The Sensex is bipolar

Posted by Izabella Kaminska on Jun 20 16:40.

Joe Saluzzi of Themis Trading has spotted a sharp almost flash-crash like move in India’s Sensex index on Monday:

And yet, is it all that unusual?

When you take a longer view of the index you realise that the Indian equity benchmark is hardly impervious to choppy technicals — though it is true they usually tend to the upside:

So what’s going on?

Moneylife has been tracking the story for a while and suggests it’s all the result of an extremely shallow Indian market:

A Sensex crash of 500 points in a matter of a few minutes, shows how hollow the Indian market is, as Moneylife has been pointing out for years now. Sometime just before 10 in the morning on Monday 20th June, on a simple rumour that India would restart talks on a tax treaty with tax haven Mauritius, stocks went on a freefall.

At 10:00AM, the Sensex was at 17,737, a modest decline of 134 points from the close on Friday, 17th June (17,870). In the next three minutes, the index had plunged by another huge 170 points. Buying came in and the Sensex was up 80 points in the next minute or two and then suddenly a wave of fresh selling sent the Sensex crashing by 330 points in just 3 minutes of trading. The Sensex was down by 500 points from yesterday’s close, literally in minutes-when a movement of 100 points has been hard to come by for days together.

Indeed, they suggest the market is slightly bipolar. There are too many option traders taking advantage of its hollowness:

Moneylife has been pointing out that the Indian market is narrow, shallow, illiquid and concentrated in the hands of a few individuals located in a few centres-nearly 20 years after India embarked on financial liberalisation. We expected a spread of equity cult, but only a few thousand investors possibly trade on the cash market. The cash market volumes on the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange) have been dwindling rapidly, replaced by volumes in stock and index options.

Which is hardly surprising if you consider that most investors are “playing” India via such vehicles like ETFs, ETNs and equity swaps rather going direct to the cash market itself.

Things are unlikely to improve until long-term players take an interest, we suppose.

Related links:
India ETF List – ETFdb
Equity shorts in disguise
– FT Alphaville
Stocks plunge in India. Could it spread? – FT Alphaville

This entry was posted by Izabella Kaminska on Monday, June 20th, 2011 at 16:40 and is filed under Capital markets. Tagged with , , , .

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