Too Many Expectations?

Market has too many expectations from the forthcoming Budget ranging from tax cuts, tax holidays, special status for some industries, fresh government investment in infrastructure and divestment of public sector enterprises. Even though, electoral victory by the Congress is more attributed to its populist measures such as farm debt waiver, pay commission and NRGEP and Congress may not like a pro-corporate image ahead of elections in key states, many market participants still believe that Congress government will push for aggressive financial reforms in the coming budget.

However, I have my own doubts whether the budget will be able to fulfill all of the market expectations. With the fiscal deficit mounting to around Rs.4,00,000 crores and the first half yearly borrowings at Rs.2,54,000 crores, government’s ability to push through larger tax cuts is quite limited even though there may few reform measures here and there more expectedly in export oriented sectors.

Hence it will be very difficult for the budget to make a major positive impact on the market as many positive factors have already been discounted in the prices. At the same time, we can not underestimate the ability of certain market participants and media to derive great things from nothing make others to believe it.

In the short term, market is expected to track the global events. In fact, our recent rally is more attributed to the FII inflows which have been stupendous in the last three months. FII inflows were mainly attributed to their expectations of a ‘V’ shaped recovery in the global economy and the huge liquidity made available to the American banking system.

Last week, global market participants came to a new conclusion that even though the recession has come to a near-end as of now, the recovery may not be as swift as markets expected earlier. US economic data has been quite mixed in the recent times and the recent downgrading of American banks resulted in strengthening of US Dollar and JPY, the less risky currencies against other major global currencies including INR. World markets are now apprehensive of raising commodity prices and Federal Reserve’s probable monetary measures to tame the inflationary expectations. These speculations led to withdrawal of FII money from emerging markets including India. Such withdrawal coupled with some local negative sentiments rising from Bombay High Court’s judgment in RIL-RNRL case resulted in a big market fall last week.

I feel that delayed monsoon, revival of Indian industry and performance by the Indian Corporate and firm government action in continuing the financial reforms would carry more weight in the minds of FIIs, who may be waiting in the sidelines for some more time to get better clarity in the global scenario. Even though, negative inflation is bad news for the industry, as RBI Governor put it, India may not fall into a deflationary environment any time soon.

Traders are requested to exercise caution in the near term and initiate long position only in case of Nifty breaking 4400 levels firmly. Banking sector is expected to do well in the short run.

Investors may accumulate shares of fundamentally strong companies during fall. Banking stocks may perform well in the long run. Indraprashtha Gas may be considered as a long term investment option. Strong Government Companies’ stocks may also be considered.

Technically Sensex finds good support at around 14,500, 14200 and 13,600 levels. It faces strong resistance at around 14,700 and 15,200 levels.

Wishing you a happy week ahead

Tiring Bulls and Fearing Bears

Last week, there was a pause in the Bull Run that had continued for a record thirteen weeks. Still, Sensex managed to close the week with marginal gains. Nifty closed with a marginal loss. However, small and midcap stocks faced a big sell-off probably due to profit booking. Even though, Bulls are quite tired after running for quite some time without break, Bears are still uncertain of taking full control of the market.

Markets opened the last week with losses as there was a good amount of profit. Sensex faced a strong resistance around 15500 levels and the Nifty at around 4600 levels. It was widely expected at that time that the Bears would take control thereafter. However, Prime Minister’s statement in the Parliament that the country has a potential for 9% growth and the stunning profit made by Satyam changed the moods of market. Bears were marauded once again. Still, rising crude prices and indecisive global markets checked a repetition of previous weeks’ big show and in fact, small and midcap stocks could not recover their early losses like their largecap peers.

WPI Headline Inflation hit record low levels. Finance Minister impressing upon the PSU Banks to cut their lending rates hit the PSU banks hard. Positive IIP numbers cheered the markets. However, it triggered profit booking by the traders.

US data was a mixed one. There are fears of an inflationary environment choking the growth prospects. Rise in crude prices is negative news for the global equity markets. There are market speculations of rate hike by Federal Reserve sooner than later to moderate the inflationary expectations.

