Global Market Updates / Special Coverage For Indian Bourses - 2nd September 2011

The global market scenario is getting more and more grim and as of now this is where we stand starting from US

US: The top for now seems to be in place with the May 2nd high of 12,873; however, we can expect 2 more attempts towards the 12k levels via relief rallies, once in September and once towards Christmas/ThanksGiving before the eventual collapse takes place. The target destination is a minimum retest of the lows that surfaced after the Lehman Brothers crisis. For those looking to use the opportunity to short Dow futures, now listed on NSE, it is indeed a good time. As highlighted earlier, the 3 critical levels are 11875, 12000, 12200. Trades on Dow futures should be initiated only by people who follow the international markets and have a fair clue of what constitutes the index and only then take the position. Unlike Dow futures on other exchanges, there are no protective Calls or Puts against a position taken as one can do with Nifty.

Whilst the dollar is sinking temporarily, being the reserve currency of the world, it is bound to stage a comeback and safe to assume that the downside in Dollar Index is limited to 70-72 levels with a target of 81 in the next 6 to 8 months. Consumer confidence is dropping in US and the debt ceiling increase is only delaying the inevitable. The S&P ratings will have no significant impact over smart money's preference for safe haven currencies which for now is restricted to the Swiss Franc. However, institutional investors will flock to the dollar to fulful dollar obligations with the exchanges. Volumes on the US bourses are dropping sharply and one of the banking darlings in terms of stock price resilience Goldman Sachs has also cracked pretty well from previous highs. Eventual target for Goldman is sub-50 levels. Jobs are not being added at all in the economy and as unofficial reports have it, job cuts are being discussed in a lot of service sectors like banking/financial services, consulting or for that matter even some of the law firms.

Unlike the previous instance in the 2007-2008 timeline when Turnaround Management firms were actively scouting for potential companies for buyouts, the optimism is remarkably lower this time. A lot of Turnaround Management professionals would rather wait for at least a 40% correction more in some of the attractive targets and keep a close eye on Chapter 11 candidates before initiating a 'Buy'. [A lot of details into these aspects are available in the Linked In Group called Turnaround Management. Those interested in global economics and finer aspects of Turnaround Management must join this LinkedIn Group]

UK: The top is very much in place with the rally above 6k in Jan. The pullback to 5400 levels this week after sinking to sub-5k levels once is remarkable. However, the picture is still bleak and will eventually fall to sub4k levels next year. One more countertrend rally to 64k was expected but sealed completely when 5550 was taken out on EOD basis. Already there are bear calls floating around calling for sub 2k levels on FTSE but that seems too far fetched for now. The banking system in UK too is on the verge of a collapse yet again and smart money does not want to buy before the post Lehman Brothers levels are not attained. The action is restricted to FnO in most cases.

In terms of day to day business, retailers are getting squeezed on margins as input costs are soaring but there is no way to pass on the price hikes to the end consumers. The commodity bubble will probably end up making some of the smaller retail players go bust and bring about consolidation in the retail space [One can refer to Nadeem Walayat's detailed outlook for UK economy in the Market Oracle site, link to which is given in the homepage of this blog]

PIIGS: Both Sovereign Debt Yield and Credit Default Swap premiums are on the rise. 3 countries are already in junk status. The critical level on sovereign debt yield of Italy and Spain will be 6%. Spain might just end up delaying the inevitable for some more time. With an election underway and an almost near certain victory of the current opposition party, there is reason to believe that Spain will manage to delay the inevitable. Case in point, to ensure that things don't go awry for Spain so soon, the Finance Ministry announced austerity plans well in advance and even the opposition agreed for the same and Spain was lauded for its 'proactive' steps by ECB early this week! The barometer of Spain's crisis will be the yield on the Sovereign bond and stock price of Banco Santander. With 1.3 trillion dollars in Assets [around 50% of which are toxic as per some estimates]  this counter will lead the fall in Ibex. [Investors must take note of the fact that the yields of 6% being discussed here are for the short term paper sold in primary markets. The long term yields are inching towards 20% due to their toxic nature in the grey markets which will only accelerate the fall next year when these become headlines]

