Outlook For November 2015 / Diwali Updates

Well October was quite lackluster in many ways. The much awaited relief rally did come through and stocks spent most of the time in narrow ranges. That is precisely how markets behave. August was sharply down and extended that to some extend in September with some smart recovery towards the end.

Going by the law of averages, November-December period should be pretty exciting as far as traders are concerned.

On the downside, 7925-7980 levels will be critical prior to Diwali. As long as these levels hold, we should have a build up for Mahurat trading that I am personally optimistic at 8625 odd levels [or 8400 levels towards 200 DMA at least technically] Wherever the relief rally ends there would be a correction after that. The correction can be deep or shallow and that depends on multiple factors.
A simple correction would imply a retest of the 7500-7600 levels from where the next leg up should take place. There is a minor possibility of a sharp correction towards 7200 levels and that can be easily determined by the Rupee-Dollar exchange rate. In the August-September period, I had updated via Twitter that breach of 64.25 in USD-INR implied a firewall breach and that is exactly how things panned out. To the extent USD-INR stays above 64.25, rallies on Nifty will get sold into. The more time USD-INR spends closer to 66.25 levels, the greater is the danger of correction not stopping at 7500-7600 levels and going below.

However, we should take things one at a time. Until Diwali AND to the extent 7925 holds, the risk-reward is in favor of buying. The Diwali rally should be used to liquidate some of the portfolio holdings as well. Post Diwali, if the negative indicators listed above start popping up on the screen, some shorts can be initiated.

Critical Levels at different timeframes as of now [All values at end of respective time-frames]

Daily - Bearish till below 8080 [Apprx]
Weekly - Bearish till below 8180 [Apprx]
Monthly - Bearish till below 8280 [Apprx]

However, a short term Diwali pataakha is on the cards IMHO

Fundamentally, we should also note that a lot of FIIs have book closing scheduled for December [Most developed nations follow the calendar year as fiscal year unlike India that follows an April to March period]. So there will be profit booking across emerging markets to plough money back to the parent firm, pay out Christmas bonuses, repatriate profits etc. This very much falls in line with the technical outlook as well. With the current USD-INR rates, we also need to remember that it is far less rewarding to repatriate money from India and this augurs well for a moderate correction. After that will come the Santa Rally into New Year.

Taking fundamentals and technicals both into account, we have the range pretty well defined

Optimistic: 8025-8625-7600-8200 for Nov-Dec combined
Pessimistic: 7925-8425-7200-8000 for the same period
[Day to day fluctuations will keep varying but the broad script will go on these lines IMHO]

From a fundamental perspective, what are the positive triggers for the markets???
The GST implementation will be a major positive trigger even if it say starts with 5 or 6 states on a pilot basis. It will provide steroids to the market

The USD-INR exchange rate - if things work in favor of rupee dollar and it manages to reclaim 64.25 or lower levels [i.e. gets stronger], markets will go in favor of bulls

Major negative triggers
Most of the standard negative triggers have also been factored into the price
Rupee Dollar, Euro-zone stability, oil prices etc

The other negative triggers will be in the form of Black Swan events that nobody can predict and have to be taken as and when they come

Statistical Correlations
There has almost always been a statistical correlation between 2nd consecutive term of a US president into his 3rd year and a sharp correction. We are into that phase at the moment

The technology stock mania. Whenever asset bubbles have emerged to alarming proportions in the technology space, markets have tumbled. It happened in 2000 with the dot-com bust. Now we can see crazy valuations creeping back again in the hi-tech space. Don't get me wrong - I am all for technology and productivity improvements, Whether it is booking tickets over an app, reviewing restaurant reviews, buying books / gifts online, hiring a taxi, the e-commerce wave has significantly improved time and resource management. These technologies are here to stay and become part and parcel of daily life. What is alarming is the crazy valuations and a mania surrounding the same. Survival of the fittest will come through and initial partners exiting businesses will come through and at some point of time, the sweet music of funding will stop

Food tech apps are already feeling the heat. Zomato with a billion dollar valuation had to lay off 300 employees???

Let us be very clear on fundamentals - whether it is speculators / investors in the stock market, banks or technology enabled businesses - they thrive on real businesses i.e. the brick and mortar businesses. Whether domestic or international, there has to be on the ground action for manufacturing, capital goods, infrastructure. Only when these businesses move on a sound footing will other support functions thrive. The masses in general need to have disposable income to allocate higher spends on cars, movies, shopping etc. With rising education, food and housing costs, disposable income is actually on a downtrend. The weak commodity prices are a boon for some companies but bane for most manufacturing units.

Without a robust economy in place for brick and mortar business, things will never be on track. 2015 has been a painful year for the entertainment industry with significantly lower footfalls / collections. That just goes to show how sceptical mass psychology is. Social mood is not so optimistic given the fact that low commodity prices have hardly affected disposable income positively. Crude prices crashed over 50% but the transmission to consumers has been less than 20%. The commodities where demand is inelastic [pulses, cereals, grains etc] are seeing prices go through the roof.

So coming back to the investment themes, as I have been repeatedly saying Gold and Silver are actually fantastic themes to get into. When we look at the longer term trends and adjust for inflation and exchange rates, precious metals tend to have a 13-3 cycle. 13 years of a bull run followed by 3 years of correction. We are approaching the end of the 3rd year and gold in dollar terms will start appreciating by 10% PA pretty soon

Crude is a wonderful investment vehicle. The challenge is that one has to go through MCX. I would strictly advise against leverage although brokerages encourage that. One can take longer term contracts on the basis of liquidity and keep going for the mini lots. In dollar terms, a bottom is almost in place and in 12-18 months, we will be staring at WTI Crude above 65 levels if not more IMHO

This is a good time to book profits in Stocks / Mutual Funds that have delivered good returns and convert to these themes. Real Estate, a sector that has been languishing due to abnormal pricing and excess inventory is now looking attractive. Prices have started showing reasonable correction and builders are doling out offers. From city to city the dynamics change and one would have to consult local experts for the same.

So enjoy the festivities and remember that the blue chip names that are lagging behind are the ones that will end up giving the 'alpha returns'. Stay tuned to the Twitter feeds for regular updates 

Outlook For October 2015

Well September again was full of volatility where in we saw a retest of lows made in August and a subsequent pullback. There was one major gap between 8225 and 8025 that has almost been filled.

Initially, prices may be pushed back from 8225 levels towards at least 8025 and maybe just maybe towards 7800. We will have to observe how prices pan out. Lets analyse the time-frames, current status and trend changing levels as on 6th October '15

Daily: Bullish [Trend Changer = 8025 apprx]
Weekly: Bearsh [Trend Changer = 8025 apprx]
Monthly: Bearish [Trend Changer = 8325 apprx]

October is a month with a lot of holidays in between and a 5 week long expiry series. Historical analysis points to the fact that 5 month series on Nifty tend to have a larger range [almost 800 points] and the same can be expected to play out this series as well [just as was the case in August]
Direction is immaterial for now; the broad range is 7800-8225 and some consolidation is on the cards. A break of either of these 2 levels for 2 consecutive sessions will yield another 150-200 points in same direction.

For Diwali 2015 [around 11th Nov '15], we are looking at a target of 8625 [barring Black Swan Events] So in case we see steep falls in October series, they can be used to buy on delivery basis for a short-term momentum trade.