Sensex faces a strong resistance at around 15600 levels and Nifty at 4700 levels. Sensex has a good support at 14500 and 13500 points.

Even though India is a good long term story, the largecap indices appear to be fully priced-in in the short run. Market seems to be in an overbought position. At the same time, tireless FII flows may change every calculation.

Wishing a happy week ahead.

Betting On A Quick Recovery

It has been an amazing run continuing for the 12th week in a row surpassing even the most optimists’ expectations. Whether “India Shining” and “India Decoupling” stories are back in market? Even though, Indian story is quite intact in a longer run, whether stock markets deserve a valuation closer to the January 2008 peak levels with the economy crawling now just at a half the pace of that time? Let us introspect once again hereunder.

As we discussed earlier, market builds up lot of expectations over Manmohan Singh’s new government. It likes to safely ignore the facts that Congress is not known for speedy reforms and it has come back to power mainly because of its populist face as opposed to the corporate image of the previous NDA regime. It also ignores that the Head of Government is not the de facto political boss. He can not push through tough reforms either way as there are still many political, coalition and electoral compulsions to show a populist face.

Sensex now trades under a fair valuation given the gloomy economic indicators like negative IIP, manufacturing degrowth and GDP growth, lowest in five years, even though the business confidence is expected to improve because of the electoral verdict. Negative credit growth is a depressing factor and an important indicator that the current business confidence is quite low.

Hence, it will be too much on the part of the market to expect that miracles will happen in the short term and Sensex (Companies) earnings will move up drastically in no time. Hence, I am of the view that the any big move hereafter may be another bubble in making.

Hype is building up in the market that there will be a huge divestment of PSU companies in the short term which will take the market further up. It defies the fundamentals of supply and demand. Divestment is good for the small investors no doubt but there are hardly any reasons to chase the costly listed companies with weak fundamentals when there are plenty of fundamentally strong PSU companies are going to be available at much cheaper valuations.

I would suggest the readers to continue their value picking in small lots over a period of time. At the same time, there should not be any “there is no tomorrow” approach. There will be a plenty of opportunity for the small investors to participate in the PSU divestment process that is going to happen shortly.

Nifty may face some resistance between 4500 and 4600. Stronger resistance may be there around 4800 levels. There is huge build up in F&O position and hence it is safer to trade with strict stop loss limits.

Wishing a very happy week ahead

Left is left out?

Last week has been a dramatic one for the markets. Key indices posted historic gains and the market was shut on an upper circuit for the first time in the history. Decisive electoral verdict for a reformist Prime Minister this time relatively free of coalition compulsions lifted the mood of the market.

Now there is a feeling of being left out among the investors from the last rally in which key indices nearly doubled from their bottoms recovering around half of their total fall. There has been a mad rush in the market last week which witnessed a historic gain and turnover.

Whether this jubilation is justified? Whether every thing has changed in India all of a sudden to become so bullish once a stable Congress government is in place?

One should have strong introspection now. In fact, Congress was in power in the last one year also almost with full control of the government particularly without any Left pressure. What it did to revive our economy? There were two or three very small fiscal stimuli making no major impact on the economy. Further, one should also remember that Congress has always been a centrist party with a socialist face. In fact, the 1991 reforms were more of a result of compulsions from IMF rather than a voluntary one.

Even the current electoral success is owed to the populist measures like NREGS, Farm Debt waiver, fuel subsidies and Pay Commission undertaken by the Congress government as it was very much aware that the corporate image of the previous NDA regime was the main spoiler for NDA in the previous elections. Hence, it is very much doubtful that the Congress will go for aggressive reforms risking its electoral successes in the future. Rather, it would like to carry on its socialist posture and doing some reforms here and there in bits and pieces.

Hence, we may conclude that the market jubilation for a Congress government is an overreaction. Even though the long term story of India is very much intact and the key indices may very well cross many new highs in the future, short and middle term success of our market will be mainly dependent on the following factors.