It is not going to be the end of the world by any standards. Consumption is still the key and will in all probability make resources and human capital more competitive in the  global job market as far as people are concerned. Only those living in the comfort of supremacy of fiat currencies and an illusion that social security will take care of challenges will suffer. Marking the first precedent in this is Portugal. With minimum wages now at EUR 400 levels for blue collar workers, a lot of factories are reconsidering placing orders into Asian or Latin American suppliers. With proximity sourcing options in Portugal, the total cost structure is beginning to tilt against low cost sweat shops of 'emerging' economies. On the other hand, countries like Turkey and Morocco are also offering good sourcing options and the concept of 'proximity sourcing' will gain a lot of momentum as we move into a prolonged dull phase for the next few months.

As far as Germany is concerned, the Bund will continue to be the European safe haven equivalent of Europe though the DAX is all set to collapse. Every interim rise now is a shorting opportunity. Likewise, the Swiss Franc will gain even more credibility as a safe haven currency but the stock market will portray a different picture [the Swiss index is already over 20% lower than its 2010 high!] Here, one can see a renewed activity of industrial production and engineering and a lot of consolidation in the SME space.

As far as India is concerned, there is no way it can shy away from the impact of global economic scenario in the short to medium term. However, even with a pessimistic 7 to 8% growth in GDP, it is a significant growth especially considering that a lot of other economies are collapsing. With an average per capita GDP of USD 1200, it cannot get worse as a country [that the middle class will receive a double whammy in the form of decreasing net worth, salary freeze and still inflation is a separate issue. The common man of India always has had to grip with this situation and unfortunately, there is no place to hide from this except to make sure some cash is always available and ready to be deployed into suitable opportunities]. Margin calls on both stocks and commodities on other bourses will force FIIs to press the Sell button and gain access to cash

This is one of the best opportunities for Indian investors who missed the party in the 2008-2009 crisis and resurgence. For long term investments, the 2500 - 4500 levels on Nifty [8k to 14k on Sensex] are all excellent buying opportunities. Rather than jumping into the 'Buy' wagon on every dip, one should use panic selling as an opportunity to accumulate for the long term. Whilst the decoupling theory is still a myth, things are changing for sure as far as emerging economies are concerned. The domestic consumption story is still strong and if the crisis does come in as expected on the western bourses, the consumption story will provide a complete fillip. Today only a fraction of the Indian populace buys exotic gadgets, items, services of the western world at a premium. The current crisis will start providing excellent opportunities for a larger proportion of the Indian population to access services at low prices [and the western suppliers would be more than willing to oblige] and hence the long term story is intact.

Whilst I do concede that my call for a potential new high this Diwali went bust big time with all time and price targets getting violated, the longer term story is intact and 2014 will be a year to celebrate. Nifty and Sensex are here to stay and they won't go to ZERO! Maybe this time Sensex will chalk a low lower than 8k which we saw post Lehman Brothers; so what - it represents another fantastic buying opportunity with a clear mandate of more than doubling if not tripling in the subsequent recovery. Prerequisite to such conditions is to ensure there is free cash available to deploy them [rather than taking loans on gold or other securities/assets which was seen as a rampant phenomenon last year when we were heading towards Diwali]

Outlook for Gold and Silver: Silver has long ago topped out and as of now safe to assume that gold also topped out at 1925 levels. A short term flight to safety may be seen and above 1925 per ounce, Gold can rally all the way to 2000 and 2200 levels, it is nearing a top. Just as margin requirements were raised on speculative longs on silver last year, 2 consecutive margin hikes on speculative longs on gold have increased margin calls by over 40% on gold now. Eventual target for gold is a minimum of 1450-1500 and whether it falls from current levels, 1925 levels or 2k levels, the fall is going to be fast and furious. Bolstering my case for gold is the divergence in the price of silver. Whilst gold pulled back remarkably after the 8% collapse within 2 trading sessions, silver has not even managed to take out 43 on EOD basis. Currently silver is taking support at the 41.5 to 42 zone but once silver closes below 38, 32 to 33 will come in a jiffy.

