Description
Project
Abheek Barua: Inflation - More shocks ahead? Abheek Barua / New Delhi July 21, 2008, 0:50 IST Some more write-downs in US banks could push oil prices back to over $140 in no time. The headline inflation rate for the week of July 5 released last Thursday printed at 11.91 per cent, a little over the 11.89 per cent of the previous week. The median forecast from financial market economists was 12.05 per cent. This prompted the finance minister to claim that inflation is stabilising. The prognosis might turn out to be a trifle too optimistic. There are a number of risks lurking around the corner that threaten to take inflation up in the months ahead. Thus, I shall not be surprised if by September the inflation rate climbs well over 13 per cent. For one, the much-discussed "base effect" turns adverse post July and is likely to pull the inflation rate up. What it means is that inflation rates were exceptionally low in these months last year. Since inflation in India is measured year on year — that is by dividing the current price level by the level in the same week last year, an exceptionally low "base" level is likely to jack the current year's inflation rate up. Apart from this purely statistical effect, there are more "real" drivers that are likely to be at play going forward. Going by the data released by the Met office, the monsoon seems to have been far from adequate in Gujarat, Maharashtra and Andhra Pradesh. This is likely to affect crops like cotton, oilseeds and pulses. Commodity traders from the region tell me that the impact is already palpable and will drive prices up. Oilseeds and edible oils incidentally have been a key contributor to the build-up in inflation over the last few months and a further uptick in prices cannot but be bad news. Fortunately, the monsoon seems to have been kinder to the North and East and some moderation in rice prices could provide some offset. The "self-imposed" moratorium on steel prices by local steel manufacturers lifts soon. Input costs like iron ore have hardened over the past few months and there is a large gap between local and international prices. If steel producers are allowed to bridge this gap, this "catch up" with global prices could drive inflation up. The problem of incomplete data capture has, in the recent past, driven nasty surprises in inflation. Price changes on the ground are often not captured in the index on time and this often creates a large "backlog" of revision that is often done in one shot. This leads to sharp spikes in inflation and sudden, unanticipated jumps in the price level. We saw this problem with iron and steel prices, which had been going up since the last quarter of 2007 but started getting reflected in the wholesale price index only in March. Inflation graphs thus show a step-jump in March. Analysis by a number of research houses shows that hefty upward revisions in the indices for cement, electricity and fertilisers are due. As they find their way into the index, a jump in inflation seems inevitable. The joker in the pack remains oil prices. While moderation in global prices might not have an immediate impact on local prices, there is little doubt that the near-term dynamic of
global inflation is inextricably linked to crude oil prices. If crude prices drop sharply, so will other commodities. This will rub off on Indian inflation. I am writing this column at a time when oil prices have skidded from a peak of over $145 to $130 a barrel over a matter of days. Much as I would like to predict the beginning of a sustained decline, the fact that I have been proved wrong at least half a dozen times over the last year has made me somewhat cautious. Let me explain. I am squarely in the camp that believes that oil prices are grossly overheated and are way higher than what the balance of demand and supply in the oil market would imply. However, over the last few months I have seen them gain in their role as a hedge against the vagaries of the US financial sector and the dollar. In short, investors have dumped dollar assets and bought oil futures instead. Thus, a permanent succour in oil markets could come from one of two things. If the anxieties about the US financial sector wane, there could be a sustained decline in oil prices. That hardly seems to be the case. The recent talk about the future of mortgage lending giants, Freddie Mac and Fannie Mae, has revived concerns about the acuteness of the American financial crisis. The analyst community seems convinced that a slew of write-downs and capital losses by banks and financial institutions are due soon. Alternatively, if oil's role as a dollar hedge diminishes and markets focus instead on fundamentals in valuing oil, the price of oil could drop. Last week's sell-off in oil suggests that some of this is happening. However, it is premature to think that this will continue. A couple of negative headlines about a threat to oil supply and more write-downs by US banks could push oil prices back over $140 in no time. It pays to be prudent in these volatile times. Traders, investors, and policymakers cannot afford to get distracted by a couple of weeks' inflation releases. Only when a sudden turn shows enough stability to become a sustained trend can they afford to let their guard down. That perhaps means more hikes in the RBI's repo rate and cash reserve ratio are coming our way in the monetary policy due at the end of the month. Volatile week ahead Devangshu Datta / New Delhi July 21, 2008, 0:06 IST Expect 500-point swings either way. The market moved through a wide range, first establishing a new 2008 low and then recovering sharply. At the weekend, the Nifty was up 1.07 per cent after it closed on 4092.25 points – it bounced from an intra-day low of 3790. The Sensex was ahead 1.23 per cent at 13,635 points. The Defty was up 1.04 per cent as the rupee weakened a little. The FIIs remained net sellers but they did buy heavily on Thursday. The domestic funds remained token net buyers. Breadth signals stayed poor with advances outnumbered by declines and volumes on the low side. There were negative divergences as smaller stocks underperformed the Nifty. The
Junior was down 0.8 per cent while the BSE 500 lost 0.4 per cent and the Midcaps-50 lost 2.09 per cent. The Vix closed dangerously high at 36-plus. Outlook: Pure technical signals suggest that the market will face very heavy resistance at 4100-4200 and Monday could see net losses. Tuesday will be very volatile. If the UPA wins the confidence vote the market could rebound till around 4400. If the government falls, the market is likely to test support at 3800 again. Either way, expect a 400-500 point swing this week. Rationale: Obviously the confidence vote is a major influence on sentiment. Right now, given bearish signals, the market seems pessimistic about the political situation. However this is a classic situation where there isn't enough hard information for the market consensus to be reliable. If the UPA does win, short positions will be cleared in a hurry. Counter-view: The market saw the establishment of lower lows last week and poor breadth signals. Whatever happens on Tuesday in Parliament, the bear market will remain very much in force. Any recovery that may occur would be temporary in nature. Bulls and Bears: The recovery last week was driven to a large extent by upwards movement in oversold bank stocks as the Bank Nifty gained 2.8 per cent. Both PSU banks such as SBI and PNB and private banks like ICICI and HDFC Bank contributed to the rise. The IT sector proved to be a major drag as the CNXIT lost close to 7 per cent after TCS failed to beat street expectations. Polaris is the only IT sector major moving up against the trend and Satyam looks to be the most hard-hit. If oil prices continue to soften, there may be a recovery in store for PSUs like IOC, BPCL and HPCL while ONGC seems to be quite strong. Gail is also looking good. On the other hand, both ferrous and non-ferrous metals are being hammered. There are isolated pockets of strength such as ABB, Bharat Forge, Airtel, Bhel, HDFC, IDFC and Larsen, which could outperform the overall market. However, movements next week are likely to be very strongly aligned because the driver is political (in)stability. What happens in Parliament on Tuesday will likely determine the trend across all sectors until the end of this settlement. MICRO TECHNICALS Gail Current Price: Rs 376.8 Target Price: Rs 400
The stock has made a promising looking breakout minus volume expansion. It has a projected target of about 400. Keep a stop at 365 and go long. Start booking profits above 395. IDFC Current Price: Rs 109.65 Target Price: Rs 115 (5 sessions), 130 (10 sessions)
The stock has made a sharp recovery from the mid-90s and generated very strong volumes while it has risen. It faces strong resistance at 115. If it closes higher than that, it would set up a target in the range of 130-135. Keep a stop at 105 and go long. Book partial profits at 115. Polaris Current Price: Rs 81.75 Target Price: Rs 90
The stock has spiked up on volume expansions. If it clears resistance at current levels and closes above 83, it faces a strong resistance at 90. Above 90, it would have a clear run till 100. Keep a stop at 78 and go long. Book profits at 90. RCom Current Price: Rs 435.10 Target Price: Rs 400
The stock has been range-trading through 400-450 while the MTN deal has been in play. Now that talks have broken down, it's liable to head back towards the bottom of that range. Keep a stop at 440, go short and cover at 400. RPL Current Price: Rs 153.8 Target Price: Rs 165
The stock has seen a big sell-off in the past five sessions down from around 170 till lows of 147. It seems to have bottomed. Keep a stop at 145 and go long. There is potential upside till 165 levels where there's strong resistance. Cover at 165. Markets last week S I Team / Mumbai July 21, 2008, 0:19 IST Markets closed strongly towards the end of the week with the Sensex gaining over 1,000 points to reach 13,635. For the week, the benchmark index gained 165 points or 1.23 per cent. This was a relief for the markets as equities lost out heavily at the start of the week on
