Traders can deploy long butterfly strategy ahead of Budget; keep an eye on metal stocks: Anand James

“For strategy traders, with expiry and budget in purview, the long butterfly may be attempted along the 17800-18050-18300 strikes,” says Anand James, Chief Market Strategist at Geojit Financial Services.

In an interview with ETMarkets, James said: “When you look at the 10-year data, 60% of the time after the Union Budget, metal stocks moved in the same direction of its 1-month pre-budget move,” Edited excerpts:

Q) Despite volatility bulls managed to retain control. What led to the price action?
A) The trading construct has been defined by a decline in trading ranges, slippage in VIX, but the rise in micro volatility. This is understandable given traders’ usually disinclination to take strong directional bets ahead of the Union Budget.

Meanwhile, despite cooling in inflation, rate hike rhetoric has continued to be loud, keeping a lid on upside attempts.
Q) How should investors play markets in the run-up to the Budget next week (expiry)? Important levels which one should watch out for: Nifty and Nifty Bank?
A) VIX is slipping, and this has thrown cold water on directional bets on Nifty. Hence, we prefer Nifty Bank, which was looking promising even on Friday, when Nifty was kept in tight ranges.
Also, Bank Nifty has a tendency to trade in bigger ranges and will provide greater mobility post results of ICICI Bank and Kotak Mahindra Bank, which together constitute more than 33% of weight in the Nifty Bank Index.

Levels-wise, the breakout band for Nifty appears to be 17800-18270, but we will be watching the performance near 18120 for early entry into moves of reasonable length, given the low VIX. For strategy traders, with expiry and budget in purview, the long butterfly may be attempted along the 17800-18050-18300 strikes.

In the case of Nifty Bank, we prefer to take a directional bet on the upside with either long calls, or futures, to stay clear of theta, given early expiry, with the downside marker placed near 42200.

Q) What are your Budget picks that investors can make a note of for a 6-12 month time frame?
A) Metal stocks are all trading above 200-DMA, reiterating underlying positivity, with Institutional participation also positive in the last four months, having piled in Rs.4550 cr in the last four months.
When you look at the 10-year data, 60% of the time after the Union Budget, Metal stocks moved in the same direction as its 1-month pre-budget move.

This time around, metal stocks have generally been on the positive side in the last month. So, there is a 60% chance that we are going to see a positive move post the Union Budget. The power sector has been witnessing profit booking since September, pulled down majorly by institutional activity. Institutions have been net sellers to the tune of Rs.1463 crore in the last four months.

Technically, the Power index has bounced off the rising wedge pattern support on weekly charts hinting at a reversal.

When you look at the 10-year data, 70% of the time after the Budget, Power stocks moved in the same direction as their 1-month pre-Budget move. 91% of the stocks in the BSE Power index are either oversold or nearing the oversold region, indicating a favourable situation supporting our bounce-back expectation.

Besides these two sectors, we are inclined to look at select IT stocks for reversal trades, given the positivity in the sector in the US too, after results as well as layoffs.

Q) In terms of sectors, capital goods, IT remained in focus. What led to the price action?
A) Better than-expected Q3 earnings from Index heavyweights like Infy, TCS, and HCL Tech drove the IT index last week. With just 37% of stocks trading above 200 DMA, we should expect positivity to extend further.

However, institutional activity in December shows that they reduced positions in IT stocks ahead of earnings. They sold Rs 20,293 crore worth of shares in December.

In the Capital goods segment, heavyweights like L&T and Siemens, which contribute close to 40% to BSE capital goods, drove the index last week on news of order wins.
75% of the stocks in the index are trading above their respective 200 DMAs, painting a bright picture for the sector as a whole.
Even though Institutions reduced 35% of what they bought last month, they still remain net buyers to the tune of Rs.9339 crore in the last four months.

Q) How should investors play RIL, Kotak Mahindra Bank, ICICI Bank, and YES Bank post results? Should they buy, sell or hold?
A) Having corrected 12% from November’s peak, Kotak Mahindra Bank will enter the week on a low base. That it is now near a four-month low may also seek to restrain prices from falling steeply, presenting a bargain-hunting window.

ICICI Bank, meanwhile, has seen a slowdown in slippages, but we may look for a push above Rs 880 before chasing upsides. RIL appears to be in the early stages of a breakaway pattern. Upside mobility will be attained once we have a close above Rs 2520. The inability to float above Rs 2470 will be a weak sign though.

Q) What is fueling the rally in metal stocks? The index hit a high in the week gone by?
A) While the early impetus came from the relaxation of covid restrictions in China, the weak dollar and rise in the price of metals and also hopes of a rise in capex spending in the Budget have given additional legs to this sector.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)