Investors need to watch out for nasty surprises in January, as markets have generated negative returns in seven out of ten times that month over the past ten years. Moreover, January returns have ranged between a negative 0.06% and 2.5% in five straight years from 2019 to 2023. Recent rollover data, which suggests that traders have carried forward heavy bullish bets at steep levels, adds to the risk.
The Nifty has generated negative returns in January, ranging from a negative 0.06% to 4.78% in 2014-2023. The years in which positive returns were generated that month include 2015 (6.37%), 2017 (4.6%) and 2018 (4.76%). Those months also tended to be marked by huge volatility.
For instance, volatility index India Vix, which measures traders’ perceptions of near-term market swings , jumped a whopping 61% between a low of 13.15 and a high of 21.21 in January 2015. A higher Vix reflects rising uncertainty about market direction, while a falling Vix reflects more bullishness.
In December, the Nifty clocked a record high of 21,801.45 on the 28th before correcting on the 29th by 0.22% to 21,731.40. This could be a forewarning as the India Vix has risen 34% from a low of 10.8 on 15 December to a closing of 14.5 on 29 December, when the market corrected.
What adds to the risk was the historic 199.35-point premium that the Nifty January futures contract traded at to the spot Nifty at closing on 27 December. The Nifty futures contract closed at 21,854.10 while the spot Nifty closed at 21,654.75 that day. This indicates that market participants are willing to roll over bullish bets even at a huge premium.
Normally, a 30/40-point premium exists between the spot and futures contract, which represents the price a trader or investor is willing to pay for the convenience of owning the Nifty in future. The 199-point premium in this context means that traders were willing to pay ₹199 a share (50 shares make one contract) over the spot price for holding the Nifty in January.
Even on the last day of the December futures contract— futures contracts expire on the last Thursday of a month—the premium between spot and futures was a huge 164 points. This means traders and investors who purchased the Nifty January contract are highly bullish. This itself can cause markets to correct on the flimsiest of excuses.
“Markets have tended to correct in January on profit-booking for five consecutive years,” said Jyotivardhan Jaipuria, MD, Valentis Advisors. “As we have had a strong market rally in November and December, chances of a profit-booking induced correction next month are quite high.”
Rohit Srivastava, founder, IndiaCharts, said the “hefty” Nifty premiums signal that the market could be close to making a short-term top. In that case, the midcap and smallcap stocks could correct further in case of profit-booking.