The Sensex and Nifty are up around 15 per cent since the beginning of this calendar spreading cheer among investors. But traders do not seem to be convinced that this rally is sustainable. Many parameters in the derivative segment such as trading volume, open interest and the volatility index suggest that traders have reduced their activity in the futures and options segment of the equity market.

Trading volumes dip

The average daily trading volume in the derivative segment of NSE was around Rs 1,28,000 crore in the last quarter of 2011. This number declined 19 per cent to Rs 1,03,000 crore since the beginning of this calendar.

Decline in trading volume is counter-intuitive on two counts. The higher stock prices should have automatically bolstered the trading volume as well. Two, traders should have traded higher volumes as they saw consistent trend in stock prices.

Slip in open interest

Open interest (OI) that comprises all the futures and options contracts not squared at the end of a trading day is also a good representative of trader mood. Increasing open interest reflects the confidence that traders feel in the sustainability of the current trend. Conversely they move to the fence in an unpredictable and volatile market thus making the open interest fall.

Average daily OI in January was Rs 1,16,000 crore. This is eight per cent lower than the average for December.

India VIX

The volatility index moves down in bull markets, and rises in bear phases. The India VIX based on Nifty option premiums moved down rapidly in the first three weeks of January. But it is once again creeping up since January 25 implying that traders expect volatility to increase.

It is not just the domestic traders who are showing reluctance to trade, of late. Gross derivative turnover of foreign institutional investors is also down 27 per cent in January over a month ago.

So what could be behind this trader apathy? Sustained downward move in the market over 2011 with the Indian equity market among the worst performers world-wide had made traders largely swing towards a bearish view. This had made them take short positions. These traders have been forced to square their position once the stock prices reversed higher. These traders could be reluctant to take a contrary stance and play long just yet.

Another reason could be the persisting woes of Greece and other beleaguered European economies. This could be making traders wary of another sell-off.

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