Monday, April 14, 2014

Outlook For April 2014

Initial Comments
Normally I post the outlook file latest by 1st of the calendar month. The post below was in draft mode until 2nd April after which I had to urgently go out for personal work with ZERO access to internet/mobile etc. I got back home only on 13th April. I have NOT MODIFIED the post with updated data now available. So when you read this, remember that 90% of the texts are updates basis data until 1st April '14.

Only 2 additions have been made to the post while uploading this post
1] Charts for Nifty/BankNifty [though they are with additional bars of 2nd April till date now
2] The last paragraphs with some more comments basis latest price action

I humbly request readers to keep these points in mind when reading the same

Beginning of Post EXACTLY AS IT WAS on 2nd April '14

So March was indeed very exciting. Nifty broke past the 6380-6415 band and moved to new highs [I had anticipated this post-elections though I admit] Sectoral churning is on-going as usual but the fact of the matter is that prices have broken out of a major consolidation band even in the weekly/monthly longer term time frames. [After the highs of 6357 in Jan '08, the index never quite managed to take those levels out comprehensively for almost 4 years and that too, with such a weak Rupee]

I have been repeating for the last 6 months that 2014 is expected to push Nifty to new highs but I also mentioned that any major upside will be post-elections. I received some mails questioning why I was so assertive about post-poll rallies when pre-election 2009 data clearly points to a pre-election rally. There are 2 parts to this explanation;

1st: Self-Selection Bias: I started actively participating in the market in 2011 with 6th Nov '10 as my personal anchor point. So my comments get assertive for events after that more than anything else. Study of price / events before that are mere statistical analyses - so the self-selection bias definitely plays a role

2nd: Weightage Assignment Confusion: Even while studying price action prior to my anchor points vis a vis other events, IMHO there is a genuine confusion as to what weightage should be assigned to what event? At the benefit of hindsight, the rally in April-May 2009 looks like a pre-election rally. But just step back a bit and reflect - the base of Nifty at that time was about 2500 post-Lehman Brothers. US FED was looking at the launch of QE program. After correction from 6358 to 2252, a 50% retracement to 4500 levels was technically very much logical in the ensuing 1 year post Oct '08. QE pouring petrol in global markets was inevitable. With such major triggers, it is next to impossible to assign a particular weightage to that price action and conclude that x-number of points rally can be atributed to pre-eleciton euphoria and y-amount of points are due to QE factor. I had given very large weightage to the QE factor when I said that the rally to new highs will be after elections 2014

Last but not the least, I had categorically mentioned in my recent posts that breaching 6415 on closing basis will push Nifty into uncharted territory.

Now that Nifty has entered uncharted territory, it will take some time to establish new supports and resistances simply because it is in uncharted territory and unless we have the benefit of time and data, the same can't be established. The only 2 additional support points I could figure out in March above 6380 are 6480 and 6580. April being the time we have a lot of Dance of Democracy [tagline courtesy ToI], prices may seem to drift sideways again. Falls won't go below 5944 IMHO even in worst case scenario [ideally a base in the 6125-6180-6225 zone] Falls will be buying opportunities.

As usual, I maintain my stance that election outcomes can't be priced in a democracy like India. Right now, the price simply indicates that hot money is expecting a stable government sans policy paralysis for India in 2014. The single largest party can garner at best about 180-200 seats IMHO and a coalition is inevitable. The 3rd Front scenario seems fading off with each passing day [relief for hot money]. Yet, we need to know whether the ruling coalition can pass the vote of confidence and express high probability of serving the full term. A fractured mandate that can potentially end up with a longevity of 13-15 months forcing re-elections in 2015. This can take all the euphoria out and trigger an exodus of hot money from India. This seems highly unlikely at least for now.

I personally will look into buying opportunities should there be some corrections in April. The risks are pretty well known; if the vote is favorable, markets will go on a roll targeting 7200 over the next 18 months. Should there be a downside move post-elections, the worst hit that a LONG-equities portfolio can take is about 20% which is absolutely ok. The dividends and subsequent rallies will more than offset that given a longer term horizon [3 years] Unless there are Black Swan events, no major risks appear for India as of now.