For the longer term, the commodities related stocks continue to remain best bets for the longer term. Crude has been consolidating around the 45 dollars a band and the worst case scenario can get the prices to 35 but it will barely stay there for 2-3 sessions and revert back to 45 levels. Prices of Steel, Aluminium, Zinc, Nickel etc are at multi-year lows and there is not much to lose in terms of value.
In 3-5 years time, the base metals pack will again be staring at the highs made in the 2010-2014 period [though not lifetime highs that are near impossible to gain]

The best bets in the base metals space continue to be Hindalco, Tata Steel, Vedanta, Cairn
IMHO, longer term targets are as follows
Hindalco = 150+
Tata Steel = 450+
Cairn and Vedanta will at least double from current levels

Why is the commodity space looking so attractive when all are looking at an abyss
1] When mass psychology is looking downwards, chances of the move in the opposite direction is far more likely!

2] From an Indian perspective, the commodity prices in dollars and rupee-dollar exchange rate determine final prices. Dollar index spiked from 75 to 98 from 2010 till date. Even a 50% retracement will ensure that Dollar Index moves towards 85-86 levels [closer to US Presidential elections] When the dollar index corrects downwards, dollar based pricing of commodities go up. Rupee Dollar has made its base at 60 levels now. So these factors put together will ensure that the recovery of commodity prices in rupee terms will be much faster over the next couple of years.

All said and done, India is an active consumption based economy keeping demand higher and hence inflating prices.

3] Like all securities, when steep rallies or falls take place, over a period of time, 50% retracement does take place technically

4] Based on practical experiences in the 2000-2003 period and 2008-2010 period, a lot of producers of commodities have already stopped production and the more prices fall, more and more producers will drop production. So market forces will levitate prices upwards

Another space that is slowly getting attractive is the FMCG space, especially names like ITC, HUL. They have had meteoric rallies and are now correcting both in terms of price and time. Over the next couple of years, we can see solid base building and perhaps doubling of stock prices from current levels over the next 5 years.

Have a profitable trading / investing month ahead. As and when some individual opportunities crop up, I will update the same.

Outlook For September Series

Well in the middle of the series the bears took an absolutely invincible lead over bulls. The larger trend for the month of August was UP with the stellar opening at 8450+ levels with an 800 points fall from there. There are multiple factors that are being touted China, crash etc etc etc.

Corrections are healthy for the market and the longer term uptrend is intact. Whilst a close above 8400 levels for the month of August would have been more helpful, I personally would read this as a false breakdown. Things should turn for the better at the end of September towards Diwali 2015.

The only point I would mention is that the breach of 7700 twice with conviction implies that a deeper correction is likely in the next 6 weeks. However, as long as the 7200-7440 band is intact, bulls have nothing to worry. The minimum upside target for Diwali 2015 is about 8600 or perhaps even higher.

NIFTY DAILY

NIFTY WEEKLY

BANKNIFTY DAILY

BANKNIFTY WEEKLY

As we can see in the Nifty Weekly charts, even in the severest correction, the long-term trendline has not been breached [currently between the 7200-7400 zone] and likewise for BankNifty [15500-16000] band. So we are almost there in terms of corrective phase. However, corrections have price, volume and time factors. This instance the price and volume factors have been high, whilst time has been short.

Falls in the current situation are great for buying on delivery basis, especially commodity linked stock prices. No matter how much the media pundits talk about the China factor, it has completed its boom and bust cycle within a 9 months. As far as base metals are concerned, there is enough inventory for about 12-15 months [the norm is 18-24 months inventory] and the dollar index is on the verge of peaking. It had a rally from 75 to 99 and a logical technical retracement would be about 85-87 levels.

The way commodity prices are shrinking, one has to wonder how much more will they have to fall? As it is prices have gone below costs for a lot of plants. The industry has been through multiple peaks and troughs. A lot of plants will be in cold-idle stage until there is a reasonable recovery in commodity prices. The US rate hike will be perhaps deferred for some more time till there is clarity on liquidity situations.

On the global front, I had mentioned earlier that there is a very strong correlation between the 3rd year-2nd consecutive term of a US president and global liquidity conditions [on the downside], as of now, the basic tenets have been entrenched. A relief rally towards Christmas is more likely as the risk reward ratio has tilted favorable for bulls over the last 4 weeks. A larger crisis is waiting to explode but that should happen about a year down the line closer to October 2016.

The longer term charts clearly show that the bull market conditions are in place. The longer term [3 to 5 years] targets are 9600 followed by 10200. However, such large scale movements take place closer to election years as outlined in the interim post. A close examination of Nifty post-2001 shows that markets open with significant gap-ups in the month of May of an election year followed by double zig-zag corrections.

How can we be sure that we are in a corrective phase??
Social mood - is a leading barometer with some more statistics as well
Movies, for one are showing not much signs of revival with low footfalls and more flops with even big budgets and mega-stars

A normally decisive government is faltering on key reforms and giving up on the very factors they were particular that there would be laws with teeth. [Land reforms, OROP, MAT for FIIs etc]

Housing inventories are piling up despite reducing interest rates and clear indications of higher rate cuts. There is an elevated level of advertisements in media for mutual funds and ULIPs that usually come towards market tops [albeit interim]. The only heartening fact is that this time, there are multiple prudent people advising SIPs and that is good. SIP is always a good route regardless of bull or bear phase.

Banking stocks have taken a strong beating in the last 5 sessions but there is only 1 last leg of fall pending, barring Black Swan events. From an EW perspective, there are always at least 2 views valid at a particular phase [Medium Term in this case]

Bullish Phase: Correction is done with the lows of 7667 and the markets are headed higher. This means a minimum retracement to 8325 levels or more. [Gets invalid below 7667]

Bearish Phase: Correction is still pending and the indices will head lower to the support lines shown in the graph.

In either scenario, the risk-reward ratio is in favor of buying on delivery basis for Diwali 2015.
As far as the longer term is concerned, I am reiterating the bullish stance and would like to remind readers that Nifty is poised to cross the 10k barrier over the next 3-4 years. As far as trading is concerned, one should exercise caution in FnO space in current scenario. Volatility / Implied Volatility are high and even a sideways move is sufficient to reduce option prices. On the other hand, with higher IVs, even a large move may not bring substantial difference to the options.

For futures, this kind of volatility can erode significant margin in case the position goes against traded direction. This is even more critical considering that soon, contracts will have new lot sizes that are higher and thereby increase risks. It is very tempting to look at the swift gains that can be made with the higher lot size, but greater the reward, greater the downside when the position goes against.

Unless one is a seasoned player with tight money management rules and discipline, the current phase is not conducive for options in the Indian market. It is much better to stick to buying the dips on delivery basis. Ignore the media as their job is to fill airtime with news. The same point will be used to justify the market move. Suppose BankNifty had started the week on a positive note after reduction in base rates from HDFC Bank and the news regarding too big to fail banks on India, the justification would have been that lower rates imply economic confidence and larger loan books etc etc etc. Since banking stocks have been hammered over the last 2 days, the excuse has been that lower interest rates mean lower interest income etc etc etc. So whether the prices move up or down, the same point will be used for justifying in a different way.

For fundamentals, the USD-INR exchange rate will be a critical barometer and the faster we come back to the sub-64.25 levels i.e. Rupee strengthening against the dollar, the faster will be the recovery for equities.