Every rise in silver is a potential shorting candidate [please take a look at the conversion of units from Comex to MCX levels and rollar exchange rates as my analysis of Gold and Silver is always based on Comex rates in USD]

To summarize: DJIA futures and FTSE futures [coming soon on NSE] are excellent shorting candidates from forthcoming countertrend highs. Nifty is still a good trading candidate and investment BUY opportunities will be coming in a jiffy. Do not panic - if you take a 3 year horizon, some excellent wealth creation opportunities are coming your way. On the banking side, don't rush to buy SBI so soon. ICICI has already shown dismal performance post acquisition of BOR and a similar effect will be seen on SBI mergers with SBx divisions. These 2 counters are worth investment only when ICICI falls below 450 on spot price and SBI falls below 1250. These are the levels when I personally will be buying these stocks. As far as other counters are concerned, I will certainly share my ideas if I come across any. My personal allocation will be highest to Nifty Bees and BankBees. I will be increasing my allocations for these counters with each fall.

EOD Analysis for 2nd September and Outlook For 5th September

Nifty futures had healthy volumes today with the OI in Nifty futures consistently around the 26 million OI mark throughout the day. Banknifty futures showed a high of 9650 levels at one point of time though most of the gains were given up in the middle session. Except for the bad start on 26th August into September series, so far, the retracement has been remarkable.

Further movements will now depend on global cues as well as political and sentiment outlook on the Indian bourses. As far as banking counters are concerned, a technical pullback to 10k on Banknifty is not ruled out at all. It may take some time for proper assessment of the aftermath of SBx mergers with SBI to sink in. For the short term, there is no value unlocking but value erosion as the fixed cost structures will be badly affected with these mergers and NPAs will actually surge. For a fully optimal NIMs improvement and effective operational efficiency that helps reduce operational and fixed costs, it will take at least 3 years.[We have already seen how ICICI Bank has been struggling with its banking acquisition last year]. As an investor, one should wait for SBI to now come to 1000-1200 levels to accumulate with a 2-3 year horizon.

Unless 5092 is taken out on EOD basis, it is very unlikely to see fresh longs in the system. Finally the weekly losing streak has been snapped for once and we are still above the psychologically important 5k mark. With the results season coming in and sudden spurt in spot gold again to 1850 levels, there is extreme panic as far as smart money is concerned. The dull market breadth across all bourses is also hinting at how most retail and HNI traders have given up at least temporarily.

The next major rally will again be led by banking only followed by automotive and pharmaceutical segments. Short term, better to go with the trading on indices and 5100 looks pretty much achievable now. Above 5177 if crossed over with good volumes, Nifty opens for a retest of 5348 but that will need 2 consecutive closes above 5177 with healthy volumes. The broad range for now still remains 4690 to 5177 for now and one can consider opening shorts at 5100 levels with Short 5100 PE as the hedge 1:1 ratio. Strategy would be to maintain a 20 point stop loss on the losing leg and riding the winning leg.

On Banknifty, one can consider opening shorts as close to 10k levels as possible and preferably with some margin and the shorts should be via a a 3 month forward contract. On Dow, 11875, 12000, and 12200 are critical resistances. First round of shorts on Dow should be opened as close to 12k as possible, again with a 3 month forward contract. Second round of shorts would be closer to 12200 or below 11400. Target is 9500 for this futures contract. [Only for high margin players and those who can hold a position without getting bogged down with the news, noise and temporary red on the counter]

Stock specific action, one can see good relief rallies on the automotive counters which is not surprising, both technically and fundamentally. The festive season will mark some optimism for the automotive segment on both domestic and international demand. The tops are in place but shorts should be opened at comfortably high levels.