political uncertainty, rising crude oil pirces and inflation. However, the markets were able to wipe out its losses as crude oil prices fell below the $130 mark. Foreign institutional investors (FIIs) have been sellers for the month of July having sold scrips worth Rs 2,235.70 crore. For the calendar year FIIs have sold shares worth Rs 27,701 crore. Mutual funds on the other hand have bought shares worth Rs 522.90 crore in July. What to expect this week Political developments and possibility of further monetary tightening measures by RBI will decide market movements this week. Markets will move up if the government manages to ride out this crisis (on Tuesday, July 22) as economic reform process is expected to come to the fore once again. The Left managed to put a spoke in the privatisation of PSUs, pension reforms, higher foreign holdings in insurance and liberal norms for foreign banks. More Q1 results could confirm the trend of declining growth of about 15 per cent in Q1 June 2008 over Q1 June 2007. Stock to watch RELIANCE IND
Last week's close (Rs) Prev. week's close (Rs) Week's high (Rs) Week's low (Rs) Last week's ave. daily turnover (Rs cr) Prev. week's ave. daily turnover (Rs cr) Number of up/down move 2,112.92 2,016.25 2,126.00 1,921.25 1,047.98 1,020.15 3/2
While the Reliance scrip has been bearing the brunt of negative newsflow be it a cut in petrochemical tariffs, possibility of a windfall tax or the withdrawl of EoU benefits for its refinery, a weak rupee and improvements on the operational front could boost the scrip in the near term. The stock could see an upswing if the settlement of the dispute with NTPC and RNRL for the sale of natural gas from KG basin, works out in RIL's favour. The Bombay High Court had restrained RIL from selling natural gas to third parties and the case is to come up on hearing on July 22. While analysts believe that earnings will be flat for Q1 FY09 (results are expected this week), higher refining margins at $16.5-$18.5/bbl reflecting higher petroleum product demand and petrochem prices due to stronger-than-expected petrochemical cycle are positive triggers for the stock.
http://www.thehindubusinessline.com/2008/07/21/stories/200 8072150720400.htm Dalal Street keenly watching political drama
External and internal triggers tossed the equity market last week. The Wall Street rally on July 16 and 17 resulted from the sharp drop in crude oil, better-thanexpected earnings reports from some of the big banks and IT companies, and short sellers covering positions after the SEC prohibited naked short-selling in 19 financial stocks reeling under the load of large short positions. Dalal Street too saw a reflection of these on the indices on short covering. As the home economics and politics did not throw up fresh troubles, some late recoveries provided temporary breathing space. This week the market may again plunge into turmoil if the trust vote results precipitate a political crisis. Market apprehension is not only over the future of the nuclear deal but also the management of the economy. Last week, the rupee appreciated over the greenback on a significant correction in crude oil prices. Rupee appreciation came after Fitch downgraded its rating for the local currency to “negative” from “stable” on “a considerable deterioration in the central government’s fiscal position in 2008-09 combined with a notable increase in government debt issuance to finance subsidies not captured in the Budget”. If political turmoil ensues this week, then rupee gain would evaporate in a jiffy.
Crude correction
On weekly basis, crude prices dropped by over 11 per cent. But there is hardly any indication to suggest that a serious corrective phase in global crude prices has set in. On the other hand, high local inflation continues to threaten growth. Erosion in corporate earnings and profits has been evident in the Q1 results declared so far. The market has been factoring in lower forward-earning growth as well. But a fresh political uncertainty would lead the market to factor in negatives more aggressively. Too many ifs and buts appear in forming a short-term outlook. If the UPA Government sails through the trust vote on July 22, the market may follow a stable course in the short term. If the Ambani brothers come to some kind of rapprochement, the market would consider it as positive, for the sentiment in the least. If after the weekend meeting in Geneva, which went off well in engaging Iran over the nuclear issue, things go sour afresh, speculators would find it easy to jack up crude oil prices in the short term and the equity markets would not have some respite.
But no one seems to be betting for a dramatic positive news even if the probability is high. RIL, Bharti, SAIL, Maruti, BHEL and ACC are among the biggies to announce their first quarter results this week.
Index Outlook
Sensex (13469.8) The dark clouds parted a little and melting crude prices sent a ray of hope to the hassled equity markets last week. Sensex rejoiced by gaining over 1,000 points in the last two sessions. Market participants will, however, switch from watching crude prices to focus on the high-octave political drama that will unfold in New Delhi next week as the Central Government seeks a confidence vote from the Lok Sabha. After weeks of pointing southwards, there is a mild bullishness apparent in the charts this week. In fact, we have not seen two consecutive days of such strong closes since May this year. Volumes were muted in both cash and derivatives segment implying that the buying was spurred by bottom-fishing by a select few. Sensex reversed from the intra-week trough at 12514 last week. As we have been reiterating, the confluence of targets and support between 12300 and 12800, make it a crucial support zone. Mild bullishness is evident in the oscillators’ chart too. Weekly oscillators are diverging positively while the 10-day rate of change oscillator has moved in to the positive territory. A bullish hammer is also evident in the weekly candle-stick chart that could portend a medium-term reversal. But these are early days yet and the steep crash from 17,735 has ensured that the Sensex has to do a lot more work before it can pull itself to safety. The pattern since the 12,822 trough appears to be a sideways correction in the down trend that could be an irregular flat or a triangle. It is, however, yet to be determined if
this move is part of the market’s base building effort before the next intermediate term rally or if it is a temporary halt in the down move from 17735. The immediate test for this rally will be in the zone between 14000 and 14250. A reversal from here would mean that a decline towards 12500 would be on the cards again. The medium-term outlook will turn positive on a close past 15300. If the trough formed last week at 12514 is penetrated in the near-term, it would mean that the C wave from the 17735 is extending and can drag the index lower towards 11800 or 11200. In other words, though the markets appeared gung-ho over the last two trading sessions, the near term trend is only sideways with a strong resistance at 14066, 14233 and 14677. A reversal from either of these levels will pull the index lower towards 12980, 12500 or 11800. Since we are faced with a confidence vote next Tuesday, the stock markets are likely to be volatile in the run-up to and following the motion. A range between 13000 and 14000 is likely before the trust vote is placed before Parliament. A euphoric reaction on the UPA winning the vote will give the upper targets at 14677 or 15330. If the vote results in the dismissal of the Government, a knee-jerk reaction can give the lower target to the index at 12160 or 11800. Needless to add, that long-term investors should use such a plunge to go on a shopping spree. Nifty (4092)
Nifty formed a low at 3790 before moving higher last week. The current shortterm up-trend can take the index to 4157 or 4297. The index faces strong resistance in the zone between 4200 and 4400 and traders should book some profits on their long positions in this band. A reversal from 4200 will drag the index lower towards 3901 or 3790 once again. For the medium-term, we continue to envisage a sideways range between 3700
and 4400. A decline below 3700 will accentuate the negative outlook and pave the way for a decline to 3596 or 3279. Global Cues Equity markets in the US and Europe reversed mid-week and are currently in a short-term up-trend. The CBOE VIX’ descent from 29 to 22 towards the end of the week captures this change in investor sentiment. Dow Jones Industrial Average formed a trough at 10827 on Tuesday and just when everyone was convinced that the sky was falling on their heads, it reversed to form a strong bullish engulfing candle on the weekly chart. The immediate resistances are at 11520 and then 11700. Rally beyond the second resistance would imply that a medium-term trough is in place at 10827. Asian and Latin American equity markets did not share the enthusiasm of the US and European markets continued to plumb lower. Commodities led by crude recorded a sharp sell-off. CRB index is down 5 per cent for the week. Immediate support for crude oil (NYMEX) is at $122 but a breach of this level can cause a decline to $110. Long-term retracement and trend line also give a potential lower target between $100
Index Outlook
Sensex (14571.3) Robert Rhea’s work published in Barron’s in 1932 describes one of the phases of a classic bear market as, “this phase represents the abandonment of the hopes upon which stocks were purchased at inflated prices.” This sentence accurately captures the mood in the Indian markets last week as the Sensex recorded yet another low for the year. Serious doubts are now beginning to rise in the minds of most market participants with regard to the unassailability of the current bull market. Volumes were lacklustre, even on days when the index closed with gains. FIIs continued as net sellers. Surfeit of short positions in the derivative segment can aid in the market recovery next week as the June contracts near expiry. The oscillators in the monthly chart deteriorated further last week. The 10-month rate of change oscillator (ROC) has slipped in to the negative zone and the 14month relative strength index (RSI) is at a reading of 50. These indicators have not tested these levels since 2003! However, positive divergences in the weekly and daily ROC imply that a recovery is possible in the short-term.
