FII Flows: How dependent are we on them?

I did a study yesterday on the 4 market rallies since July'09. I came to some startling conclusions. They do not paint a very happy picture. Our markets are getting shallower even if all the drumbeats say new all time highs.

Have a look at the images.

1. The rallies are getting slower. The first 3 rallies had about 18 points per day gain on an average. Last rally has barely sputtered to 11 points a day.The rise has been very slow in the last rally. This means Option Sellers make huge money. If you buy Calls, the time decay eats away the profits. If you write puts you carry a big risk of a market crash.



2. The FII have had to pump in more cash to move the markets. For the first 2 rallies, it was just 10-12 crores per point. This went up to 23 crores per point for the third and now 28 crores per point.

3. The DIIs have in fact been sellers in 3rd and 4th rallies. LIC seems to be following buy low sell high principle perfectly.



4. Most surprisingly, the crores in terms of FII+DII to move 1 point of Nifty has reduced to 11 from about 17. Now here is the catch. What does this mean?
a. Less amount of institution money is required to move the Nifty up by 1 point, but more amount of FII money is needed.
b. This means there is a third invisible player in the market (The Retail is out) or the volumes have gone down drastically.

Since I do not believe in re-inventing the wheel, here is Lakshmi Ramchandran's analysis on volumes:
http://vipreetinvestments.blogspot.com/2010/08/reigning-nifty-23rd-august-2010.html

Now, what do we conclude from all this?

a. We are more dependent on FII flows for markets to rise.

b. If for any reason, they turn net sellers, there would be sharp fall in a shorter time, even maybe a downward circuit since there is no safety net.

Best course is to watch FII fund flow everyday on NSE site. If they are net sellers for 3 days in a row or sold 1 billion dollar worth in 5 trading sessions then get out of the markets.