Tuesday, December 2, 2014

Outlook For December 2014

So we are coming to the end of an exciting 2014. Stocks created record highs; much earlier than election results and much higher than anticipated levels [7200-7500 was my expectation]
The rally has gone almost 15% above 7500 levels. Record highs were recorded in almost all segments whilst some of the old front-liners retraced back much of their earlier levels.

The correction in October below 7800 was a red herring and now a lot of people are feeling left out of the rally. As I have been reiterating for the last 4 months, this is not a time to be brave and enter markets. These highs should be used to book profits in long term investments and cut net long exposure. Trail the remaining positions but don't rush to create shorts as well.

December tends to be a volatile month with large moves closer to 21st December [Winter Solstice]. 61.8% retracement of the rally from 7730 to higher levels comes to about 8100-8200 levels that in all likelihood will be tested before 2014 gets over. These shorts can be initiated when Nifty posts a close below 8480 odd levels [these daily levels are dynamic and will be updated in the Twitter feeds]. Similarly, for BankNifty, the corresponding level will be about 17950-18000 levels.

Also, there is remarkable complacency in markets overall and that is not a very good sign. The longer it takes to bring in a correction, the greater will be the ensuing one and  in all likelihood a fast and furious one. I wouldn't be surprised to see a revisit to 7200-7400 levels before Budget 2015. However, that is not going to help the trading plans for December.

For December 2015, the trading plan is simple; trail existing long positions and avoid creating fresh longs at this stage. Initiate shorts when appropriate levels come through. Whilst it is pleasing to see green symbols and higher levels on the ticker, one must also understand that the euphoria is excessive. The situation on the ground has not changed as well as what the indices indicate. This is indeed a major asset bubble as current prices are reflecting potential benefits over the next 3 years!

That being said, we cannot say that we are in a bear market anymore. Even the strongest of corrections over the next 2 years will likely keep the base in the 6k levels [+/- 100 points] All falls will be opportunities to buy. The baseline for investment levels have also gone up significantly

A view on frontline stocks

Axis Bank will have a new baseline of about 325 and SBIN about 180-190

Kotak Bank has been rallying like crazy and although technically the new base seems at around 680-700 levels, I would be wary of this stock. Despite the ING Vysya move, Kotak Bank is relying heavily on a corporate loan portfolio. We have already seen enough evidence that corporate loan portfolios go bust and / or get significantly restructured. It just takes a couple of bad portfolios to get impaired and then counters go for a tailspin. So as far as the banking space is concerned, I would still bet on the regular SBI, Axis, ICICI Bank in individual counters and BankBees ETF to invest when the next severe correction comes through.

Similarly, the new baseline for NiftyBees will be about 625, InfraBees about 180 and JuniorBees about 130. Give or take a few points here and there, investments at these levels will be lucrative over a longer term.

They say History repeats itself and the same can be expected on Nifty. It had a strong upsurge to record 6357 levels in Jan '08 followed by a 3 year correction. Once the current top-out process is done, a similar 2-3 year corrective phase can be expected. One critical point to note is that the next correction when it comes, will literally provide no safe haven like FMCG or Pharma or IT. It will be an across the board correction and this correction is much required. It will be healthy for the markets.
As I keep saying always, when a stock market top is nearer, the frequency and quantum of 'best time to be in equities', 'equities as most superior asset class' gets louder and louder in the media space. We have been in that phase for the last 2 months now.

Also there have been a string of IPOs lined up and a lot of disinvestment counters lined up in the PSU space. The government is strongly [and rightly] keeping sentiments high on bourses for better valuations and realizations. No matter how attractive the markets look at this stage, this is not a time to get into front-line stocks IMHO. Its all about booking profits and reducing net long exposure. There will soon come a time to re-enter equities.

On other asset classes, Gold, Silver, Crude and Real Estate are the most exciting places to be in at the moment. Gold had a 13 year bull market from 400 dollars to 1925 dollars an ounce, After such a long rally, a 2-3 year period of correction/consolidation is fairly logical. 2 years of correction / consolidation are through and we have about one more year left at the most. This is the right time to pick up gold in electronic format and SIP route. Most of the downside in dollar terms is already done and at the most about 15% downside in price can be expected [and this may or may not happen] Likewise, Silver has crashed over 50% from previous highs and there is very little downside left. Any price below INR 40k / kilo is attractive to invest with a 5 year horizon.

For crude, one of the best indicators is statements from Goldman Sachs. In the 2007-2009 frenzy, when GS predicted crude to boil from 120 to 200 dollars, it moved slightly higher and then crashed below 90 dollars. Subsequently when it predicted crude to sink below 30 dollars an ounce, crude found a bottom around 40-42 dollars and tripled in 5 years. In the current scenario, I find it difficult to see crude below 65 dollars a barrel and within 12-18 months, it should be able to reclaim the 90-95 dollars per barrel mark. Any fall below 65 dollars is a golden opportunity to lap up more crude oil with a 3-5 year horizon.

To summarize, RBI policy will not really be a major game changer for December unless there is a major rate cut. As long as Nifty holds around 8480 levels and BankNifty holds 18k levels, shorts are risky.

On a side note, I had reviewed the long term charts of Asian Paints and had anticipated a top at 740 odd levels. The prices over the last 2 days have gone way beyond that. Since the time-frame was weekly / monthly, It is critical to see whether the stock closes weekly / monthly above 745. If this event does happen, then Asian Paint will be a complete game changer on the bourses as a weekly close above 745 indicates break-out of a 8 year weekly chart. And if it happens on a monthly basis, it will perhaps go on to become an equivalent of ITC / INFY / TCS / RIL etc with over 10% weightage on Nifty. Even in case of a strong correction, 550-600 seems to be the new base for Asian Paints!