Home >market >stock-market-news >Market volatility peaks despite strong rally

Mumbai: Investors are getting increasingly nervous about the equities rally as markets soar to new highs. The India VIX index, the so-called fear index, rose 14%, to a 14-month high during the day on Wednesday.

The index closed 11.18% higher, its biggest single day gain since 4 September. So far this year, the fear gauge has climbed 43.23% even as the markets hit new highs in 12 out of 18 sessions.

The volatility index typically has an inverse correlation with rising markets. The current rise in the fear index suggests that investors are losing confidence in the rally or that a correction is imminent. Indeed, last year, the VIX had hit a record low suggesting that investors were complacent about risks.

According to Ajay Bodke,chief executive and chief portfolio manager, Prabhudas Lilladher Pvt. Ltd increase in volatility underlines nervousness in the markets.

“The markets are rising on the massive flows of liquidity by foreign and domestic investors. However, any disappointment on earnings front may jolt the sentiment. Also, any major fiscal slippages, reintroduction of long term capital gains (LTCG) and new taxation may result in the much-needed markets correction," said Bodke.

Bodke said the markets have been running ahead of fundamentals which is worrisome for most investors. “There is a bubble building in the markets and margin of safety is receding. There is a speculative fervor in the markets which is driving the rally in selective sectors," he said.

Foreign institutional investors (FIIs) have bought Indian shares worth $1.6 billion so far this year even as the Nifty is trading at 18.56 times its expected earnings over the next 12 months making it one of the most expensive gauges.

The market breadth is weak which means that a few stocks are driving the rally, said Nagaraj Shetti, a technical analyst at HDFC Securities.

“The high VIX indicates that the upmove is losing steam soon and markets are going to see a phase of corrections," said Shetti.

Technical analysts also said that January futures and options (F&O) expiry on Thursday may have added to the volatility a bit.

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