Hope all had a profitable week and a good festive break. For me personally, this week was not very good in trade because I did not follow up on my positions with proper discipline and allowed greed to take over a couple of winning positions. Again goes to show how analysis and trades are 2 totally different aspects. The fine tuned EW counts and projected path will be updated over the weekend out here and on Raghuji's blog.

Until then, enjoy the weekend and festivities.  

EOD Analysis for 30th August 2011 and Outlook for 2nd September 2011

Nifty opened on a good note today and the OI in Nifty futures was around 27 mill throughout the day. VIX is at 25 levels now. Banknifty and RIL led from the front for the upsides. Still safe to assume that these upsides have been triggered by short-covering rather than fresh buying. [The Nifty futures OI was almost 39 million on expiry so it is very much probable that a high number of shorts entered the system on August expiry and the day after that]

Some profit booking can be expected on Friday as well for liquidity constraints. The broad range has been specified already in yesterday's posts. The bullish stance only gets vindicated after 5092 is taken out on EOD basis. With 2 days of holidays, some selling was expected but that was not to be. The rise from 4720 to 5k levels again has been very rapid but such sharp rises and falls are always followed by some flat sessions. 25% of the fall from 5740 to 4720 was retraced in 2 days. A further upward march can happen but expect 1 round of retest of 4800-4850 levels with strong hands shaking out the weak hands before moving further. \

Vindication of this point comes from the way closer strike ITM Puts like 5100 PE were behaving; in the first round of crossing over 5k levels, the 5100 Put Premium was around 160-165 levels; in the 2nd round of crossing over 5k levels, the premiums rose to 175-180 levels [VIX dropped so logically the price should have come down or at least stayed the same. Whether it was a Demand-Supply equation or smart money getting into Puts can only be gauged by Friday and Monday's price action]

For now, having seen the 5k levels is a psychological boost for a lot of traders and investors. One needs to see how this sustains as we move through the month.

For more details, please have a look at the EW counts for the best possible count and alternate count on Raghuji's blog. Overall, things remain unchanged and I expect a lot of options premiums to be sucked out during the next 5 to 8 trading sessions.

Time/Price Alerts For September Series Nifty

Critical Dates For September series as follows

5th /6th / 7th September:
Justifications: 5th September marks the 1st Gann Circle of Sep series to be complete and coincides with 5 trading days from the low of 26th August. 6th September marks the 55th trading session from the low of 20th June 2011. 7th September marks the Gann Angle of 45 degrees for Sep series and 144 trading days from the 11th Feb 2011. [The cluster of dates coinciding with Fibo number of trading days from different lows is significant and one must look for a turning point around 7th Sep]

9th Sep: Marks the 90 Degree angle for Sep series;
11th Sep: Marks the 135 Degree angle for Sep series
13th Sep: Marks the 180 Degree angle for Sep series
15th Sep: Marks the 225 Degree angle for Sep series
17th Sep: Marks the 270 Degree angle for Sep series
19th Sep: Marks the 315 Degree angle for Sep series

22nd Sep: Marks the 0 Degree angle for Sep series [Rotation 3; Also marks the Fall Equinox in the Global Financial Calendar; so around 22nd, 23rd, one may see a trend change similar to that of March and June series.] The DJIA being launched on NSE is a boon for people who follow global markets. Around this time, one may see Dow make an attempt to go to the 12k mark and should use the opportunity to short DJIA futures with a 3 months forward contract {if and ONLY IF Dow spot is in the 11750-12k zone and you have a fair clue of global indices}

25th Sep: Marks the 45 Degree Angle [Rotation 4]
26th Sep: Marks the completion of a 55 day Fibo cycle from the high of 5740 seen on 8th July 2011

28th Sep: Marks the 90 Degree Angle [Rotation 4]

Projected Path of Nifty For Sep Series [Indicative only and Positions Must be Taken with Hedges]
Broad Range is expected to be 4690 to 5150

Week1: 4720 - 4970 with 1 dip towards 4800-4850 in between. If markets are strong, then the downside will be restricted to around 4828 levels

