This is in continuation of the article “Impact of Institutional Investments on NIFTY” published last week. Data and suggestions compelled me to analyses further with FII trading as focus area. Will analyzing the mystery of FII alone throw clues in finding our way in market maze? What will you think, if you take a closer look at the pie chart below :
The above chart is based on average of daily turnover in NSE since April 2012 to Feb 2015.
Still not convinced to read further? Then take this. Majority of You, me and the other animals (bulls, bears…) who contribute to the second major share of daily turnover, trade against the big boys. Now, does it sound familiar read with the market gospel that 10% of traders gain what 90% lose? No exaggeration. The data shows existence of a very, very strong relationship between FIIs and the “Others” and the relationship is in OPPOSITE direction. This is deciphered by subjecting the daily trading data of the two segments to statistical analysis of correlation coefficient. It threw a correlation coefficient of -0.97 (negative) existing between the two. (Please refer to last week’s cited article to refresh your memory of this statistical tool). If the data is plotted to create a cluster chart, it creates the below chart.
FII turn over in X Axis and Others on Y, show that on majority times/trades, majority of You and Me trade against the FIIs – one reason for the busted trading accounts that we have missed so long? Why else the market savvy traders keep highlighting on what FIIs did yesterday? Let me be honest. This research and analysis is an eye opener for me. Read further and decide for yourself.
FIIs take position in Index Futures, Stock Futures and Equities (called cash segment). Average of the past three years net turnover in each of these segments is produced in the below pie chart.
The above chart says that FIIs are predominantly Equity players, who dangle with Index and stock futures for short term trading. Two points must be emphasized about the above chart:
- It represents “average net position” at EOM. Not the turnover.
- The negative 10 (-10)% of stock future trading requires further study, which we will undertake.
This take away was observed in the present analysis. A graphic representation of FII activity in the three segments over the study period is given below:
Do you see more green cones than the blue and red? Do you see blue and green cones in same direction? Do you also see the red cones in the opposite of green and blue cones? Let us dissect the chart further.
Are the stock future cones go in opposite direction of index futures? See next chat.
Is the above statement applicable to stock futures and Equity?
If so, what happens between equity and index futures? Here it is.
Above chart shows that equity and index futures are synchronized in their movement. Equity longs/exits are supplemented by longs/shorts in index futures. Further, above three charts also tell us that stock futures are mainly hedging tools and not necessarily trading instruments for the FIIs.
We will move on to understand the impact of FII activity in the three segments (Index & stock futures and equity) on market – NIFTY. A line chart of NIFTY during the study period is given below: (all data points are eom net numbers).
Take a closer look. NIFTY movement is more in sync with FII’s equity net position and absolutely mirrors FII’s Index future net position. Stock futures and NIFTY…what do you conclude? And also, stock futures and equity/index futures?
We will proceed with statistical analysis of the data before firming up our conclusion. Karl Pearson’s coefficient of correlation is used to understand the relationship between the three elements of FII trading and between them (Index & stock futures and Equity) and NIFTY. Produced below is a table of correlation values.
Above statistically determined values suggest that:
- Negative relationship between Index and stock futures, stock futures and equity.
- Positive relationship between equity and index futures.
- Positive relationship between Equity and NIFTY (0.56) (reduced marginally if clubbed with stock futures).
- Strong positive relationship between Index futures and NIFTY.(0.79).
As explained earlier, positive relationship suggests that NIFTY moves along with equity and index futures. NIFTY moves in the opposite direction of stock futures. And among the three segments, stock futures remain in the opposite direction of equity and index futures, meaning FII remain “short” in stock futures against their longs in equity and index futures and vice versa.
Movement of the FII trading components and NIFTY over 35 month period of study was tabulated to infer non tool based conclusions. The table is produced below.
|Combined movement of Index & stock futures,Equity and NIFTY|
|Read as Index Fututers(Down),Stock Futures(Down),Equity(Down) and NIFTY(Down)||Total||%|
|Index Futures Down(Short) – NIFTY Down – 9 out of 13 times||69.2|
|Index Futures Up(Long) – NIFTY UP – 18 out of 22 times||81.8|
|Stock Futures were Down(Short) – NIFTY Down – 7 our of 7 times||ignored|
|(But for 4 of the 7 times, the other two segments – Index Futures and Equity were also Down).|
|Only in two of the 35 month period NIFTY was down with Shorts in Stock Futures,when the other|
|two segments were UP. (i.e. Longs in Index Future and Equity,Short in Stock futures).|
|Stock Futures were Up(Long) – NIFTY UP – 6 out of 12 times||ignored|
|(But during all 6 times, both Index Futures and Equity were Up).|
|Equity was Down (Net Sell) and NIFTY was Down – 7 out of 7 times.||ignored|
|(But for 6 times, Index Futures was also Down and in 3 all three segments Down).|
|Equity was Up(Net Buy) and NIFTY was Up – 21 out of 27 times.||77.8|
|(This is overcoming negative Index Futures – 4 times and negative stock Futures 21 times)|
Hence, graphically, statistically and through pure data analysis it can be concluded that :
- FIIs have remained long term buyers in equity and equity trading is their main focus.
- Index futures are the preferred trading tool
- Index futures are traded in the direction of equity position rather than against it
- Stock futures are used as hedging tool and normally FII position in them remain against their position in Index futures and equity.
- FIIs position in Index future influences NIFTY movement the most, followed by their position in equity.
- Large part of the retail/other segment (non FII/DII) trade in the opposite direction of the FIIs. (difficult to digest? Prove me wrong).
You can if you are a serious trader:
- Create a data sheet of daily FII activity in the three segments
- Watch out for drastic shifts in equity and Index futures
- Keep a close watch on the Stock future to Equity/Index ratio – an increase from normal denote FII’s “discomfort”.
Whatever you do….
- Money control.com and NSE site for FII/DII data.
- Just Nifty blog Sri Vanilango for the NIFTY data.