Ø Mounting Fiscal Deficit which is the biggest threat for our growth.
Ø Slow down in economy and degrowth in industries.
Ø Falling exports of goods and services.
Ø Low WPI Inflation resulting in high real interest rates and persisting credit squeeze.
Ø Global recession particularly the US recession may hurt us.
Ø Falling profits of the listed companies and their poor corporate governance record
Ø Last but not the least, infrastructure bottlenecks.

It will be a challenging situation for Indian economy and its corporate world to recover quickly.

In my view, Nifty is now placed at a fair value with its Price-Earnings multiples at 16-17 levels. Any big rally from here onwards in the short run may be a bubble in the making. However, there are many small and midcap stocks trading at attractive valuations. But they have to be picked only after a careful analysis of their fundamentals under necessary professional guidance.

Nifty faces a strong resistance at 4500 levels breaking which it may move towards 4800 levels. It has a strong support at 4150 levels and any fall below this level may take it to 3900 levels.

F&O open interest has gone up very much in the recent times. There is a market talk that FIIs are now selling in F&O market even though they keep buying in cash market. Caution is the key word now and any trading position should be accompanied by strict stop loss limits.

Wishing a happy week ahead!

Happy Times Are Back?

It has been a stunning rally sustaining for the sixth week in a row. Even the hardcore optimists would not have expected such sharpest recovery in a Bear phase.

Even the poor guidance from Infosys, last week, did not affect the market sentiments beyond a point. Positive global market cues and resumption of FII inflows were the main reasons for such sudden turnaround in market sentiments. Are the happy times back? Whether this mind-boggling rally will sustain in the longer term?

Last week was one more truncated trading week. Though the results of Infosys were in line with the market expectations, the guidance was way below expectations. There was an initial negative reaction in the market but recovery came sharply because of the strong positive undercurrent.

Small and midcap stocks outperformed their largecap peers. Many smaller stocks were hitting upper circuits giving an indication that the operators are back in the market in full swing.

Banking sector was the major gainer for the week as the market was expecting good results from that particular industry. Capital Goods and Realty sectors also recovered significantly on the hopes of an economic recovery sooner than later.

Consumer Durable sector was the worst hit for the week as the traders shifted their focus to high growth sectors. IT sector was negative because of the poor guidance from Infosys. Oil & Gas sector was facing heavy profit booking.

Even though, largecap indices have successfully broken the psychologically important 200-day Moving Average levels, they could not sustain above these levels for a longer period of time. There was an indecisiveness prevailing in the market at the higher levels evidenced from the sharp rise in India Vix, the volatility indicator, to 50 plus levels.

Inflation fell to new low level of 0.18% even though the market expected it to be much lower i.e. to hit negative zone.

Week Ahead?

All-important Quarterly Review of the Monetary Policy (RBI) will be published during the coming week. There is a divided view in the market whether RBI will cut its policy rates in this review. Even though the WPI inflation is hovering near zero levels, the more important CPI inflation is still in double digits. Market will look for fresh cues from the Monetary Policy.

US economic data and global markets may also be closely followed. This month alone, FIIs pumped more than Rs.3000 crores into Indian markets. Further inflow is crucial for the market to sustain at higher levels.

There is a divided view in the market on the direction here onwards. A section of the market players feel that Nifty has made a “Double-Top” pattern in the 200-day moving average zone and has fallen thereafter in the last week indicating that there will be good amount of correction downwards taking the Nifty to 3150 levels.

Another section believes that the bull phase has just begun and there will be a longer bull run at least till the election results are announced.

Technically Nifty has to firmly close above 3500 points to sustain the current rally. In such case, next targets will be 3600 points and 3750 points. If the Nifty falls below 3300 levels, the downward target will be 3150 and 2970 points.

Happy investing times ahead.

Cautiously Optimistic!

Last week, it has been a stunning rally surprising even the hardcore optimists as the bull-run continued for the third week with a bang. Well supported by the global trends, Sensex rallied by more than 1,000 points and Nifty by 300 points. Sensex closed above psychologically very important 10,000 levels and Nifty closed above 3,100 levels.

FIIs turned net buyers for the week with inflows to the extent of around Rs.1300.00 crores. Frantic Short covering ahead of the F&O expiry also helped the market to rally further. Renewed domestic interest helped the market to sustain its gains.

