Thursday, August 7, 2014

Outlook For August 2014

So after spending the first half of July '14 in a corrective mode, Nifty started marching upwards and scaled a new intra-day high as well as closing high in the second half. I have been reiterating over the last couple of months that this market keeps on giving opportunities to buy and 7800 levels are to be attained. While it is premature to call for a top, now IMHO we are slowly approaching the top end of this rally. Logical targets for the rally were around 7200-7500 and euphoria took the markets much higher. Technicals and ratio analysis suggest that the top for this rally if not achieved already should come around 7900-8000 levels.

While that does not imply creation of shorts but it is high time to be cautious with longs created with a longer term view as well. Most of the stocks are exhibiting signs of distribution and topping out [SBIN, LT, ICICI Bank etc] whilst a few select counters are taking the indices higher [Asian Paints, ITC, Kotak Bank etc]
Distribution takes a lot of time and markets will not fall fiercely in one go. Lending credence to the distribution phase is the advertisements of Mutual Funds, Insurance schemes etc continuously on media channels. Historically, excessive advertisements regarding securities on media has coincided with distribution phase and within 6 months of such advertisements surfacing, Indian equities have corrected significantly. In the 2008 period, the largest number of securities advertisements surrounded ULIP schemes like Fortune Plus, Market Plus and similar products from other insurance firms. The ensuing correction got worse due to the Lehman Brothers' crisis. Around October '10, we had a flurry of mutual fund advertisements, especially thematic schemes and we had a correction of almost 40%. The key point to note here is that mutual fund advertisements did not surface in India in 2014 aggressively even when Nifty took out the 6400-6600 levels

The scale of such advertisements only has started increasing now and will perhaps continue to do so until Diwali '14. As mentioned earlier, unless some Black Swan incidents from international markets hit the scene, there won't be any 'crash' or 'melt-down' in the correction that will come. The corrective phase could last about 12-18 months and the downside price targets will be 5900-6200 i.e. the psychological 6000 level will in all likelihood be the new baseline for Nifty [just as 4800-5200 levels were in the previous corrective phase]

I would again like to draw the reader's attention to the point that I am not talking about a correction setting in immediately. All that I am saying is that now we need to be careful about the longer term investments in major stocks as we are approaching a top. Now it is time to slowly book out profits and deploy those funds in FMPs, FDs and if the profit chunks are large, in assets like real estate. The next set of buying opportunities will come later this year or next year and the same will be intimated through the updates.

As long as the 7400 levels hold on daily / weekly basis, the risk-reward is in favor of buying the dips. Once Nifty posts a close below 7400 levels, it will be a potential sign of reversal from the bull trend [weakness gets pronounced if the close is below 7400 levels on a weekly basis] The most crucial date will be with the pivotal date of 26th Aug '14 [3 years ago on 26th Aug '11, Nifty had made a swing bottom of 4728] So one can expect a major upswing or downswing in the 7-8 days around 26th Aug '14

For BankNifty, if it takes out the swing high of 15700 levels of May '14, then it can rally a further 800 odd points towards 16500 levels. The crucial support remains at 14200 levels breach of which will invite a further correction of 800 odd points.

One need not read too much into the stock split of Axis Bank [1:5] It is another sign of distribution. Initially prices may get marked up towards 420-425 levels and then correct downwards to 300 odd levels. Again, no need to rush to build shorts. The same will be confirmed by price and volume action and I will update the same via Twitter.

So for August, the broad Nifty range is expected to be 7400-8000 levels and high volatility in price action expected. On BankNifty broad range can be expected to be 14200-15700 and breach of either of these barriers will bring a large swing trade in the same direction.

For Gold and Silver, the rupee prices have in all likelihood bottomed out at 24k and 38k respectively on MCX levels [though silver still has the potential to test the 35k mark once]

Crude in dollar terms will move in the 95-105 dollars / barrel mark whilst MCX Crude will likely move in the 5900-6400 range for August '14. Falls are buying opportunities.

To summarize, book profits but resist creating shorts till 7400 is not taken out on downside.

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