However, on the issue of which segments will take the markets up, my bets are on cyclicals, banks and capital goods. IT and Defensives have had significant upsides and I reckon there would be significant profit-booking in these counters in the near-medium term. IT and Pharma income depends largely on weak currencies. Should there be a stable election outcome, the Rupee is going to appreciate significantly by at least 20% and that itself will take out a lot of sheen. Moreover, with the western governments aggressively trying to reduce their medical care expenses, there will be a lot of pricing pressure on pharma companies. As far as FMCG is concerned, most of the positives have been priced in. Volume growth on a sustainable level is about 5% and FMCG cycles are much larger. They rally for about 3 years, stagnate for about 3-4 years before any major upside follows through again. FMCG has almost rallied 200%-300% on the indices and that kind of growth to return will take longer. In strong bull market trends, interest rate sensitives, capital goods, banks [high risk categories] are the ones that rally the most as compared to defensives.

Just to put things in perspective, the toothpaste market is worth about 5500 crores. 40% of this is manufacturing cost, 20% distribution cost with almost 25%-30% marketing costs (gross estimates basis data available on the net). New product lines are crowding this market space. So how much bottom-line growth can these deliver? Take any other category like soaps, detergents and the same theme emerges. The only silver lining in all this is that this segment is largely recession-proof as the scope for discretion in spending in these categories is limited.

I don't think one should read too much into the Russia-Cremia kind of encounters. The US and Europe know very well that Russia is not another poodle nation like Iran, Iraq, Afghanistan etc; any offensive will be very strongly countered by Russia and not just a reckless one but a very measured one as Russia too has a lot of levers in command. Also I personally think that the statements from US Fed regarding QE taper is rubbish. It appears like a perfect build-up to ramp up money printing under guise of security threats in the geopolitical space. In a nutshell, such statements just end up creating large veils under which the money printing fiat schemes can thrive without challenges.

To summarize, apart from a major war or banking collapse [Black Swan events], the emerging market equities, especially India are well poised for a bull run. The more they fall, the greater buying opportunities they throw up.

End of Post as it was on 2nd April '14. The portions below are now basis additional knowledge as of 14th April '14

Let us review the Nifty and BankNifty Charts (Charts updated on 14th April '14)

Nifty Daily

Nifty Weekly

BankNifty Daily

BankNifty Monthly

Now that Nifty has kissed 6800 and RSI indicates a highly OVERBOUGHT reading (remember that the OVERBOUGHT condition has remained intact for most of the time from mid-March) the supports for April have been established as follows
No resistance above these points are known. Should there be corrections and prices go below the points mentioned above, the supports will become resistances. All falls are buying opportunities on delivery basis. I am already seeing comments on various portals with Nifty targets at 8k, 9k, 10k!!!  These numbers seem far exaggerated as markets don't move in one direction only for very long periods. Not that these targets cannot be met but there will be profit-booking corrections, sideways corrections etc. I still maintain that a realistic target is about 7200-7500 levels until Diwali 2014. Any upside beyond that for 2014 will be an added bonus. Any correction arising after price rises above 7200 will end up being very swift and deep in all likelihood.

For now unless a Black Swan event happens, prices seem unlikely to go below 6358 in worst case and below 6500 on an optimistic note. Building short positions on Nifty/BankNifty is not a prudent idea at this juncture. Even in the FnO space, it is much better to use corrections to build Long Futures positions with a protective Put as hedge.

The rally in March and 2 weeks of April has seemed very healthy and secular. The mid-cap indices also have participated in the rally. There will be lots of buy calls on perhaps unknown names as well in the small-cap and mid-cap space. Unless one has very strong conviction on the person giving the call or one knows the fundamentals of the company, I would say be very very careful in buying these aggressively. The mid-cap space is always tricky because the price swings are very very sharp in both up and down directions. It is better to allocate mid-cap allocation to index linked ETFs like JUNIORBEES.

The goal is NOT PERCENTAGE gains but absolute gains made from the transaction. As much as possible, stick to large caps and index linked ETFs.