As we discussed last week, there are hopes prevailing in the market that the American currency, to be released into the market shortly, would find its ways to equity markets (in particular, emerging markets) and commodity markets. Accordingly, US Dollar weakened against major global currencies including Indian Rupee. There was a strong rally in commodities as well, particularly in base metals.

Revision of the global financial sector outlook, helped Indian banks to post huge gains. Metal stocks also gained in a big way during the week thanks to the rally in commodity markets and better visibility of raising demand.

As the change in methodology for calculating the movement of Nifty was more favorable to Reliance Industries, it gained in a big way. Other Oil & Gas stocks also gained on hopes of increased demand. Nano release further lifted the sentiments of the market and Auto stocks were also doing well.

Inflation fell further down to 0.27% raising the hopes of fresh cuts in interest rates.

Week Ahead

There are views that the market has already found a bottom at around 2600 levels (Sensex around 8000) and may see an interim rally, which may last, up to 3600 levels (Sensex around 12000)

Even though, there are some reasons like renewed FII inflows, fresh domestic interest, bottom fishing etc, to support the above views, one should exercise extreme caution in taking a long position as there has already been a big rally of 500 points (Nifty) and the profit booking may emerge any time soon. Further, Rupee not breaking 50 mark creates doubts on any large FII inflows in the short term ahead. As we discussed earlier, 3200 points (Nifty) may be the next target for the market.

Coming week, there are many key events such as G-20 meeting, ECB meeting on interest rates and announcement of bailout package for US Auto industry. Markets will be keenly following the outcomes of the above events. Further, there are many economic data to be released from US.

With many Indian Operators becoming quite active again, the focus may shift to small and midcap stocks. “Akruthi” chapter reminds the small investors to be extremely cautious about the abnormal movements in small and midcap stocks.

One can accumulate stocks with good valuations and high dividend yields on every dip with a long-term view. Short-term traders may go long till 3200 points however with strict stop loss limits. A fresh view can be taken after 3200 levels.

Wishing a great week ahead.

Currency is the King

Last week, US Federal Reserve announced that it would buy back over 1 trillion dollar of government debt. Though it is a bad move for the global economy in the long run, global markets rejoiced the move with the hope that thus increased dollar flow would help in reviving the world markets in the short run. Our market also joined the global party with a second consecutive positive weekly close, which is rarity nowadays.

Buy back plan resulted in weakening of US Dollar against all other major global currencies. Gold and other commodities went up in dollar terms. Crude Oil crossed psychologically important $50 levels. Reports that China was piling up base metal inventories helped base metals to post gains.

In addition to the above, positive data on housing and employment from USA resulted in a global rally in equity markets too.

Indian markets also joined the rally on the hope that FII inflows would go up here onwards. Beaten down sectors like metals and realty were the major gainers for the last week. Barring Capital Goods, almost all sectors had a positive week. Highlight of the last week was the surge in small and midcap stocks outsmarting their largecap peers.

Though the fall of headline inflation to new low levels (0.44%) raised fears of a deflationary environment, there were fresh hopes of further cutting in interest rates also.

Thanks to the huge stimulus packages announced by governments/ central banks across the globe, there is a lot of money flow into the economy and some part of it may find its way into markets also helping them to stage a relief rally.

At the same time, Nifty closing below the crucial mark of 2810 points and the Dow Jones closing below 7500 levels show that the markets are not yet fully convinced about any major revival in the equity markets. Surge in CBOE Vix also indicates that we may expect some more volatility in the market in the coming week.

As there is no major economic event in India on account of General Elections, our markets may follow the global trends particularly from USA. There is a lot of economic data going to be published in US coming week, which may set the tone for the global markets.

As we told earlier, 2810 levels (Nifty) will continue to be a strong resistance. Traders may take long position once Nifty breaks 2850 decisively however with a strict stop loss limit.

F&O expiry for March series, due for this week, may add to the volatility of the individual stocks.

Rupee may follow the global trends and it will be difficult for it to break 50 mark because of surge in crude oil prices.

Happy week ahead.