Onion prices are going through the seasonal spike and will reverse to normalcy soon. Overall inflation numbers are ok [though I don't agree with RBI's inflation measuring metrics] The way things are moving, a rate cut is highly likely before Diwali 2015 that will fuel the relief rally.

For September series, we have already got the strong moves in the beginning of the month. In a couple of sessions more, the volatility cooling effect should start with a range-bound market in between. Large moves in either direction with higher volatility will return to the market around 22nd September [Fall Equinox] and prices on 30th September will be most critical to determine underlying strength / weakness.

Happy Investing / Trading

Indian Indices Crack Over 4% - What Next???

Well the last 2 sessions have been sending shock waves across markets. Everybody is wondering what the hell is happening. The last time, such deep corrections at index level happened was in 2008-2009. In my tweets and previous posts, I had categorically mentioned that 64.25 on USD-INR would be a firewall breach as far as equities are concerned.

However yesterday's fall did surprise a lot and in all likelihood, there could be some steeper cuts this week. What was surprising was that a lot of media pundits tweeted "When the US market sneezes, the world gets fever" or something on those likes. Bull**** I say to them. It is not even an apple to orange comparison - understand this; the market capitalization of Apple [AAPL] is equal to the market capitalization of the Indian stock market [well almost]

We have our own cues and own technicals and fundamentals. Most of the major bad news have been put behind us; Grexit avoided [at least for now] and hence Euro-zone is stable. US Fed Rate hike will take a bit longer. Then comes the Chinese dragon. A country can't keep on growing at the same rate for perpetuity. The strong 7% to 8% growth posted for over a decade now have as it is more than tripled the country's GDP. Now the base effect is much larger.

Commodity prices are collapsing and in most likelihood are in the last leg of fall. Given current prices, cost of production is way below market costs. Most players will stop production as it will only amplify losses. So a recovery in commodity prices is the next logical step over the next few months [I have given my reasons vis a vis Dollar Index in my previous post]

Let us evaluate Nifty. Below are the Weekly Charts based on yesterday's close

Nifty Weekly

For Nifty, there are 2 swings to take into account

1] Swing from 5100 to 9100 [Aug ' 13 lows to the all-time high, rounded]

61.8% retracement = 6628 [Longer Term]

2] Swing from 6400 to 9100 [Last Major Swing High To all-time high, rounded]

61.8% retracement = 7431 [Medium Term]

The base building around 7400 levels has been well cemented from May 2014 till date. In the short term, I don't think we will go below 7400 levels [even with a sharp correction for now]

By Diwali 2015, we can expect Nifty to scale 8550 at a minimum [barring Black Swan events]

Given the volatility, it might be difficult to trade FnO unless one is seasoned and disciplined. However, SIP with 4 to 5 tranches in blue chips will be a good way to play the current fall.

Also, we need to look at the behaviour of Nifty on a larger time frame with fundamentals in place. The Nifty cycle is largely driven by the political cycle

First major life-time high was in Jan '08 [6357] and the same was fueled for 4 years with UPA 1 and the credit expansion with the US housing markets and advent of Euro

The technical bottom for the same was expected at 3900 but the severity of credit crisis post Lehman Brothers took it down to 2252 levels but within 6 months, the technical bottom was reclaimed

UPA 2 brought in the next major leg up with a significant gap-up and then we went on to retest 6338 in Nov '10. QE facilitated a major portion of the subsequent rise post May '09

Then we went to a corrective mode [6338-5691-6181-5177-5944-5196-5740-4728-5400-4531] from Nov '10 to Dec '11

There was a good rally as a precursor to elections 2014 and we saw a huge gap-up and lifetime highs yet again. Liquidity injections by ECB, BoJ and BoE helped despite Fed taper.

But can you observe a pattern over here? The large chunks of upside happen around the election year with stratospheric levels and then we get into a corrective mode. Corrections come with a combination of domestic and global factors. When the correction is driven by domestic factors, it is less severe in terms of price but longer in duration. When the correction is driven by global factors, even the deepest supports get breached in panic only to see things recover within a short time period at least to the technical supports.

Come on let us face it - markets will have swings up and swings down. India has had meteoric rallies over the last 2 years with the index almost doubling and individual stocks even tripling and quadrupling. I am not talking about mid-caps here but large caps.

Axis Bank, ICICI Bank, Kotak Bank, Yes Bank, SBI all have doubled tripled or quadrupled

Infosys, Wipro and TCS have more than doubled

Britannia, HUL, Dabur etc

LT, BHEL more than tripled

MRF, Bosch, Maruti, M&M have quadrupled

The heartening part of the rally this time has been the fact that blue chips have performed extremely well with existing business models [unlike Suzlon, Unitech, JP, DLF, ADAG Group etc that was the case last time] 

If we look at the Rupee-Dollar exchange rate, so far the correction has been less severe. In 2010-2011, when the rupee went from 48.25 to 52.25, the index shaved off over 30% in less than 6 months from 6338 levels. 

Bottom-line: Corrections are good and healthy for the market. Regardless of where the current correction ends, Nifty has a very high probability of reclaiming 8550-8600 levels [if not more] within the end of 2015 [barring Black Swan Events]. Use current corrections to buy on delivery basis in a systematic and phased manner. As usual, a well diversified way would be to buy Nifty Bees and BankBees. I won't recommend Junior Bees and Infra Bees as of now because they are still very expensive and are most fragile [When I had recommended these last time, InfraBees was around 180 a piece and Junior Bees was around 115 a piece. Currently these 2 ETFs are way above those prices]

On a longer term horizon, Nifty is well-poised to hit the 5 figure mark of 10k levels but that I reckon will happen only after the next election cycle.

Happy Investing

Some Longer Term Buying Opportunities - Bargain Buys

The strengthening of the dollar has been playing truant as far as commodities are concerned. Hence, on Indian bourses also, we are seeing some blue chip names getting battered and for all one knows, these are perhaps buying opportunities with a 2-3 year time horizon

First things first, let us evaluate Dollar Index
The Dollar Index has surged from 75 odd levels in 2011 to 99 levels and even in case of extreme panic, it may spike to 101 levels. Almost 5 years now and a correction in Dollar index is on the cards. What news and events will take it there, I do not know. However, technical correction of 50% retracement will gradually take it back towards the 85 levels. Of course that will not happen immediately but over a period of 2 years

Even at constant commodity prices at current low levels, this dollar weakening will automatically propel commodity linked prices by 25% to 30%. As we are aware, commodity prices will also not stay stagnant. They will rise along with the weakening dollar giving an upside potential of 50% to 60% of blue-chip commodity price linked stocks

Tata Steel
Last time, Tata Steel had its fall arrested in the 200 zone. This time, even 200 may not hold and there is every chance that the stock may test 150 levels. That is fine. It is a Nifty bell-weather stock and will continue to be so. It will eventually surge to 350-400 levels

Hindalco
Let us ignore the Novelis loss for now. Fact of the matter is that Hindalco is the global leader as far as cans for food and beverages segment is concerned. It has been doing extremely good backward integration to reduce power costs [the biggest cost as far as aluminium manufacturing is concerned]
Short-term, the stock may go to 75 levels also and that is fine. With recovery in aluminium prices, and weakening of dollar, the stock will find its way back to 150+ levels

