Saturday, October 29, 2011

Global Markets Update - Special Coverage For Indian Bourses - 29th October 2011

So now where do we stand with Nifty that seems to be playing catch up with positive global cues. As indicated earlier, the fall from 5740 to 4720 was too fast and too rapid and a 50% retracement was a very logical target [already achieved] and could possibily do 61.8% retracement [this was also achieved on Friday]. The next resistance levels are at 5378-5408-5440. We ensorse the view that 1 major leg of correction is due taking Nifty to the 4450-4550 region that will mark the end of this correction and the next phase of upside will begin there-after. In terms of time analysis, if we talk in terms of global cues, we should remember that in this entire bear market rally, Nifty topped out in November 2010 whilst FTSE took 3 more months [Feb 2011] and Dow took 6 more months [May 2011]

So on a larger scale, right now the western markets have a higher lead time than emerging economies like India or China. If we take the small cap segment and mid-cap segment, the value erosion has been tremendous. In the largecaps, the IT pack, especially Infosys and TCS have bounced back well [we also need to remember that Infosys topped out in Jan 2011 and TCS a couple of months later]. So this is actually a gift for investors to escape unhurt with minimal losses from the earlier investments and of course those who risked buying some units at the lows would do well to book some profits right now because the slowdown will come and affect the IT pack significantly and they will jump off the cliff they are on right now. The valuations are not at all attractive.

In the metals segment, the consumption of steel will continue to diminish as there is a lot of excessive inventory in the system and the slowdown in the automotive segment will accelerate the falls. Shipping stocks also can be safely avoided right now because the current rise in the Baltic Dry Freight Index [a measure that determines freight prices for moving cargo] is well below 50% of its peak value prior to the Lehman Brothers debacle and this is a seasonal rise; with Christmas shipments around the corner, there are peak season surcharges and a demand-supply imbalance that will get over once the Chinese New Year gets over - that is how the commercial geography of shipping works and all are set for a royal collapse. Moreover, with the slowdown, there is an increasing demand for using scrap and converting it into steel rather than fresh supply - so one may enjoy the short-term bounce [which is anyways more than 30% below the peak prices be it Tata Steel, Ispat or whatever]

Automotive segment is showing strength again due to seasonality and trying to mirror the movements in the global automotive segment but it is just an illusion. There is an increasing demand for used cars all over the mature markets and Indian auto-makers cannot escape the wrath of markets.

Banks led this rally along with RIL for Nifty throughout 2011 and Banks will lead the fall. I do not read too much into deregulation of the savings rate - the quantitative easing from Europe and US will keep inflation at higher levels and to the extent that happens, RBI will continue to raise interest rates [although it has no impact on taming inflation] Pharma segment will continue to reel under pressure with a lot of medicines going off-patent next year and the billion dollar formula pipeline is dry.

So as per our estimates, 4450-4550 visit is due in the short term where we should see aggressive buying. Now for the alternate scenario that is being propelled i.e. 4720-4750 levels that have been re-visitied 3 times now and markets have given a bounceback - is it possible that correction is over for Nifty as we have been reeling under pressure significantly for more than a year now. Our take is simple - cannot be ruled out though fundamentals do not justify this proposition.

Technically, 2 consecutive closes above 5532 will do the trick and then we have to ensure that by the end of December, we hit 5690 on a closing basis for Daily/Weekly/Monthly basis. If these 2 conditions are satisfied, we can safely say that 4720 was the bottom of this correction and now we should be looking up north but I don't assign this a probability of more than 1%

Next week, we need to see how 5032 holds out; the first gap from mahurat trading day to Friday will be closed with a downward price move next week itself IMHO. This then leaves us with the 4880-4750 gap pending but only a close below 4880 will provide confirmation that the gap is on a set path to be filled.

In terms of investments, a lot of mid-caps and small-caps have bottomed out and one can start accumulating in a systematic manner. Some stock ideas were shared last week and for now, do not have much to add to that list. IDFC closer to 95-110 range will be a good buy and so will be JM Financial IMHO with a 12 to 24 month target of doubling the holdings.


Meavin said...

Nagraj ji, please let us know the significance of Nov 16 - 22 period.. If its a major turning point then can it coincide with a Top and thereafter the fall will resume?

Bishoyi b said...

dear nagraj ji,
kudos to you and all the team for your much needed effort and analysis.
we love the way of your analysis and it's jest.
however we want to have some buy in those 16-22nov. period. so please guide us some stocks from CNX-500, for 3-5 years horizon.

thanks and regards.