Week2: Gradual falls and rises within a tight range of 4800-4900 [give or take a few points on either side]

Week3: Possible retest of 4690-4720 zone

Week4: Gradual retracement back again to 4900 levels and possibly, a couple of high sessions with gap-ups towards 5100 [Further updates will be provided once some more price action is available]

Consider this as the best path being projected by the GPS right now; diversions as and when they come will be intimated. One needs to be very nimble footed in such market conditions and ideally play both sides and then use trailing stop losses to cut losses and ride the profitable legs to the maximum possible extent.

4690-4720 was a good buy zone and the benefits of that have already been seen.
For the immediate term, 4950-5000 will be good levels to short Nifty and major counters that gained more than 5% to 8% [and could gain a little more]

Volumes are there in the market to the extent the VIX is above 24-25 levels; once that comes down further, one can see dwindling volumes. For getting more fine tuned movements keep an eye on Raghuji's EW count and do make it a point to see Shriram Oka's comments to the EW counts.

The mother of all resistances i.e. the downward trending line now cuts the price axis as 5400 levels and a channel drawn with a parallel line to that shows that we may not break the 4600 levels so soon.

Please use this LINK  for the Image

EOD Analysis for 29th August 2011 and Outlook for 30th August 2011

We had a gap-up opening and a rapid fire upside largely triggered by short-covering on Banknifty and Nifty. As expected, India VIX shaved off more than 25% during the trading day today. However, it is still above the 25 mark and for markets to remain calm, it needs to go down below 23 which should happen by next Monday. Banks led from front for the recovery and Reliance / LnT did their bit as well gaining over 4% today. The volumes were actually healthy in the second half of the day. In the first half, the OI in Nifty futures was around 25 mill which went upto 27 million in the second half with the rise.

One should note that this rise is purely on account of short covering rather than fresh buying. Markets are not yet out of the woods and some more headwinds are expected as we proceed through this week. With just 3 trading days this week, safe to assume that 1 round of sell-off would come through for liquidity requirements. Expect rangebound trades until 22nd September and then the real march upwards until Diwali. As of now, safe to assume that the broad range is 4675 to 5092 for current series. However, when the 'Lows' of the candlesticks start going above 5092, then major upsides will come through.

Again, the term real march is also illusory. The downward trending line from the highs of 6339-6181-5944-5740 when extended all the way down cuts the price axis at 5400 levels. It will be a herculean task to cross that line. [For the high to occur in 2011, the challenge was to cross over 5532 by mid-September and 5944 by mid-October and no close below 5092; all these conditions have been violated]

We can see a technical pullback on Banknifty towards 10k levels and on Nifty upto 5200 levels but after that, one will have to take into account the headwinds from global markets. ONGC is showing too much weakness now and a close below 270 will bring a further 5% to 6% fall on this counter. Sun Pharma has started showing some signs of weakness despite such a strong performance on all major counters today.

The technical pullback on Banknifty may take a little longer as the rise in Banknifty today has been accompanied with fresh shorts entering the system. Towards the last hour of the day, there was hardly any premium on Banknifty shorts or fresh long build up being witnessed. With a little more consolidation or 1 more round of shorts, the much awaited recovery on our bourses may come through. One main reason why I am drawing this inference is from the behavior of Deeply ITM Options

The 5200 PE was going at 300 @ Nifty spot of 4920 levels [whilst this has been a noisy reflector for July/Sugust series, it still pays to keep a close eye on this one; this indicates high possibility of a relief rally]

The 4800 CE was going at 220 levels @ Nifty spot of 4920-25 i.e. an intrinsic value of 125 plus time value of  almost 100 points [giving a hint of 1 more round of correction / profit booking; the case gets even stronger with the way premium rich Puts sold on Friday were crushed today] Expect the Puts and Calls of 48/49 strikes to be crushed similarly during the 3 trading sessions this week by about 50-80 points with upward and downward gyrations.