We had marked two possible medium-term moves for the Sensex in this column last week. Since the index failed to move past 16000, it is obvious that the third part of the down-move from the 21206-peak started at 17735 on May 5. The minimum target for this wave was 14676 (already achieved). Further decline would bring the next target at 13700 in to play. The fact that the August 2007 trough is at 13780, adds significance to this level. If we step back and view the entire bull market since September 2001, the important Fibonacci retracement support for this move occurs at 14096. If the current bear phase is going to be a shallow but prolonged (more than two years) then we can get away with a sideways move between 13500 and 20000 over this period. In other words, the Sensex is nearing key long-term support levels and the movement of the index over the next couple of weeks will determine how the Indian markets will move over the long-term. We will do a more detailed review of the long-term counts if the Sensex closes below 13700 for the week. It is highly likely that the Sensex recovers after an initial dip next week. The range envisaged for index over the next couple of weeks is between 14000 and 15500. The immediate downward targets for the index are 14089 and then 13880. Resistances would be at 15789 and 16400. Nifty (4347.5)
Nifty failed to move beyond 4750 and declined to an intra-week low at 4333 instead. It is now obvious that the C wave from the 6357-peak in unfolding now. The next target of this wave is 4130. If we look at the key Fibonacci retracement target for the current bull, phase, it occurs at 4287 and the August 2007 trough lies at 4002. Nifty can halt this leg of the down-move at either of these levels. Traders holding short positions should book profits around these levels. The immediate downward targets for the Nifty are 4320 and then 4168. The resistances for the week ahead would be at 4700 and then 4880. Global Cues It was an extremely disappointing show by the Dow Jones Industrial Average as it trudged lower towards its January trough at 11600. The zone between 11500 and
11600 is very significant from a long-term perspective for this index. The moot question is whether this level will hold. A penetration of this level would take the index lower to 10700. A positive take-away from the charts of the US indices is that the picture in the S & P 500 is not that dire as the index is only slightly below the key support at 1320. The Nasdaq Composite Index too is weathering the recent leg of the decline quite well. Many of the European indices are nearing their March lows. The Asian indices have been relatively resilient last week, moving in a band that is half-way down from the recent rally recorded in April. Philippines, China and Thailand continue to under-perform the other Asian indices. CRB Index on NYFE gained 6 per cent last week after a sideways consolidation spanning nine weeks, implying that commodities could be getting ready to zoom upwards again after the minor halt. Base metals such as copper and aluminium and some of the agri-commodities recorded sharp upward movement last week. Crude is ominously hovering in a narrow band between $130 and $138. A spurt to $147 to $150 appears imminent. —Lokeshwarri S. K.
Day Trading Guide
Monday, Jun 30, 2008
The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stoploss level is breached. There is a risk of loss in trading.
Sensex long-term outlook review
Sunday, Jul 06, 2008
We had expected the four-year long bull-phase to terminate in the first quarter of 2008 in our long-term outlook at the beginning of this year.
Our outermost target for the Sensex for 2008 was at 13700. Now that this level has been conclusively breached, a review of the long-term counts is called for. The signs of a significant bull-market top were littered all over in the last quarter of 2007 – irrational price movement, excessive speculation, unjustifiable valuations, bottom-rung stocks coming out of wilderness to enjoy their days in the sun, surfeit of exorbitantly priced IPOs and so on. The party had to come to an end and it did at the peak at 21206 on January 11. As explained in our yearly outlook, it is possible to anticipate a correction but difficult to judge the nature of the correction. We had taken the more optimistic view at the beginning of this year and anticipated the corrective move to halt at the first long-term support at 13700. A halt here would have implied a sideways move between 13700 and 21000 for a couple of years before the up-trend resumed to take the Sensex beyond 30K. But the decline below 13700 brings the next long-term supports for the Sensex at 11900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus.
Index Outlook
Sensex (13802.2) It was the turn of the bear to thunder through the Indian stock markets last week sending stock prices and the indices tumbling to one-year lows. The tiny mid-week recovery was scuttled by crude prices that spiked above $140 on Thursday. The weekly close below 14,000 has left everyone wondering where this would finally end. The rising level of pessimism in the market is a positive since it is one of the hallmarks of a market bottom. This pessimism was reflected in the sales of index
options by FIIs last week implying that they expect our markets to decline further. BSE mid and small-cap indices that had been holding up well in the sell-off in June joined the large-cap sliding brigade last week leaving no place to hide for investors. The Sensex’ plunge to the intra-week low at 13730 has helped to achieve the first target of the C wave from 21206. We have dwelt at length in our previous columns regarding the importance of the support band between 13700 and 14000. It is still possible that the index stabilises at current levels and moves higher towards 17000 over the medium- term. But it is obvious to all observers that the Indian benchmark is very precariously placed. What if the 13700 bastion is shattered? The next long-term support on the chart is present at 12316 - that is the March 2007 trough. Fifty per cent retracement of the bull market from 2001, gives us the level of 11900. In other words, the next long-term support band for the index is around 12000. Again, we have been reiterating that the third waves (up or down) are all-inclusive and cause extensive damage in a very short period. Penetration of the 13700 support will mean that the downward momentum will accelerate. The Sensex can decline to 13554 or 13178 next week. Resistances will be at 14500 and then 15000. Failure to rally past the first resistance will imply that the down-move will intensify. Investors having sleepless nights worrying over their portfolio need to have faith in the companies they have invested in. The fundamentally sound stocks will recover though it might take them a year or two to do so. It is time to think long-term and nibble at blue-chips stocks at opportune levels. Nifty (4136.6) Nifty declined to an intra-week low of 4093 before staging a recovery. But subsequent moves make it obvious that the index is poised to decline further in the near-term. The index is currently pausing close to the first target of the C wave from the 6357 peak. The next target for the index is at 4002 that is the August 2007 trough. If the index declines below 4000, the next long-term support would be at the March 2007 trough at 3573 that coincides with the 50 per cent retracement of the current bull-market. For the short-term, the downward targets for the Nifty are 4106, 4002 and then 3961. The down-move will intensify only on a decline below 3950. Resistances would be at 4320 and then 4450. Fresh long positions are advised only on a close above the second resistance. Global Cues
All eyes were riveted on the Dow Jones Industrial Average as it plunged to a new 2008 low and closed with a 4 per cent weekly loss. The target of the C wave down from the October 2007-peak is 11393 and then 10318. The index has already achieved the first target and some attempt at stabilisation is possible at these levels. Despite the violent moves in the equities, the CBOE VIX (volatility index) was at 24, well off the peak at 37 recorded in the first quarter of 2008. This can probably be explained by the fact that the other US indices are not that negatively poised. The broader S & P 500 and the Nasdaq Composite have yet to test their March lows. European indices continue to under-perform their Asian and Latin American peers. Philippines and Chinese stocks trudged lower. Crude prices on Nymex took a tentative step beyond the short-term band between $130 and $138 on Friday, sending a ripple of fear in equity markets. Immediate upward targets are $148 and then $159. Gold needs to move past $940 to indicate that a medium-term recovery is under way.