Other updates / Global Factors

Money printing is pretty much on an overdrive from most important Central Banks that will fuel money into stock markets. However, 2014 will see higher allocation in Emerging Markets especially where elections are due. We have already seen the euphoria in India and similar action can be expected in Indonesia, South Africa and perhaps Brazil as well. The developed market indices like DOW, FTSE and DAX. There is a global mania in the technology space just as it was in the dot-com time period. So 2 main triggers of a global contagion [Black Swan events remember] are potentially

1] A sharp bust in the dot-com space yet again. Obscene valuations for technologies with deals in billions for companies that are yet to show a profit and show no signs of making money anywhere in the next 5 years. The common examples given all the time are Google, LinkedIn, FaceBook etc. However one must remember that there are over 300 startups for one good bet like Google. This technology bubble is going to burst very hard in global markets when they come. It is not a question of if this will happen - it is bound to happen; the only question is when and hence one needs to be careful. The only companies that are in a position to get through the rough patch even after a roil in the IT space are Google, Microsoft, IBM, Apple and CISCO according to me. These are the only large-cap firms that have very sound fundamentals in place.

In India, over the last few weeks I have been seeing so much of dot-com euphoria with names like Flipkart, Snapdeal, OLX, QUIKR and countless number of local-abc.coms. It is sheer madness and most of these will fall like 9 pins when the going gets tough. On a very longer term basis, only and have been portals that has survived so many booms and busts in India now. Only JustDial, Flipkart and Snapdeal are 3 portals with sound business models in place. However JustDial prices have been crazily overvalued and the same can be expected in Flipkart and Snapdeal on 2014-2015. One may park a very small sum into these to cash in on the euphoria but remember that they will call come crashing down very hard just like Educomp, NIIT, Aptech [if you look at 5 year historical data for these]

This space is a ticking time-bomb..........

2] Although ECB has been holding the European indices steady with money printing, the Eurozone threat is far from over. Remember that markets move opposite to the majority opinion most often than not. Since the time PIIGS crisis came, most people have had a very bearish outlook on Europe [including me as you can see in my older posts]. When the vast majority was expecting a fall, the much needed oxygen dose came in from ECB and Merkel re-election did not make any damage so far over the last 6 months [That was a very real danger that I had mentioned along with the bond markets of Denmark] Now there is a vast majority of people on the bullish side for Europe. The fundamentals of Europe have only deteriorated but the equity indices are scaling higher on free money printing dole-outs. With so much euphoria and complacency creeping in, the time bomb from Europe can hit anytime.

Both the above events cannot be planned for as they are random Black Swan events. But aalll izz naat well - always be alert!

Gold and Silver seem to have found their bottoms in rupee terms as of now. However, the rise in dollar prices of gold and silver have not recovered significantly until now [technically at least a 50% retracement was expected after gold hit 1200 dollars and Silver hit 20 dollars per ounce each. The maximum retracement so far has been 30%. So from an Indian perspective, should there be a sharp appreciation in Rupee-Dollar exchange rate, Gold and Silver may make a new low once.

I admit even until last month, I had kept saying that the appreciation in rupee-dollar will be more than offset by the appreciation in dollar denominated prices of gold and silver. However looking at the sluggish prices in dollar terms, should there be a sharp appreciation in rupee, Gold testing INR 22000 per 10 gms and Silver slipping to INR 35000 / Kg is not ruled out. I am not saying it will happen but the odds for this seem to have gotten higher now. Let me also add that even if this event does happen this will be an excellent buying opportunity. Looking at a 3 year horizon, Gold and Silver both will scale back to at least 1925 dollars an ounce and 30 dollars an ounce respectively. When this happens, depending on exchange rates Gold and Silver in Rupee terms will be 35k+ and 60k+ respectively. I won't reccommend shorts in this space also but should the falls come through, BUY

On the crude oil front, should there be an NDA government structure, petrol and diesel may go down 10% once but remember that fuel prices falling will be a very very temporary phenomenon. With the kind of subsidies and benefits that any government in India will have to deliver, taxing petrol and diesel de-regulation is one of the key levers for governments to increase revenues. Petrol is headed to 100+ per litre within the next 3 years.

To summarize, 6600-6700 was the first target expected on upside and though I expected this after elections it happened much before and even kissed 6800. 7200-7500 should be realistic expectations as of now and anything above that is a bonus. Use the dips to buy. Keep looking at the Twitter feeds for day to day updates!