The mood in India’s stock markets is the most bearish in the past five years since the 2016 issue of demonization of high-value notes, if one were to go into the derivatives market Put-Call Ratio (PCR), a key technical indicator that captures investor sentiment. Buying and calling are high-risk derivative options contracts, and history shows that stock markets have seen a strong rebound or rebounded in the following weeks and months every time the PCR hits a new low.
sign of pessimism
Low PCR is considered a sign of pessimism. The data provided by Indiacharts shows that last Friday PCR touched 0.68 to break the previous low of 0.71 in November 2016, a level that was recorded just days after the announcement of the cancellation of trading by Prime Minister Narendra Modi. In November 2016, Nifty and Sensex crashed 11.73 percent from their peak following Modi’s announcement. This month, the Nifty and Sensex indices are down 8.7 percent from their peaks and much of the decline came after Modi’s announcement that the three farm laws would be repealed and news of another potential Covid wave.
“History shows that the markets rebounded strongly when PCR reached an extreme level. It is all about historical comparison and interpretation. PCR tends to move up and down with the market, therefore, lower readings show an oversold condition,” said Rohit Srivastava, chief strategist at Indiacharts. in the market and the average peak optimism rises.”
Srivastava says current data shows that traders in the broader market are more bearish now than they were after the cancellation. “Such negative sentiment should be a contrarian indication for markets that have delayed a full reversal and are ready for a strong rally,” Srivastava said.
Indiacharts data shows that net OI (open interest), which is the value of outstanding calls minus those of Puts after the November derivative expired, was still at Rs 1,10,390 crore, indicating that the positions were not fully reversed. The same was at ₹90,882 crore on 17th March this year when Nifty and Sensex fell sharply. After months of recovery, OI touched a high of Rs.135,793 crore on July 29 and remained the same all-time high at Rs.185,478 crore in November of this year.
“What each new record at higher levels indicates is confidence in the market short selling. But as the PCR is down, the markets have always followed it up,” Srivastava said.