We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980. The fifth leg (upward) would then take the index beyond 25000 again. Caveat decline below 9703 would need recasting of the counts. The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move. The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a longdrawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.
Second half of 2008
Though the Sensex appears to be hurtling lower in to an abyss right now, a three wave A-B-C movement downwards is drawing close to termination. A 1:1 relation between the A wave and the C wave gives us the target at 11206. Fifty per cent retracement of the bull market from 2001 gives us the support at 11900. The decline from January can halt somewhere between these two levels. However, it needs to be borne in mind that the down-move from 21206 could be the first leg of the long-term correction. But once this leg ends, we would have an intermediate term up-trend that would provide some respite to the battered stocks.
The preferred view is that the index would halt in the zone between 11000 and 12000 and spend the rest of 2008 in a range between 12000 and 16500. Our outer targets for the year would be 18000 and 9700. We await clues from subsequent rallies to tell us how the rest of this correction will shape-up. — Lokeshwarri S.K.
Make sense of market jargon
Sunday, Jun 29, 2008
The road to upward mobility is best travelled by ‘term-droppers.’ The more jargon you throw at colleagues, bosses, vendors, the more likely people will regard you as intelligent and well read and in-the-know. So if you want to impress that snooty colleague in the next cubicle with a few wellchosen technical terms, make sense of all the jargon splashed across the pink papers. Here’s a primer: India is expensive; Investors reconsider fresh investments; Valuations look attractive Lesson 101 of Valuation comprises four words really — Buy Low, Sell High. Behind this seemingly simple line resides a very complex world. The terms ‘Low’ and ‘High’ are relative terms — which means that we need a common parameter of comparison. This is where P/E comes into the picture. P/E ratios are typically used as a first-cut measure by investors to determine if a stock is overvalued or underpriced and whether it makes sense to invest in it. The P/E ratio or Price Earnings Multiple is calculated by dividing the price (of a share) by its earnings (EPS or earnings per share). It means that for a given level of performance by the company — EPS, the market has priced the stock at a particular level — P. Take, for instance, a company, Xlerate, in the biotech space. Say, the company’s stock price is Rs 240 and its EPS forecast for the year is Rs 8, then the PE for Xlerate is 30. However, 30, per se means nothing; it doesn’t signify if the P/E is high or low and whether one should buy Xlerate stock. To take that decision, one needs to compare the P/E to other stocks in a comparable category or industry. So if most other stocks in the biotech industry have P/Es of around 40, then Xlerate could be undervalued and hence its ‘valuation seems attractive.’ However, there could be two reasons why the market has priced it lower : Either the major local and global investors are unaware of the company and its performance and hence haven’t been able to value it correctly, or they think the stock purposely ought to be priced lower than competitors due to reasons such as bad management, expected slowdown in performance, inadequate ability to deal with future/competition, etc.
Similarly, if most of the other emerging market indices P/E s are at around 12 and India’s P/E is at 17, then India is considered ‘expensive.’ Inflation figures spook market Inflation is basically a measure of prices in the country. It is measured by something called the WPI — wholesale price index, which factors in prices of basic goods and commodities in India. It is usually indicated in percentage terms. For the banking and financial system players, inflation is the centre of their universe. The reason: inflation erodes the value of money and hence the return on investment. If inflation is 4 per cent, it means that a lunch that cost Rs 100 last year will cost you Rs 104 today. Your Rs 100 should have grown by Rs 4 in one year for you to enjoy the same standard of living. Hence, for you to have a ‘real’ return on your investment of Rs 100, the interest rate should be more than 4 per cent. Hence when inflation rises, interest rates need to rise to ensure that investors get ‘real returns.’ Liquidity is tight This phrase is used generously by journalists across the stock, debt and commodities markets. Liquidity refers to the amount of money floating in the system and which is available to corporates, government and individuals. The Reserve Bank of India creates money in the system. It also reduces the amount of money in circulation by sucking up money from the system either by buying rupees from banks and selling them foreign currency, or by issuing government securities which banks and institutions subscribe to. The RBI is, therefore, the controller of liquidity. Liquidity can become ‘tight’ when the demand for funds far exceeds the supply. This could happen due to a variety of reasons: Corporates are borrowing more to fund their business growth and for capital investments; The Government of India is borrowing more to cover the gap between its expenses and income; The value of the rupee is depreciating faster than the RBI would like and hence the RBI is ‘buying rupees’ to increase its value versus the dollar. And the usual repercussion of tight liquidity is increasing interest rates. Market is currently overbought Simply put, the market being overbought means that the market has risen too much or too fast and is ‘expensive’ . Likewise, oversold means that the prices have fallen too sharply.
The terms per se are used by technical analysts who chart price movements to predict what the future price of the stock is likely to be. Usually there is a fair degree of balance between buyers and sellers in the market. However, sometimes, there might be too much buying or too much selling. These are unnatural conditions and often an indicator that one must take the contrary action. Hence if the market is considered overbought, the technical analyst will sell, and if the market is considered oversold, she/he will buy. There was some unwinding of long positions in the futures market.... It’s probably easier to learn two foreign languages simultaneously than decipher finance’s complexity. So baby steps on this one: Futures market This market refers to contracts where the buyer and seller agree to transact at a future date; the price and quantity for that future transaction is, however, fixed in the present. Think of a futures contract as an understanding you would get into with your local raddiwallah. You promise the raddiwallah that you will give him 5 kg of newspapers every month over the next six months. The raddiwallah, in turn, promises to pay you Rs 5 per kg. So, basically, you two will have entered into a futures contract where the price and quantity has been pre-fixed, regardless of what the price of second-hand newspapers will be in the coming months. Both parties benefit: The raddiwallah is locking in a guaranteed supply of newspapers whereas you are guaranteed you will get a good price for the next six months. Similar transactions take place in the stocks and commodities markets. People tend to enter into futures contracts if they think the markets will be volatile in the future. By agreeing to price and quantity now, they can control their risk. Long positions: When an investor holds a long position, it means that he actually holds the share and intends to hold it for a while because he thinks prices will go up on the share. If prices go down, then the investor loses money. Similarly, a long position in a futures contract means the person is required to buy the share at a future date. She will make money if the share price goes up at a later date. Unwinding: This refers to the process of selling to liquidate long positions ’There was some unwinding of long positions in the futures market’ basically means that investors think the market is likely to go down in the future and hence are selling their underlying shares and offloading their long positions.