Cairn
The stock has its price linked to crude oil prices. In between, there was a risk of losing out cash with merger with Vedanta. Now that majority share-holders have rejected that move, it is still a crude oil price play. To the extent Cairn steers clear of merger with Vedanta, the max downside that this counter can have is in the 100-120 zone. However, when crude prices will eventually surge towards 65 dollars per barrel, this counter will come to 275+ levels IMHO

The regular index will follow its own course. However, there are instances when there are good opportunities to pick at bargain prices and hold in the portfolio. These counters IMHO are right now presenting opportunities to be picked. They may not end up multi-baggers like the FMCG, IT or Pharma but still have potential to generate 30% CAGR returns over the next 3 years

Disclosure: I have personal holdings directly / indirectly through family members in these counters. I have also recommended these counters to people in my professional network

Outlook For August 2015

So it has been yet another roller coaster month starting with gains, then a sudden fall and a mind boggling recovery. If we analyze the last 3 months, this has been a pattern with Nifty

It starts the series with a rock solid opening only to fizzle out sooner. A lot of people are already resigned to the fact that August may again repeat the same story. Unless a Black Swan event comes through, I personally believe that this time the story will tilt towards the bulls.

Over the last couple of months and July as well, the 8380-8425 zone was critical on the monthly time-frame. In May, the series ended at 8433 [border] and in June the series ended at 8368 giving a fair clue that prices would gravitate towards 8400 as we move closer to expiry.

31st July is the first day of the August series and it seems deja vu as far as first day of stellar performance is concerned. What is critical is that it is the close of the month as far as technicals are concerned [Technicals don't care when expiry is done!] The crucial zone for month close was 8380-8425. We have closed well above that for the calendar month of July. This makes August series a high probable month for bulls. Will there be no correction at all?? Corrections are healthy for the market and will take place - the quantum is what matters. So from a mathematical, statistical and technical point of view, the max downside is 8180 for August series barring Black Swan Events.

Even if the Nifty drops to 8180 levels, it is poised to recover smartly just as the case was with the recovery from 7940 levels. On the upside, 8800-8825 zone has been a high resistance zone on Nifty. As of now, the expected range for Nifty in August series is 8200-8800. We are right at the middle zone right now. I cannot say which end of the range will get a visit first. If we do get to the upper end of the range first, I will be cautious with shorting. On the downside, I would be a buyer in the 8180-8280 zone with SL at EOD < 8080

For the BankNifty, the expected range is 17800-19200 levels. 18800 level also has been critical for the last 2.5 months with just 1 week when BankNifty was above this zone. When I look at the major banking names, even with a stellar performance on Friday, SBIN is at critical resistance of 275-282 band. ICICI Bank has stiff resistance at 325 levels for now. LT has made a double top in the 1825 zone. Which end of the market will be visited first - will get clearer by Wednesday, 5th Aug '15.

NIFTY / BANKNIFTY CHARTS

A glance at the weekly chart clearly shows that unless there is some major economic catastrophe, the severest correction will not take Nifty below 7442-7525 levels.

BankNifty weekly chart clearly shows why most of the action will be in the 18500 +/-300 points zone for most of August series [21, 34 and 50 week Moving Averages are trying to converge at 18500 levels] First, they will converge [4 to 6 week process] and then determine whether an upper cross-over has to happen or the other way around. As far as my understanding of MAs in higher timeframes is concerned and the concept of 'Regression To The Mean', even if on an hourly or daily time frame, prices go above / below 18200 and 18800, prices will gravitate or levitate towards 18500 till convergence of 21, 34 and 50 week MAs]

The range is pretty good on Nifty as well as BankNifty from a trading perspective in August. Falls will be buying opportunities. As far as shorting goes, it is better to wait for confirmation on at least daily time frame. 

For the EOD June contest, our winner is Asit. My apologies for not having got back to you in time.

Will connect with you personally next week.

Stocks for buying on delivery basis [Longer Term Recommendations]

I would still go with the metals pack Tata Steel and Hindalco. Tata Steel may correct downwards upto 150 levels also but will find its way back to 300, followed by 450 in a 3 year timeframe.

Hindalco may correct downwards to 70-75 levels also but it will most likely reclaim 160 in a 3 year timeframe. 

Tata Global Beverages: The stock has been in a range of 120-150 for over 3 years now. It is likely to do that for some more time. However, I personally believe that this stock is a potential multibagger with a 5-7 year horizon in mind. This stock has potential to repeat the past outperformance of Tata Coffee and Trent Retail.

In the financials, L&T Finance and IDFC would perhaps be the next outperformers with a 5 year horizon in mind. L&T is gearing up to be a supermarket of funds and insurance and will perhaps bag a banking license soon. IDFC has been good with fund management on both equities and debt. With more innovative products like Trade Finance and Supply Chain finance, this stock has the potential to be the next Yes Bank / Kotak Mahindra Bank in terms of relative stock outperformance.

We must note that such scrips stay in embryonic / gestation phase for longer periods of time and then shoot up like bamboo sticks. One needs to be extremely patient. There was a time when Axis Bank and ICICI Bank were traded at 28 rupees a share [2.8 rupees considering the stock splits] They simply kept oscillating around this range for almost 5-6 years before soaring to stratospheric levels

Even the 52 Week Low of ICICI Bank is 100 times the original price [considering split]

To summarize, I don't think there is too much potential for Hindalco and Tata Steel to outperform as such. The true range is known. These counters should be accumulated when the prices are below the true ranges. Being linked with prices of metals on international markets and debt-intensive nature of the businesses, they can't go on to make fresh highs. Forget fresh highs, they perhaps may not even visit the old highs!

Tata Global Beverages is a futuristic story on aspirational Indians. L&T Finance and IDFC are in the budding stages to become the next Sriram Transport Finance, Yes Bank, Kotak Mahindra Bank, Bajaj Finserve etc.

Disclosure: I do have personal holdings in the mentioned counters directly or through family members. I have also shared / recommended these counters with contacts in my professional network. 

Outlook For July 2015

Well it has been a very exciting June series on expected lines with large swings in either direction.
The Grexit woes are currently looming large. I won't get too much into the details as I have already covered the same in 2 separate posts.

What do we expect for July 2015???
Common market mantra for Nifty is Sell in May & Go Away / In July Make the Nifty Fly
Sell in May was not a predominant theme this time and it is too early to hazard a guess for July

Review of Nifty / BankNifty Charts

As far as Nifty is concerned, there are 2 major resistances to be conquered

1] 8425 [apprx] The prev swing highs prior to June expiry

2] 8493 A major swing high from where the previous fast and furious fall started towards 7940

2 consecutive closes above 8493 [8525 for a bit of tolerance] and Nifty opens for a retest of 8800 levels [vindicating in July make the Nifty fly]

At the time of writing, Nifty is flirting with the 8425 mark but I can stick my neck out and confirm that both 8425 and 8493 are extremely difficult to negotiate and would need a lot of volume and momentum [especially 8493 as that has stuck out for almost 5 weeks now]

On the downside, 8225, 8125 and 8025 remains good supports from where bounce backs can be expected.

On BankNifty, the critical resistance comes at 18600. As of now there is a short term double top formation around the 18800 area. 2 consecutive closes above 18600 and breach of 18800 with volume and momentum opens Nifty for test of 19200-19400 area.

