11 February crash similar to May '06 correction

Correction like this compels comparison with that of May 2006 and several comparisons can be drawn. The May 2006 correction started with a minor sell-off a week before similar to this correction that saw huge cuts on 15 May and 17 May.

The entire correction lasted about 25 days till about June 14. IT stocks and the bank index led the recovery, which lasted about 86 days, and both these indices rallied over 50 per cent.

During this period, the FIIs sold about $36 billion primarily during the period of 11 May to 31 May, though some bit of buying emerged in June, post that key sell-off. Mutual funds had then bought stocks worth Rs4,700 crore. But if you break off these figures, they bought Rs6,700 crore between 11 May to 31 May and they sold Rs2,000 crore from 1 June to 14 June, booking some profits immediately after some bottom fishing after the May sell-off.

This time, the correction started from the 9 January and 23 trading sessions have commenced so far taking yesterday's closing. FIIs so far have sold $3.7 billion in stocks, with the inflows having got more insignificant and so therefore the outflow would be slightly higher than what we saw in May 2006.

Mutual funds during this period have bought about Rs560 crore and we have to wait and watch whether mutual funds actually start booking any profits at these levels.

If one looks at the F&O picture, we were highly leveraged May 2006, Stock Futures as a percentage of total Futures Open Interest were about 70 per cent-75 per cent and that saw fair bit of unwinding.  IVs, which were extremely high, have come down and it took 2-3 months and in this case IVs have continued to remain higher at about 45 per cent-65 per cent.