doc_265242439.doc
Project
Abheek Barua: Inflation - More shocks ahead? Abheek Barua / New Delhi July 21, 2008, 0:50 IST Some more write-downs in US banks could push oil prices back to over $140 in no time. The headline inflation rate for the week of July 5 released last Thursday printed at 11.91 per cent, a little over the 11.89 per cent of the previous week. The median forecast from financial market economists was 12.05 per cent. This prompted the finance minister to claim that inflation is stabilising. The prognosis might turn out to be a trifle too optimistic. There are a number of risks lurking around the corner that threaten to take inflation up in the months ahead. Thus, I shall not be surprised if by September the inflation rate climbs well over 13 per cent. For one, the much-discussed "base effect" turns adverse post July and is likely to pull the inflation rate up. What it means is that inflation rates were exceptionally low in these months last year. Since inflation in India is measured year on year — that is by dividing the current price level by the level in the same week last year, an exceptionally low "base" level is likely to jack the current year's inflation rate up. Apart from this purely statistical effect, there are more "real" drivers that are likely to be at play going forward. Going by the data released by the Met office, the monsoon seems to have been far from adequate in Gujarat, Maharashtra and Andhra Pradesh. This is likely to affect crops like cotton, oilseeds and pulses. Commodity traders from the region tell me that the impact is already palpable and will drive prices up. Oilseeds and edible oils incidentally have been a key contributor to the build-up in inflation over the last few months and a further uptick in prices cannot but be bad news. Fortunately, the monsoon seems to have been kinder to the North and East and some moderation in rice prices could provide some offset. The "self-imposed" moratorium on steel prices by local steel manufacturers lifts soon. Input costs like iron ore have hardened over the past few months and there is a large gap between local and international prices. If steel producers are allowed to bridge this gap, this "catch up" with global prices could drive inflation up. The problem of incomplete data capture has, in the recent past, driven nasty surprises in inflation. Price changes on the ground are often not captured in the index on time and this often creates a large "backlog" of revision that is often done in one shot. This leads to sharp spikes in inflation and sudden, unanticipated jumps in the price level. We saw this problem with iron and steel prices, which had been going up since the last quarter of 2007 but started getting reflected in the wholesale price index only in March. Inflation graphs thus show a step-jump in March. Analysis by a number of research houses shows that hefty upward revisions in the indices for cement, electricity and fertilisers are due. As they find their way into the index, a jump in inflation seems inevitable. The joker in the pack remains oil prices. While moderation in global prices might not have an immediate impact on local prices, there is little doubt that the near-term dynamic of
global inflation is inextricably linked to crude oil prices. If crude prices drop sharply, so will other commodities. This will rub off on Indian inflation. I am writing this column at a time when oil prices have skidded from a peak of over $145 to $130 a barrel over a matter of days. Much as I would like to predict the beginning of a sustained decline, the fact that I have been proved wrong at least half a dozen times over the last year has made me somewhat cautious. Let me explain. I am squarely in the camp that believes that oil prices are grossly overheated and are way higher than what the balance of demand and supply in the oil market would imply. However, over the last few months I have seen them gain in their role as a hedge against the vagaries of the US financial sector and the dollar. In short, investors have dumped dollar assets and bought oil futures instead. Thus, a permanent succour in oil markets could come from one of two things. If the anxieties about the US financial sector wane, there could be a sustained decline in oil prices. That hardly seems to be the case. The recent talk about the future of mortgage lending giants, Freddie Mac and Fannie Mae, has revived concerns about the acuteness of the American financial crisis. The analyst community seems convinced that a slew of write-downs and capital losses by banks and financial institutions are due soon. Alternatively, if oil's role as a dollar hedge diminishes and markets focus instead on fundamentals in valuing oil, the price of oil could drop. Last week's sell-off in oil suggests that some of this is happening. However, it is premature to think that this will continue. A couple of negative headlines about a threat to oil supply and more write-downs by US banks could push oil prices back over $140 in no time. It pays to be prudent in these volatile times. Traders, investors, and policymakers cannot afford to get distracted by a couple of weeks' inflation releases. Only when a sudden turn shows enough stability to become a sustained trend can they afford to let their guard down. That perhaps means more hikes in the RBI's repo rate and cash reserve ratio are coming our way in the monetary policy due at the end of the month. Volatile week ahead Devangshu Datta / New Delhi July 21, 2008, 0:06 IST Expect 500-point swings either way. The market moved through a wide range, first establishing a new 2008 low and then recovering sharply. At the weekend, the Nifty was up 1.07 per cent after it closed on 4092.25 points – it bounced from an intra-day low of 3790. The Sensex was ahead 1.23 per cent at 13,635 points. The Defty was up 1.04 per cent as the rupee weakened a little. The FIIs remained net sellers but they did buy heavily on Thursday. The domestic funds remained token net buyers. Breadth signals stayed poor with advances outnumbered by declines and volumes on the low side. There were negative divergences as smaller stocks underperformed the Nifty. The
Junior was down 0.8 per cent while the BSE 500 lost 0.4 per cent and the Midcaps-50 lost 2.09 per cent. The Vix closed dangerously high at 36-plus. Outlook: Pure technical signals suggest that the market will face very heavy resistance at 4100-4200 and Monday could see net losses. Tuesday will be very volatile. If the UPA wins the confidence vote the market could rebound till around 4400. If the government falls, the market is likely to test support at 3800 again. Either way, expect a 400-500 point swing this week. Rationale: Obviously the confidence vote is a major influence on sentiment. Right now, given bearish signals, the market seems pessimistic about the political situation. However this is a classic situation where there isn't enough hard information for the market consensus to be reliable. If the UPA does win, short positions will be cleared in a hurry. Counter-view: The market saw the establishment of lower lows last week and poor breadth signals. Whatever happens on Tuesday in Parliament, the bear market will remain very much in force. Any recovery that may occur would be temporary in nature. Bulls and Bears: The recovery last week was driven to a large extent by upwards movement in oversold bank stocks as the Bank Nifty gained 2.8 per cent. Both PSU banks such as SBI and PNB and private banks like ICICI and HDFC Bank contributed to the rise. The IT sector proved to be a major drag as the CNXIT lost close to 7 per cent after TCS failed to beat street expectations. Polaris is the only IT sector major moving up against the trend and Satyam looks to be the most hard-hit. If oil prices continue to soften, there may be a recovery in store for PSUs like IOC, BPCL and HPCL while ONGC seems to be quite strong. Gail is also looking good. On the other hand, both ferrous and non-ferrous metals are being hammered. There are isolated pockets of strength such as ABB, Bharat Forge, Airtel, Bhel, HDFC, IDFC and Larsen, which could outperform the overall market. However, movements next week are likely to be very strongly aligned because the driver is political (in)stability. What happens in Parliament on Tuesday will likely determine the trend across all sectors until the end of this settlement. MICRO TECHNICALS Gail Current Price: Rs 376.8 Target Price: Rs 400
The stock has made a promising looking breakout minus volume expansion. It has a projected target of about 400. Keep a stop at 365 and go long. Start booking profits above 395. IDFC Current Price: Rs 109.65 Target Price: Rs 115 (5 sessions), 130 (10 sessions)
The stock has made a sharp recovery from the mid-90s and generated very strong volumes while it has risen. It faces strong resistance at 115. If it closes higher than that, it would set up a target in the range of 130-135. Keep a stop at 105 and go long. Book partial profits at 115. Polaris Current Price: Rs 81.75 Target Price: Rs 90
The stock has spiked up on volume expansions. If it clears resistance at current levels and closes above 83, it faces a strong resistance at 90. Above 90, it would have a clear run till 100. Keep a stop at 78 and go long. Book profits at 90. RCom Current Price: Rs 435.10 Target Price: Rs 400
The stock has been range-trading through 400-450 while the MTN deal has been in play. Now that talks have broken down, it's liable to head back towards the bottom of that range. Keep a stop at 440, go short and cover at 400. RPL Current Price: Rs 153.8 Target Price: Rs 165
The stock has seen a big sell-off in the past five sessions down from around 170 till lows of 147. It seems to have bottomed. Keep a stop at 145 and go long. There is potential upside till 165 levels where there's strong resistance. Cover at 165. Markets last week S I Team / Mumbai July 21, 2008, 0:19 IST Markets closed strongly towards the end of the week with the Sensex gaining over 1,000 points to reach 13,635. For the week, the benchmark index gained 165 points or 1.23 per cent. This was a relief for the markets as equities lost out heavily at the start of the week on