As I have kept saying again and again, it is not the Greece standalone issue that is sending shivers for hot money. It is the risk of contagion and negative precedence it sets for a negative chain reaction across bond markets that will result in a lot of liquidity contraction with investors' flight to safety.

As I mentioned in an article earlier, purely from a sovereign debt perspective, ECB's standalone cost of Grexit standalone is estimated at about 40 billion euros over the next 36 months. The real uncertainties come on the shock-waves after that.

First and foremost: A large scale currency devaluation should Greece go back to Drachmas and what happens to the depositors' money in the banks. What exchange rates will be used?

And then if these things spill over to other PIIGS countries, the impact is much larger in countries like Spain and Italy.

The humanitarian angle: With deposits curbed at 60 Euros per card and ATM machines without cash, basic food, medicines and fuel purchases are also in danger. Procedural justice for sovereign mismanagement is resulting in a humanitarian collateral damage.

Multiplier Effect: There is not much public domain data in Europe with regards to Credit Default Swaps. Even when the previous 2008-2009 crisis took place, it was the Credit Default Swaps market that accelerated the credit crunch.

Hopefully by 6th or 7th July, we will have clarity on the issue.

So let us stick to critical levels and other indicators to watch out 

For the Indian equities arena, I have already outlined the crucial resistance and support levels.

2 things that I will be watching very closely are USD-INR and 10-Year bond yields. As long as spot rates are below 64.25 for currency and below 8% for the G-Sec, the house is in order. If the currency starts trading above 64.25 and / or bond yields harden over 8%, the corrective phase will get prolonged. For the corrective side, the pattern target comes to around 7650-7700 zone

Which way it will go, time will tell.

However, for the longer term, there are a lot of individual stocks that are ripe for accumulation.

Hindalco, Tata Steel, IDFC, Nestle, Tata Global Beverages are all at attractive levels. They may fall further from current levels by another 20% to 30% but that is ok. The time horizon for these investments is around 3-4 years and expected gains are at 20% PA in the longer term.

In the second week of July, Jupiter, a major planet will move into the fiery sign of Leo. On a personal level, it will bring a lot of positive changes for some whilst challenges for some other. Across capital markets, this Jupiter transit will bring a medium term shift. Whether it is a change for positive or negative, time will tell. But some certainty and direction will come into force by the end of July 

China - Meteoric Rise and Free Fall

Chinese markets hit multi-month highs within a short period of 6 months and have almost cracked 20% from recent highs within 2 weeks. Most Indian stock market commentators are busy harping on 2 points

1 - Margin selling pressure due to tighter government regulation [Partly correct]

2 - Money invested in China may be re-directed to India [Grossly Incorrect]

As usual, when the key objective of tv anchors is to fill in airtime and prove himself / herself smart, such loose comments are inevitable. Unfortunately, a vast majority of people end up following these very delusional anchors to find themselves on the wrong side of the fence.

Let me first put out a 5 year Chart of Shanghai Composite v/s Nifty from Yahoo Finance for a perspective 

The bold green line is the path of Nifty whilst the thin blue line is Shanghai Composite

Shanghai was down and out in 2013 at almost half the value of the earlier peak when all emerging economies were in their corrective phases. It stayed there for a very long time with elections due in South Africa, India, Indonesia and developed nations like Germany.

Remember that to a large extent, China pegs currency values and undoubtedly, it is the largest holder of US T-Bills and German Bunds as a sovereign across the globe. China was [and is still] trying to build on as a hegemony country of the East [Like US hegemony in the West]. The South China Sea dispute was a major factor of concern highlighted by major investment banks as well. 

Once the election tailwinds went out of the way and dollar strength started surging in second half of 2014, it started making a lot of sense for fund managers seeking 'alpha' returns that the Chinese market was one major pocket of opportunity. China is a major guzzler of steel, copper and zinc and base metal prices are down in doldrums globally for over 2 years now. Oil prices started cooling off and with Dow, FTSE almost near peaks, uncertainty in Europe and expensive emerging markets, it was no brainer that China was waiting to explode as far as fund managers were concerned.

The successful IPO of Alibaba gave things a positive fillip but this rise was too much too soon. Doubling of the entire index in 6 months and that probably meant tripling and quadrupling of some of the index heavy weights.

Statistically, this concept is known as "Regression To The Mean". In simple terms, it means that something that has been grossly overperforming / underperforming for a prolonged period of time will go contrary to that trend and allow averages to catch up. We see that with sales teams across sectors, thematic mutual funds and sectoral indices as well. [Law of Averages, as we say in cricket]

For instance, a sales team that consistently hits and exceeds sales targets for 3 or 4 quarters starts tapering and cooling off for a couple of quarters. On the other hand, sales teams that were down in the doldrums suddenly stage a comeback with good sales. Fundamentally there are many reasons for that but statistically, it is something that has been established well over time.

Let us take India itself for instance; In the 2005-2008 rally when we hit 6300+ for the first time in Nifty's history, FMCG and Pharma were steady overall but not rank outperformers. Cyclicals and Infrastructure was the buzzword. By the time the entire correction of 2008 peak corrected and we scaled 6300+ again in Nov '10, most of the stellar performers of 2008 were anywhere between 50% and 80% down. 2010 was the time when FMCG, IT, Automotive started becoming pet themes outperforming frontline indices and cyclicals [HUL was around 280 at Nifty Nov '10 peak and Asian Paints was around 350 (adjusted for stock split), Tata Motors hit lows of 125, Maruti 750 M&M 630]

From a global indices perspective, DJIA and DAX were rank outperformers in the 2010 to 2014 period. DAX rallied from 5750 levels to 11k+ levels despite the Euro-zone crisis; DJIA was at 10800 in Oct '11 and went on to scale 16k by end 2013. Nikkei more than doubled from 2012 to 2015. With all the After getting to these levels, the subsequent leg up has not been very inspirational. Euro-zone problems intact, massive QE, Shanghai was a rank under-performer in global activities. So what would law of averages indicate? It was time for the Chinese dragon to spit fire.

Early indications of the Chinese dragon waking up from slumber was the way it has been lapping up physical gold from the time gold went below 1450 dollars / ounce [and China has an almost 5 month order to delivery backlog! Details can be obtained from the LME notes and World Gold Council]

The way Chinese government is using T-Bills as collateral to fund massive infrastructure projects was a clear indicator of things to come. 

By September 2014, the Chinese dragon woke up from slumber and started breaking out of some critical resistances one after the other. The problem was the rise in Chinese markets was too much too soon and pretty much an asset bubble with a lot of margin trades [leverage] Chinese central banking agents were absolutely right in implementing tighter leashes because an index that languished at less than 50% off old peaks for over 2 years suddenly shot up defying gravity big time. Media pundits are again harping along big time about China being in a bear market since it has breached the 20% fall from peak.

I am not even getting into Elliott Waves here - simple technical analysis tells you that large swings up or down tend to retrace at least 50% in nominal terms and 38.2% in semi-log terms. So for an index that has moved from 2200 levels to 5200 levels, a 50% retracement is very much on the cards that pegs the retracement to go to at least 3700 levels before resuming the next leg upwards.

A lot of Indian tv anchors are making an absolute fool of themselves by saying money will move out of China into India. Taking the major index stocks into account, Indian stock market is worth a little over 1 Trillion USD. Chinese penny stocks alone are worth 8 trillion!!

