Bearish times ahead?

For the past couple of weeks I have been advocating that the big ticket stock traders were unable to break even on fresh exposure based on the simplistic back of the envelope hypothesis (See: Are the bulls overstaying their welcome?). The last time I saw a cost of carry for stock operators hit 100 per cent was in the great vyaj-badla (interest-carry forward) scam of year 2000. 

The Calcutta stock exchange operators borrowed funds at 100 per cent coupon rates to try and push stock prices higher. Their hopes were dashed as history is testimony of the ensuing times between 2000-2003. While the magnitude of the buying has not reached the 1999-2000 levels yet (taxi drivers and maid servants haven''t started asking for stock tips yet), the cues emanating from the commodity and F-and-O markets merit mention:

1 Copper prices have sort of collapsed. Any commodity analyst worth his salt will tell you that copper is a barometer of global industrial health. Sluggishness in copper prices are a fairly accurate advance indicator of equity sentiments.

2 Since Oct 26 2007, I noticed a sharp decline in the number of contracts traded in the F-and-O segment. While one may attribute this partially to the expiry process, note that most of the fresh longs were in the low risk out of money calls rather than futures segment. Risk appetite is on the wane.

3 Sustained buying is like mother''s milk for a bull market. Heavy selling is not necessary to tear down prices. Just absence of buying momentum is enough, I mentioned above, not only is fresh buying taking place in lower risk options, but even those are at 40 - 45 per cent volumes compared to a fortnight ago. A little selling pressure and the brittle nature of the market''s underbelly will be exposed.

4 Bullion is a safe haven for risk-averse players. Gold and silver are rising. Crude oil can upset many an analysts calculus - and it is soaring. I have been warning of this commodity being the party pooper since six quarters. A top is far, far away for crude oil.

5 Implied volatility is easing and is at 62 per cent (market wide). But it has come on lower volumes. Add cost of carry (18 per cent per annum) and borrowing cost (15 per cent per annum) and you still have a near 100-per cent input cost for a stock operator. Expecting sustained buying is stretching things a little too far.

6 Recent sessions have seen down tick sessions on higher volumes and uptick sessions on poor volumes. These indicators smack of smart money distributing at higher levels. That the markets fell close to the festive season when many a retail trader is away on a short vacation (with long positions intact of course!) is another trigger too convenient to ignore.

7 The markets bottomed out on 17 August 2007 with the Nifty at 4000 levels. A 2000 point upmove followed. Even a 35 per cent decline will imply a fall to the 5250 levels on the Nifty spot. Leveraged traders should be worried. The short-term outlook is negative, whether one chooses to ignore the facts or not. If you are a long term delivery based investor, ignore this mailer. If you have leveraged trades, start planning for a short-term decline. The markets seemed to have turned for the near-term.

(Fair disclosure: This analyst has delivery investments in the equity markets)