political uncertainty, rising crude oil pirces and inflation. However, the markets were able to wipe out its losses as crude oil prices fell below the $130 mark. Foreign institutional investors (FIIs) have been sellers for the month of July having sold scrips worth Rs 2,235.70 crore. For the calendar year FIIs have sold shares worth Rs 27,701 crore. Mutual funds on the other hand have bought shares worth Rs 522.90 crore in July. What to expect this week Political developments and possibility of further monetary tightening measures by RBI will decide market movements this week. Markets will move up if the government manages to ride out this crisis (on Tuesday, July 22) as economic reform process is expected to come to the fore once again. The Left managed to put a spoke in the privatisation of PSUs, pension reforms, higher foreign holdings in insurance and liberal norms for foreign banks. More Q1 results could confirm the trend of declining growth of about 15 per cent in Q1 June 2008 over Q1 June 2007. Stock to watch RELIANCE IND
Last week's close (Rs) Prev. week's close (Rs) Week's high (Rs) Week's low (Rs) Last week's ave. daily turnover (Rs cr) Prev. week's ave. daily turnover (Rs cr) Number of up/down move 2,112.92 2,016.25 2,126.00 1,921.25 1,047.98 1,020.15 3/2
While the Reliance scrip has been bearing the brunt of negative newsflow be it a cut in petrochemical tariffs, possibility of a windfall tax or the withdrawl of EoU benefits for its refinery, a weak rupee and improvements on the operational front could boost the scrip in the near term. The stock could see an upswing if the settlement of the dispute with NTPC and RNRL for the sale of natural gas from KG basin, works out in RIL's favour. The Bombay High Court had restrained RIL from selling natural gas to third parties and the case is to come up on hearing on July 22. While analysts believe that earnings will be flat for Q1 FY09 (results are expected this week), higher refining margins at $16.5-$18.5/bbl reflecting higher petroleum product demand and petrochem prices due to stronger-than-expected petrochemical cycle are positive triggers for the stock.
http://www.thehindubusinessline.com/2008/07/21/stories/200 8072150720400.htm Dalal Street keenly watching political drama
External and internal triggers tossed the equity market last week. The Wall Street rally on July 16 and 17 resulted from the sharp drop in crude oil, better-thanexpected earnings reports from some of the big banks and IT companies, and short sellers covering positions after the SEC prohibited naked short-selling in 19 financial stocks reeling under the load of large short positions. Dalal Street too saw a reflection of these on the indices on short covering. As the home economics and politics did not throw up fresh troubles, some late recoveries provided temporary breathing space. This week the market may again plunge into turmoil if the trust vote results precipitate a political crisis. Market apprehension is not only over the future of the nuclear deal but also the management of the economy. Last week, the rupee appreciated over the greenback on a significant correction in crude oil prices. Rupee appreciation came after Fitch downgraded its rating for the local currency to “negative” from “stable” on “a considerable deterioration in the central government’s fiscal position in 2008-09 combined with a notable increase in government debt issuance to finance subsidies not captured in the Budget”. If political turmoil ensues this week, then rupee gain would evaporate in a jiffy.
Crude correction
On weekly basis, crude prices dropped by over 11 per cent. But there is hardly any indication to suggest that a serious corrective phase in global crude prices has set in. On the other hand, high local inflation continues to threaten growth. Erosion in corporate earnings and profits has been evident in the Q1 results declared so far. The market has been factoring in lower forward-earning growth as well. But a fresh political uncertainty would lead the market to factor in negatives more aggressively. Too many ifs and buts appear in forming a short-term outlook. If the UPA Government sails through the trust vote on July 22, the market may follow a stable course in the short term. If the Ambani brothers come to some kind of rapprochement, the market would consider it as positive, for the sentiment in the least. If after the weekend meeting in Geneva, which went off well in engaging Iran over the nuclear issue, things go sour afresh, speculators would find it easy to jack up crude oil prices in the short term and the equity markets would not have some respite.
But no one seems to be betting for a dramatic positive news even if the probability is high. RIL, Bharti, SAIL, Maruti, BHEL and ACC are among the biggies to announce their first quarter results this week.
Index Outlook
Sensex (13469.8) The dark clouds parted a little and melting crude prices sent a ray of hope to the hassled equity markets last week. Sensex rejoiced by gaining over 1,000 points in the last two sessions. Market participants will, however, switch from watching crude prices to focus on the high-octave political drama that will unfold in New Delhi next week as the Central Government seeks a confidence vote from the Lok Sabha. After weeks of pointing southwards, there is a mild bullishness apparent in the charts this week. In fact, we have not seen two consecutive days of such strong closes since May this year. Volumes were muted in both cash and derivatives segment implying that the buying was spurred by bottom-fishing by a select few. Sensex reversed from the intra-week trough at 12514 last week. As we have been reiterating, the confluence of targets and support between 12300 and 12800, make it a crucial support zone. Mild bullishness is evident in the oscillators’ chart too. Weekly oscillators are diverging positively while the 10-day rate of change oscillator has moved in to the positive territory. A bullish hammer is also evident in the weekly candle-stick chart that could portend a medium-term reversal. But these are early days yet and the steep crash from 17,735 has ensured that the Sensex has to do a lot more work before it can pull itself to safety. The pattern since the 12,822 trough appears to be a sideways correction in the down trend that could be an irregular flat or a triangle. It is, however, yet to be determined if
this move is part of the market’s base building effort before the next intermediate term rally or if it is a temporary halt in the down move from 17735. The immediate test for this rally will be in the zone between 14000 and 14250. A reversal from here would mean that a decline towards 12500 would be on the cards again. The medium-term outlook will turn positive on a close past 15300. If the trough formed last week at 12514 is penetrated in the near-term, it would mean that the C wave from the 17735 is extending and can drag the index lower towards 11800 or 11200. In other words, though the markets appeared gung-ho over the last two trading sessions, the near term trend is only sideways with a strong resistance at 14066, 14233 and 14677. A reversal from either of these levels will pull the index lower towards 12980, 12500 or 11800. Since we are faced with a confidence vote next Tuesday, the stock markets are likely to be volatile in the run-up to and following the motion. A range between 13000 and 14000 is likely before the trust vote is placed before Parliament. A euphoric reaction on the UPA winning the vote will give the upper targets at 14677 or 15330. If the vote results in the dismissal of the Government, a knee-jerk reaction can give the lower target to the index at 12160 or 11800. Needless to add, that long-term investors should use such a plunge to go on a shopping spree. Nifty (4092)
Nifty formed a low at 3790 before moving higher last week. The current shortterm up-trend can take the index to 4157 or 4297. The index faces strong resistance in the zone between 4200 and 4400 and traders should book some profits on their long positions in this band. A reversal from 4200 will drag the index lower towards 3901 or 3790 once again. For the medium-term, we continue to envisage a sideways range between 3700
and 4400. A decline below 3700 will accentuate the negative outlook and pave the way for a decline to 3596 or 3279. Global Cues Equity markets in the US and Europe reversed mid-week and are currently in a short-term up-trend. The CBOE VIX’ descent from 29 to 22 towards the end of the week captures this change in investor sentiment. Dow Jones Industrial Average formed a trough at 10827 on Tuesday and just when everyone was convinced that the sky was falling on their heads, it reversed to form a strong bullish engulfing candle on the weekly chart. The immediate resistances are at 11520 and then 11700. Rally beyond the second resistance would imply that a medium-term trough is in place at 10827. Asian and Latin American equity markets did not share the enthusiasm of the US and European markets continued to plumb lower. Commodities led by crude recorded a sharp sell-off. CRB index is down 5 per cent for the week. Immediate support for crude oil (NYMEX) is at $122 but a breach of this level can cause a decline to $110. Long-term retracement and trend line also give a potential lower target between $100
Index Outlook
Sensex (14571.3) Robert Rhea’s work published in Barron’s in 1932 describes one of the phases of a classic bear market as, “this phase represents the abandonment of the hopes upon which stocks were purchased at inflated prices.” This sentence accurately captures the mood in the Indian markets last week as the Sensex recorded yet another low for the year. Serious doubts are now beginning to rise in the minds of most market participants with regard to the unassailability of the current bull market. Volumes were lacklustre, even on days when the index closed with gains. FIIs continued as net sellers. Surfeit of short positions in the derivative segment can aid in the market recovery next week as the June contracts near expiry. The oscillators in the monthly chart deteriorated further last week. The 10-month rate of change oscillator (ROC) has slipped in to the negative zone and the 14month relative strength index (RSI) is at a reading of 50. These indicators have not tested these levels since 2003! However, positive divergences in the weekly and daily ROC imply that a recovery is possible in the short-term.