Right now, all focus is on the major Grexit and potential repercussions. The structural bull market in China is absolutely intact. In the short to medium term, it may slip to 3250 as well but it is poised to scale 7500 levels over the next 5 years. The current correction is severe simply because the meteoric rise was fueled by leverage and when deleveraging has been imposed, weaker hands will be taken out in the process. All said and done, some headwinds have to be negotiated.

If the Grexit crisis and contagion does hit global markets, then we may see the Dollar Index briefly kiss the 100 mark. After things cool off in Greece and the next innings of QE begins to alleviate the pain caused, we will in all likelihood see the Dollar Index cool off to about 90 levels. This is the time when the Indian Tiger and Chinese dragon will roar once again.

[What goes up must come down; smart money is always on the look out for alpha and hence regression to the mean / law of averages will play out across asset classes]

Just as we have Hang Seng Bees, we may soon get Shanghai / Shenzhen Bees in India and should that come through, it makes sense to have SIPs in that!  

The Big Fat Grexit Drama / Nifty

Says Keynes, "Markets are irrational to the extent one is solvent"; whilst I may not agree with all his economic principles, I definitely agree with this prophetic statement of his.

We started with a huge gap-down and all major index futures across the globe were showing cuts of over 4%. First it was the put writers who ran for cover, then we saw some brave gladiators aggressively write calls only to run for cover towards the end.

Whenever this kind of uncertainty hits the market, there will be multiple knee-jerk reactions and at the end of the day, one starts wondering what the hell is going on! Technicals are supreme; temporarily they may show ticker prices contrary to technical expectations and that always happens in conditions of flux and panic. However, these tendencies are exceptions and eventually prices move back to regular technical conditions.

Going purely by a technical outlook for Nifty [I will be making a separate detailed post tomorrow with outlook for July 2015], we had a large swing down from 8493 to 7940 in April series.

8493 - 7940 = 553 points [61.8% = 342]
7940 + 342 = 8280 So a move upto at least 8280 was very much on the cards. What really happened was a fast and furious pull-back [signs of a structural bull market] all the way to 8425 odd levels.

With today's gap down opening and lows of 8200 [rounded], the swing has been 8425 - 8200 = 225
[61.8% = 8340 apprx]

Tomorrow is the monthly close. For the last 2 months or so, the critical price on a monthly time-frame has been around the 8380-8425 zone [Last month's critical number was 8410] If we do manage to close around the 8380-8425 zone tomorrow, then it suggests that regardless of where markets go in the early part of July 2015, prices will try to stage a comeback towards the end of the series exactly as they did in June 2015]

Back to Greece and why markets are so worried.....

ECB funding to Greece has been about 340 billion Euros over the last 60 months i.e. about 5.5 billion Euros a month [Note that this is the estimate for GREECE ALONE] If the series of bailouts have to continue, then the amount can be upwards of 500 billion Euros for the next 5 years!

Good economists also pride themselves highly on Game Theory and always say "Think Forward - Reason Backwards" It is difficult and time consuming for me to put out the illustrations here but as the so called Troika is examining the situation with Greece, the starting premise for ECB with Greece is "Heads = Greece Wins, Tails = Germany loses"

This game needs to be evaluated from ECB perspective
Node 1: ECB allows concessions to Greece. The immediate effect will be that the other PIIGS nations will haunt ECB even more with concessions offered to them. [Greece and Ireland are small drops in the messy ocean. Spain and Italy are the white elephants to manage. And if managing 1 drop like Greece costs almost a trillion euros including already spent money and further funding needs, imagine the costs for other PIIGS nations]

Node2: ECB allows Greece to get booted out of the Euro zone by coercion or by voluntary exit, it sends strong signals to other PIIGS nations that one cannot take the ECB for granted. However, this option then comes with far greater pain. There are trillions of dollars worth of derivatives betting exactly on a Euro-zone contagion. And these derivatives are largely spread across the bond markets and the moment Greece is booted out, there will be immediate repercussions in the derivatives markets of other Euro-zone members bringing in a temporary liquidity freeze not just in Greece [already in place today] but the entire Euro-zone

As this happens, it also sets a precedent for other PIIGS nations to work out on exit options. Regardless of which way the ECB decides on Greece, there is inevitable pain. From a Greece stand-alone perspective, the cost of Grexit has been estimated at about 1 billion dollars a month over the next 36 months as per Angela Merkel's calculations [refer bloomberg.com news and views from Saturday for details] Just as RBI does not care what Dalal Street wants, ECB does not care what equity markets want. Central banks have their objectives in a different realm all together

They are however aware that there will be a huge liquidity squeeze with Grexit because of the panic in bond markets and a HUGE RISK of Germany returning to DMs that will perhaps end up trading at 2:1 against USD if this event does take place. Any return to DMs for Germany will almost close doors for German goods and services all over the globe. Exports are the key to Germany's survival.

Last but not the least, there is the humanitarian aspect
Some of the images on Sunday were extremely disturbing
Queues outside of ATM machines resembled the queues Indians have at Shirdi Sai Baba Temple or Tirupathi Balaji temple! There was a 76 year old lady who was in the queue for 2 hours to withdraw her maximum quota of 60 Euros and when her turn at the ATM counter did come up, there was no cash left in the machine! The lady just fainted out of physical and mental stress!!

To get a feel of how bad the situation is, forget supermarkets but talk to mom and pop grocery stores [equivalent of our kirana stores] and pharmacies. With social security cover and/or medical insurance, a person cannot be denied access to medicines. Over the last 5 years, medical bill settlements have seen ballooning turnaround times [Remember that most of the medical insurance is underwritten by banks' insurance arms] From a regular 1 week turnaround time in 2009-2010, the turnaround time has gone up to an average of 90 days. Legally, medicines cannot be denied to people with genuine documents. With the bank run that has just begun, pharmacies are not sure whether they will even get back money rightfully due to them if the system itself goes bankrupt

As far as mom and pop stores are concerned, they have every right to refuse customers any form of credit, even to purchase essentials like milk, fruits, vegetables. That being said, these very stores may not get credit from stockists and super-stockists and with no resolution in place, the entire country's stockpiles of essentials will last for no more than a month.

Along with the Grexit, it will be a return to Drachmas for Greece that will be at least 10 times lower in comparison with Euro and release hyperinflationary trends. [In the post- World War time zones, Germans had to carry millions of DMs in wheel barrows to grocery stores to just pick up basic essentials. From a humanitarian aspect, Germany is very well aware of the pain, a common man has to go through]

One last example of the problem: A small business owner logged on to his internet banking account. As it happened with Cyprus in 2013, the system ended up displaying messages on the lines of "Book Balance xyz Euros; available for transaction = 60 Euros. It can be very frustrating indeed to not be able to access your own money. They money stuck in the bank can end up becoming literally worthless if Grexit happens.

So whilst the mainstream press is pointing fingers at Greece alone prolonging the negotiations, fact is that ECB also wants time to ring-fence itself and minimize the pain. It is definitely not a pleasant site to see people not being able to buy essentials with their own money for mismanagement from the baking sector [both Central Banks and Private Banks]. ECB is looking at every possible loophole in the derivatives legal codes to avoid having liquidity crisis for Credit Default Swaps.

