25 Mar 2009, 0655
Just about everyone is convinced that the current leg of rally in the markets is nothing more than a Bear Market rally. Bear market rallies are often described as sharp and swift rallies, which are accompanied with the advent of low volumes. One unique feature of the current rally is the extraordinary jump in volumes.
Picture this – last time when the markets rallied 30% from 2008 lows in the month of October, volumes were sub-60000 crore. Post October, volumes only deteriorated, with the average turnover being sub-50000 crore.
Source: - NSE + F&O
This is a significant number, as these are the volumes that we clocked as back as in Jan '08-during the peak of this bull market.
One explanation that some feel could partly explain the phenomenal rise in volumes could be the surge in option activity. Option used to account for a mere 25-30% of the total derivative turnover.
The recent few sessions have options accounting for over 40% of the total derivative turnover. The surge in option activity coupled with the rise in the markets indicates that market participants want to trade long, but with an insurance cover.
The fact that markets have risen on robust volumes indicates that this is not just another bear market rally. This rally is witnessing increased participation, which makes this rally one on stronger legs than the earlier ones.
Even though it may be too early to speak about the advent of another bull market, investors could take heart from the fact that the market is not necessarily thinking on lines of a bear market rally – more likely, the current surge is a participatory uptrend.
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