We had marked two possible medium-term moves for the Sensex in this column last week. Since the index failed to move past 16000, it is obvious that the third part of the down-move from the 21206-peak started at 17735 on May 5. The minimum target for this wave was 14676 (already achieved). Further decline would bring the next target at 13700 in to play. The fact that the August 2007 trough is at 13780, adds significance to this level. If we step back and view the entire bull market since September 2001, the important Fibonacci retracement support for this move occurs at 14096. If the current bear phase is going to be a shallow but prolonged (more than two years) then we can get away with a sideways move between 13500 and 20000 over this period. In other words, the Sensex is nearing key long-term support levels and the movement of the index over the next couple of weeks will determine how the Indian markets will move over the long-term. We will do a more detailed review of the long-term counts if the Sensex closes below 13700 for the week. It is highly likely that the Sensex recovers after an initial dip next week. The range envisaged for index over the next couple of weeks is between 14000 and 15500. The immediate downward targets for the index are 14089 and then 13880. Resistances would be at 15789 and 16400. Nifty (4347.5)
Nifty failed to move beyond 4750 and declined to an intra-week low at 4333 instead. It is now obvious that the C wave from the 6357-peak in unfolding now. The next target of this wave is 4130. If we look at the key Fibonacci retracement target for the current bull, phase, it occurs at 4287 and the August 2007 trough lies at 4002. Nifty can halt this leg of the down-move at either of these levels. Traders holding short positions should book profits around these levels. The immediate downward targets for the Nifty are 4320 and then 4168. The resistances for the week ahead would be at 4700 and then 4880. Global Cues It was an extremely disappointing show by the Dow Jones Industrial Average as it trudged lower towards its January trough at 11600. The zone between 11500 and
11600 is very significant from a long-term perspective for this index. The moot question is whether this level will hold. A penetration of this level would take the index lower to 10700. A positive take-away from the charts of the US indices is that the picture in the S & P 500 is not that dire as the index is only slightly below the key support at 1320. The Nasdaq Composite Index too is weathering the recent leg of the decline quite well. Many of the European indices are nearing their March lows. The Asian indices have been relatively resilient last week, moving in a band that is half-way down from the recent rally recorded in April. Philippines, China and Thailand continue to under-perform the other Asian indices. CRB Index on NYFE gained 6 per cent last week after a sideways consolidation spanning nine weeks, implying that commodities could be getting ready to zoom upwards again after the minor halt. Base metals such as copper and aluminium and some of the agri-commodities recorded sharp upward movement last week. Crude is ominously hovering in a narrow band between $130 and $138. A spurt to $147 to $150 appears imminent. —Lokeshwarri S. K.
Day Trading Guide
Monday, Jun 30, 2008
The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stoploss level is breached. There is a risk of loss in trading.
Sensex long-term outlook review
Sunday, Jul 06, 2008
We had expected the four-year long bull-phase to terminate in the first quarter of 2008 in our long-term outlook at the beginning of this year.
Our outermost target for the Sensex for 2008 was at 13700. Now that this level has been conclusively breached, a review of the long-term counts is called for. The signs of a significant bull-market top were littered all over in the last quarter of 2007 – irrational price movement, excessive speculation, unjustifiable valuations, bottom-rung stocks coming out of wilderness to enjoy their days in the sun, surfeit of exorbitantly priced IPOs and so on. The party had to come to an end and it did at the peak at 21206 on January 11. As explained in our yearly outlook, it is possible to anticipate a correction but difficult to judge the nature of the correction. We had taken the more optimistic view at the beginning of this year and anticipated the corrective move to halt at the first long-term support at 13700. A halt here would have implied a sideways move between 13700 and 21000 for a couple of years before the up-trend resumed to take the Sensex beyond 30K. But the decline below 13700 brings the next long-term supports for the Sensex at 11900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus.
Index Outlook
Sensex (13802.2) It was the turn of the bear to thunder through the Indian stock markets last week sending stock prices and the indices tumbling to one-year lows. The tiny mid-week recovery was scuttled by crude prices that spiked above $140 on Thursday. The weekly close below 14,000 has left everyone wondering where this would finally end. The rising level of pessimism in the market is a positive since it is one of the hallmarks of a market bottom. This pessimism was reflected in the sales of index
options by FIIs last week implying that they expect our markets to decline further. BSE mid and small-cap indices that had been holding up well in the sell-off in June joined the large-cap sliding brigade last week leaving no place to hide for investors. The Sensex’ plunge to the intra-week low at 13730 has helped to achieve the first target of the C wave from 21206. We have dwelt at length in our previous columns regarding the importance of the support band between 13700 and 14000. It is still possible that the index stabilises at current levels and moves higher towards 17000 over the medium- term. But it is obvious to all observers that the Indian benchmark is very precariously placed. What if the 13700 bastion is shattered? The next long-term support on the chart is present at 12316 - that is the March 2007 trough. Fifty per cent retracement of the bull market from 2001, gives us the level of 11900. In other words, the next long-term support band for the index is around 12000. Again, we have been reiterating that the third waves (up or down) are all-inclusive and cause extensive damage in a very short period. Penetration of the 13700 support will mean that the downward momentum will accelerate. The Sensex can decline to 13554 or 13178 next week. Resistances will be at 14500 and then 15000. Failure to rally past the first resistance will imply that the down-move will intensify. Investors having sleepless nights worrying over their portfolio need to have faith in the companies they have invested in. The fundamentally sound stocks will recover though it might take them a year or two to do so. It is time to think long-term and nibble at blue-chips stocks at opportune levels. Nifty (4136.6) Nifty declined to an intra-week low of 4093 before staging a recovery. But subsequent moves make it obvious that the index is poised to decline further in the near-term. The index is currently pausing close to the first target of the C wave from the 6357 peak. The next target for the index is at 4002 that is the August 2007 trough. If the index declines below 4000, the next long-term support would be at the March 2007 trough at 3573 that coincides with the 50 per cent retracement of the current bull-market. For the short-term, the downward targets for the Nifty are 4106, 4002 and then 3961. The down-move will intensify only on a decline below 3950. Resistances would be at 4320 and then 4450. Fresh long positions are advised only on a close above the second resistance. Global Cues
All eyes were riveted on the Dow Jones Industrial Average as it plunged to a new 2008 low and closed with a 4 per cent weekly loss. The target of the C wave down from the October 2007-peak is 11393 and then 10318. The index has already achieved the first target and some attempt at stabilisation is possible at these levels. Despite the violent moves in the equities, the CBOE VIX (volatility index) was at 24, well off the peak at 37 recorded in the first quarter of 2008. This can probably be explained by the fact that the other US indices are not that negatively poised. The broader S & P 500 and the Nasdaq Composite have yet to test their March lows. European indices continue to under-perform their Asian and Latin American peers. Philippines and Chinese stocks trudged lower. Crude prices on Nymex took a tentative step beyond the short-term band between $130 and $138 on Friday, sending a ripple of fear in equity markets. Immediate upward targets are $148 and then $159. Gold needs to move past $940 to indicate that a medium-term recovery is under way.