To summarize, there is inevitable pain for Greece, ECB and in fact the entire Euro-zone. The only thing that one has to look at is how to minimize the pain. Also note that should a contagion take place, forget about US Fed raising interest rates or other major economies tightening monetary policy - it sets up the platform for next round of QE

So that is the background for the ongoing panic and volatility. Technicals may go out of the window for a brief 1 week timeline only to come back. As long as Rupee-Dollar exchange rates remain below 64.25 levels and bond yields do not jump past the 8% spot rate for 10 year treasures, India remains an active. Markets may not fall immediately but Rupee-Dollar above 64.25 and bond yield above 8% will the first indication of a large wave down.

Maggi In A Soup??? WTF

So Maggi has been in the news for excessive chemicals in food. Don't people know that. Pepsi and Coke have carbolic acid and aspetim [in diet versions] that are harmful???? [Note that I am a heavy consumer of Diet Pepsi n Coke Zero] Cigarettes are injurious to health - I find it stupid that US and Canada courts are awarding billions of dollars as fines to tobacco companies for "not warning adequately risks of tobacco consumption" People are well aware of what they are getting into [as mature adults. Nevertheless, I can speak only for myself and I am fully aware of risks when I pick up that puff or that peg. And most people are - it is a choice made]

Anyways coming back to Maggi - let us face it folks. It is an FMCG product that follows the conventional supply chain as of now. Factory to Regional Distribution Centre, Regional Distributor to Super Stockist, Super Stockist to Stockist and Stockist to Point of Sale. Business means every time a product or service changes hands, there is a margin to be paid. Conventional FMCG business works on the following premise [Average and Ballpark Figures]

Point of Sale - Margin = 10%
Stockist - Margin = 8%
Super Stockist - Margin = 6%

So for a product that costs 10 rupees, 2.4 have to be kept aside for margins for these players
Another 2 rupees have to be kept aside for trucking, warehousing and wastages
So from an MRP of 10 bucks almost half is already shaved off as expenses and these are all operating expenses. Then comes the aggressive marketing campaigns and salaries to be paid to staff. What is left is just about 3 bucks to produce [mostly contract manufacturing]

So is there any scope to have "healthy" ingredients??? "Healthy Food" means well controlled procurement of "good ingredients" that come at a price. That is why the meal at Taj or Sheraton costs that high. If you want a pack of noodles for 10-15 bucks, there is bound to be artificial chemicals in the product. [Because the company has to manufacture within the 3-5 rupees price band]

Note that I am not justifying Nestle or Maggi. The point I am trying to drive is that as far as the common man is concerned, s/he is well aware that if you pay peanuts, you get monkeys. This is universally applicable to staff, products and services.

When we go to the street corner to savor that bhelpuri, samosa, wada pav, chole kulche, we are well aware that quality will be a challenge. We attribute that to unorganized food sector and make our choice.

Just because Maggi belongs to a brand like Nestle, it is creating news. Even that is fine but then one needs to also evaluate Yippees, Chingles, Feasters [Private Label of Aditya Birla Group], Knorr et al. Take any of these brands and the odds of them failing quality tests are as high as Maggi. Right now, my personal contention is that since the issue has cropped up, why single out Nestle alone. Subject ITC, HUL, Aditya Birla, MTR, GITS all for food safety standards. Since this issue has cropped up, let there be a fair evaluation of the entire sample space.

We have had agitations with regards to pesticides in soft drinks, genetically modification in KFC. It will be in the news for sometime [till media keeps trumpeting it on prime time] and then fade away.

This is a daily chart of Nestle from 2013. Look at the volume bars.Whenever Nestle has traded on extra-ordinary volumes, yes prices collapse in the short term [3 to 6 months] and then resume their upward march. Currently, we have not yet reached the volumes that existed in 2013-2014

Normal Trading Volume on Nestle 80k to 100k shares

26th Nov '13 - Volume = 750k with spot price around 5000 bucks a share

28th Feb '14 - Volume = 850k with spot price around 4800 bucks a share

By 10th March 2015, Nestle stock was trading at 7500 clocking a 50% gain in 18 months.

Yesterday's fall volume was about 400k shares. So there is some more downside pending as the volumes need to hit 750k to 800k shares. Technically, the critical buying levels are 5800, 5400 and 5000 levels. Of course the rally of 2014 had a sentiment effect with the new government and the next rally will not be that fast. However, just like the soft drinks and pesticide news, KFC and chicken news, this MSG and Lead stuff will be behind us soon.

The stock will eventually reclaim old highs and perhaps attain newer highs of 10k levels. Since timing the market is next to impossible, this is a very good time to start an SIP on Nestle as the stock is poised to deliver 30% CAGR returns over the next 36 months.

Stock has breached 200 DMA with conviction and historically when Nestle breaks 200 DMA with volume and momentum, it tends to spend about 6 months below that 200 DMA mark.

Euro Zone Crisis and Why It Will Be Good For Break-Up

For the last 5 years now, the PIIGS crisis has dominated business news headlines and stock markets keep taking corrections every time there is mention of Greece. Let us first understand the basics of the common currency bloc

Euro-zone always had allied interests that allowed capital, people and goods to freely move within boundaries of Europe, more so after the Berlin wall collapse ending communist forces in the eastern bloc. With the exception of Germany, most countries were net importers of goods and services and a strong currency suited business interests. Also, the Asian Currency Crisis and 9/11 terrorist attacks much later, there were strong interests within Europe to create an alternative currency to the US Dollar. Germany being a high net exporter, also needed slightly weaker levels as compared to traditional marcs. So eminent politicians of Europe and banksters discussed next steps in this regard. Thus was born the concept of Euro - one continent one currency setup. Germany being the strongest member would have control of treasury for Euro. Certain rates were fixed for the Kroners, Guilders, Francs etc and all moved to common currency Euro.

Of course this had a short-term inflationary effect as salaries had to be revived by companies to match consumer spending in Euros. Things that were perhaps not adequately thought of during Euro creation

1] Diversity Mix in Countries: It is critical to note that Euro-zone has far more diversity in socio-economic conditions, similar to an emerging economy like China, India, Indonesia etc. The Nordic countries like Finland, Denmark, Sweden etc always were extremely strong economies due to low population and some strong industries. UK, France, Germany were also strong players in political as well as economic blocks. [The first alarm bell rang during creation itself - UK agreed to be part of Euro-zone geographically but not economically with the common currency] On the other hand, there were countries like Poland, Hungary, Czech Republic, Romania etc that had far more similarity with emerging nations than strong nations like Germany, Denmark etc.

It is no surprise therefore that even Indian technology companies like Infosys, Wipro, TCS set shop in emerging nations of Europe.

2] Disparate Policy Measures: The common currency setup implies control over Euro will be with ECB [read Germany] whilst fiscal measures are responsibilities of individual nations. Such a scenario never works. For details on this, please read the articles by Nadeem Walayat [marketoracle.co.uk] through the link given.

