also have an adverse impact
This week the long-awaited Goods and Services Tax (GST) Bill is to be introduced to the Rajya Sabha and Q1 results continue to come in. Next Tuesday, Raghuram Rajan will chair his last policy review at the Reserve Bank of India. That will end the series of major central bank meetings after Brexit.
This is the GST end game: Either it passes now or it is effectively shelved until the next general elections. Obviously, there will be a strong rally if GST does go through the Rajya Sabha and there appears to be little reason for it being held up any more.
The Federal Reserve and the Bank of Japan both stood on status quo. However, the Japanese government has pushed through a major bailout package in the Budget so traders are hoping that this means a liquidity surge in Japan. The Fed's inaction and statement have been taken to imply that it will probably hold rate hikes until the presidential election. RBI is not expected to take any action either.
The earning seasons has not been very positive so far. The IT industry's numbers reveal margin pressure. Private banks have seen rising NPAs. Reliance and Maruti have relied on other Income to generate higher profits. L&T has delivered weak guidance and results.
Technically, the Nifty continues to look bullish. The Nifty continues to test resistance above 8,600. Every trend following system would suggest staying long until there is a clear trend reversal. In practical terms, news flow will continue to be the driver. The GST passage could push the market into a higher zone.
FIIs bought equity in massive quantities in July while Domestic Institutions were net sellers. The breadth has been good since retail has also seemed bullish. A good monsoon has boosted sentiment. The Nifty could run up till the 9,000 level or higher in the next 10 sessions, if the GST is passed.
However, in the Nifty Bank, resistance at 19,175 has been tested unsuccessfully and the trend has turned more bearish. A long August 25, 18,500p (247), long August 25, 19,500c (132) costs 379 and it has gained marginally since the last recommendation.
This long strangle could go into profit, given just one big down-session or three big up-sessions. The trader could sell the August 11, 18,500p (111) and the August 11, 19,500c (42), this costs 153.
If this short strangle is not struck, the premium inflow boosts returns. If it is struck, the long August 25 strangle should gain enough to offset the short strangle losses.
There is good open interest (OI) in the Nifty August call chain till 9,000 where the peak is seen. In the Nifty put August chain, there's good OI till 7,500p, with big peaks at 8,000p and 8,500p.
The Nifty is currently held at 8,635, with a reasonable premium of 50 on the futures over the spot. The put-call ratio (PCR) has slipped into bearish territory, falling to 0.88 for the August Nifty PCR and to 0.95 for the 3-month set.
A bullspread with long August 8,700c (115), short 8,800c (72) costs 43 and pays a maximum 57. This position is 70 points from money. A bearspread with long 8,600p (92), short 8,500p (61) costs 31 and pays a maximum 69. This is only 35 points from money. Obviously the nearspread looks more attractive.
There is a promise, almost a guarantee that high volatility will continue. There could be a steep uptrend if the GST passes the Rajya Sabha. But, a logjam on the GST front could turn things upside down and turmoil in Gujarat might also have an adverse impact.
Photograph: Reuters