We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980. The fifth leg (upward) would then take the index beyond 25000 again. Caveat decline below 9703 would need recasting of the counts. The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move. The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a longdrawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.
Second half of 2008
Though the Sensex appears to be hurtling lower in to an abyss right now, a three wave A-B-C movement downwards is drawing close to termination. A 1:1 relation between the A wave and the C wave gives us the target at 11206. Fifty per cent retracement of the bull market from 2001 gives us the support at 11900. The decline from January can halt somewhere between these two levels. However, it needs to be borne in mind that the down-move from 21206 could be the first leg of the long-term correction. But once this leg ends, we would have an intermediate term up-trend that would provide some respite to the battered stocks.
The preferred view is that the index would halt in the zone between 11000 and 12000 and spend the rest of 2008 in a range between 12000 and 16500. Our outer targets for the year would be 18000 and 9700. We await clues from subsequent rallies to tell us how the rest of this correction will shape-up. — Lokeshwarri S.K.
Make sense of market jargon
Sunday, Jun 29, 2008
The road to upward mobility is best travelled by ‘term-droppers.’ The more jargon you throw at colleagues, bosses, vendors, the more likely people will regard you as intelligent and well read and in-the-know. So if you want to impress that snooty colleague in the next cubicle with a few wellchosen technical terms, make sense of all the jargon splashed across the pink papers. Here’s a primer: India is expensive; Investors reconsider fresh investments; Valuations look attractive Lesson 101 of Valuation comprises four words really — Buy Low, Sell High. Behind this seemingly simple line resides a very complex world. The terms ‘Low’ and ‘High’ are relative terms — which means that we need a common parameter of comparison. This is where P/E comes into the picture. P/E ratios are typically used as a first-cut measure by investors to determine if a stock is overvalued or underpriced and whether it makes sense to invest in it. The P/E ratio or Price Earnings Multiple is calculated by dividing the price (of a share) by its earnings (EPS or earnings per share). It means that for a given level of performance by the company — EPS, the market has priced the stock at a particular level — P. Take, for instance, a company, Xlerate, in the biotech space. Say, the company’s stock price is Rs 240 and its EPS forecast for the year is Rs 8, then the PE for Xlerate is 30. However, 30, per se means nothing; it doesn’t signify if the P/E is high or low and whether one should buy Xlerate stock. To take that decision, one needs to compare the P/E to other stocks in a comparable category or industry. So if most other stocks in the biotech industry have P/Es of around 40, then Xlerate could be undervalued and hence its ‘valuation seems attractive.’ However, there could be two reasons why the market has priced it lower : Either the major local and global investors are unaware of the company and its performance and hence haven’t been able to value it correctly, or they think the stock purposely ought to be priced lower than competitors due to reasons such as bad management, expected slowdown in performance, inadequate ability to deal with future/competition, etc.
Similarly, if most of the other emerging market indices P/E s are at around 12 and India’s P/E is at 17, then India is considered ‘expensive.’ Inflation figures spook market Inflation is basically a measure of prices in the country. It is measured by something called the WPI — wholesale price index, which factors in prices of basic goods and commodities in India. It is usually indicated in percentage terms. For the banking and financial system players, inflation is the centre of their universe. The reason: inflation erodes the value of money and hence the return on investment. If inflation is 4 per cent, it means that a lunch that cost Rs 100 last year will cost you Rs 104 today. Your Rs 100 should have grown by Rs 4 in one year for you to enjoy the same standard of living. Hence, for you to have a ‘real’ return on your investment of Rs 100, the interest rate should be more than 4 per cent. Hence when inflation rises, interest rates need to rise to ensure that investors get ‘real returns.’ Liquidity is tight This phrase is used generously by journalists across the stock, debt and commodities markets. Liquidity refers to the amount of money floating in the system and which is available to corporates, government and individuals. The Reserve Bank of India creates money in the system. It also reduces the amount of money in circulation by sucking up money from the system either by buying rupees from banks and selling them foreign currency, or by issuing government securities which banks and institutions subscribe to. The RBI is, therefore, the controller of liquidity. Liquidity can become ‘tight’ when the demand for funds far exceeds the supply. This could happen due to a variety of reasons: Corporates are borrowing more to fund their business growth and for capital investments; The Government of India is borrowing more to cover the gap between its expenses and income; The value of the rupee is depreciating faster than the RBI would like and hence the RBI is ‘buying rupees’ to increase its value versus the dollar. And the usual repercussion of tight liquidity is increasing interest rates. Market is currently overbought Simply put, the market being overbought means that the market has risen too much or too fast and is ‘expensive’ . Likewise, oversold means that the prices have fallen too sharply.
The terms per se are used by technical analysts who chart price movements to predict what the future price of the stock is likely to be. Usually there is a fair degree of balance between buyers and sellers in the market. However, sometimes, there might be too much buying or too much selling. These are unnatural conditions and often an indicator that one must take the contrary action. Hence if the market is considered overbought, the technical analyst will sell, and if the market is considered oversold, she/he will buy. There was some unwinding of long positions in the futures market.... It’s probably easier to learn two foreign languages simultaneously than decipher finance’s complexity. So baby steps on this one: Futures market This market refers to contracts where the buyer and seller agree to transact at a future date; the price and quantity for that future transaction is, however, fixed in the present. Think of a futures contract as an understanding you would get into with your local raddiwallah. You promise the raddiwallah that you will give him 5 kg of newspapers every month over the next six months. The raddiwallah, in turn, promises to pay you Rs 5 per kg. So, basically, you two will have entered into a futures contract where the price and quantity has been pre-fixed, regardless of what the price of second-hand newspapers will be in the coming months. Both parties benefit: The raddiwallah is locking in a guaranteed supply of newspapers whereas you are guaranteed you will get a good price for the next six months. Similar transactions take place in the stocks and commodities markets. People tend to enter into futures contracts if they think the markets will be volatile in the future. By agreeing to price and quantity now, they can control their risk. Long positions: When an investor holds a long position, it means that he actually holds the share and intends to hold it for a while because he thinks prices will go up on the share. If prices go down, then the investor loses money. Similarly, a long position in a futures contract means the person is required to buy the share at a future date. She will make money if the share price goes up at a later date. Unwinding: This refers to the process of selling to liquidate long positions ’There was some unwinding of long positions in the futures market’ basically means that investors think the market is likely to go down in the future and hence are selling their underlying shares and offloading their long positions.
doc_265242439.doc