Look at India for instance - RBI and Finance meetings get log-jammed for this reason only. Everybody is pro-growth but anti-inflationary.  RBI has to do a tight ropewalk to take care of both. RBI chief rightly says within tools and powers in my arsenal, I can only control monetary policy. Fiscal prudence is government's responsibility and government after government is spending far more than earnings. [That is the reason why we have such a large and active bond market globally] The bonds are money raised from institutional investors to fund government expenses that cannot be covered with the tax collections. If we have this kind of a situation within India, imagine the state in a country like Spain, Greece, Italy etc

When the Euro started, it started to trade at parity with the USD. Over a period of time, it went from strength to strength. The going was good and everybody was in a mood to party. What nobody realized is challenges that will emerge over a period of time. Western society is very particular about welfare of human beings and there are a lot of provisions by governments in form of social security. So when the move to join a common currency came through, ideally there should have been as much harmony as possible towards fiscal measures as well.

Peripheral countries continued with their own schemes. Perpetual healthcare, high social security net for citizens etc. The music would stop at some point though. Over a period of time, countries started finding it difficult to meet even basic obligations to bond holders and that started sending jitters across the globe. [A large part of 2010-2012 equity correction was a result of this fear] Forget earning interests, recovering principal itself was a major issue. Institutional investors in bond markets are pre-dominantly banks themselves. That is when the bailout packages started coming in.

A Catch 22 situation started developing and is now reaching a crescendo; if ECB [i.e. German Tax Payers' money] keeps bailing out peripheral countries, it goes on a weak wicket back home. German citizens are angry. So when bailout packages are given to countries, they come with austerity measures. The moment there is austerity, public spending drops and creates political ripples internally in countries. Let me give 3 examples of countries based on my personal experience in those countries for considerable time for education as well as employment

Denmark: It had a strong corporate say with 3 major companies i.e. Maersk [large conglomerate with multiple interests though strongest in shipping related activities], Vestas [once upon a time king of wind energy] and Novozymes. The country has one of the strongest tax regimes but also some of the best social security measures. Due to exremely low population, it is able to manage all of that. Denmark is one of the countries where you literally don't pay anything for education. Rather, the government pays you to study and as long as you keep your grades respectable, you can study as much as you want in government recognized universities without bothering about fees. Hospital care is totally government responsibility - you only pay for the doctor's fees. If you are unemployed, you get allowance from the government [with certain conditions attached]

Maersk has been facing a tough time since the 2008 economic crash as shipping industry as a whole is still reeling under pressure. There is excess capacity of ships globally, ship-building once the pride of Denmark has shifted to Samsung, Hyundai in South Korea [Samsung is much more than mobile phones and consumer durables. Samsung has a very strong heavy engineering setup for ship-building, shipping containers manufacturing and Samsung accounts for almost 40% of South Korea's GDP!!!]

Vestas, once a crown jewel in the world of wind energy hardware manufacturing has lost out big to the Chinese. Since 2009-2010, the company has been tightening its belt to stay afloat. Novozyme is still active but being a bio-technology and pharmacy related company does not have too many employment opportunities. Maersk, Vestas and Novozyme put together probably employ over 50% of Denmark's population directly or indirectly [just like software in India. For every 100 jobs created by the It sector, it creates another 20-30 jobs in areas like transportation, food, telecom, facilities management etc] During good times, the housing market in Denmark was on a song with housing prices making new highs almost everyday. Now with bad economic times, housing prices have tumbled and the situation is so grave that the government has had to intervene and tell banks - increase tenure of loans to customers and forget the princpal - just focus on interest servicing!

Denmark or for that matter any of the Nordic countries like Norway [oil-rich], Sweden [home to Volvo, Scania and Ikea], Finland [home to Nokia-Microsoft] won't have much of a challenge. This is because of the countries' size, population and large businesses. In fact if the Euro zone breaks up and these countries go back to their old currencies 2 largest beneficiaries will be Vestas and Novozyme.

France: This country has been in a crisis since 1984 though they have never acknowledged it. It is one of the most populist and socialist governments that likes to control prices and keep high taxes. The population is ageing and state coffers are dry. They jumped on to the Euro with a strong currency in mind and let us not forget the country is a net importer of goods. The challenge is that austerity simply does not work in France. The work culture is different and if people are not happy, they can go on strike. In fact, France is plagued with strikes from bus operators to metro operators almost every month in some part of the country or the other. Tourism is a major attraction in France.

Spain: The people in Spain are very friendly in general and very relaxed as well in work culture. Lunch break can extend to 90 minutes as well. Spain is one of those peculiar countries where the paradox of socialist measures comes up to the surface. The average salary for simple jobs [factory workers, gas station attendants, security guards, tellers in supermarkets etc] is about EUR 1000 per month. Over 30% of the population under the age of 30 is unemployed. The government unemployment allowance is about EUR 800 per month [it varies from person to person but this is an average]. So a lot of youngsters are saying "Why should we slog out 160 hours a month for 1000 Euros salary when I can sit at home and make 800 Euros!!!" Classic Catch 22 situation for both Spanish and German governments. They want the Euro to be there as Germany is a net exporter and needs a market like Spain to stay afloat. For the Spanish government, laws for social security were made decades ago and taxes were collected in this premise. Now if the economy has to recover, you need youngsters to go out there and work. Unless the wheels of industry don't move, the government will be forever dependent on bail-outs.

Whatever is applicable for Spain, is applicable for Italy, Greece as well. It was once applicable to Portugal as well but they came back on their feet smartly. The premise that the Portuguese government used was a great sell to people; "Look I understand that your minimum wage has dropped more than 50% post-crisis. However, you also need to take into account that all other expenses you have to incur have also dropped significantly as the entire industry is reeling. Your net savings were negligible even in good times and even with a 50% reduction in salary, your lifestyle does not alter significantly" The masses took heart and started getting back to work - the end result is that a lot of firms found it productive to build manufacturing plants in Portugal. Transport within the Euro-zone is not much of a challenge. So taking into account carbon footprint, time to import from Asia etc, "total cost of purchase" for goods and services form Portugal are favorable to the industry.

Ireland also understood this concept well and hence the contagion has been arrested within reasonable means. Unfortunately as of now, Greece, Italy and Spain are having challenges with industrial rebound. Constitutional measures dictate that social security spend continue. Many youngsters not joining the workforce and smarter ones migrating to greener avenues like UK and US. The gap between what the countries earn and what they spend are significantly higher. Bailout packages call for austerity on these fronts but austerity comes with a lot of local backlash

What if the currency breaks up? Let us go back a couple of decades when we had the Asian Currency crisis that plagued Thailand, Indonesia, Malaysia etc. Initially there was panic, hyperinflation but what next? Thailand, Malaysia, Indonesia as tourist destinations that were once upon a time only for the wealthy people and business travellers came on the radar of common man. Exports from these countries started surging higher. They became highly competitive. Yes the initial 18-24 months after the crisis broke out was chaotic. That always happens with any economic crisis. But that does not mean the end of the world.

Greece, Italy, Spain etc all have strong olive production. They are excellent tourist locations. If the Euro currency breaks up and these countries go back to their original currencies, then tourism that is currently very expensive [due to Euro] will flourish. Today, just as it is common for an Asian to make at least one vacation to Thailand, Malaysia, Singapore etc, it will become very common to visit Spain, Greece and Italy in Asian currency denominations. Exports will flourish. As far as people are concerned, they just need to realize that rather than anchoring themselves with old salaries, numbers and denominations, they should focus on lifestyle. As long as they are able to get a certain kind of lifestyle [albeit a toned down version], it does not matter which currency they earn in and the amount.
But there is bound to be inertia as right from kindergarten, one has been conditioned with the notion that the state will take care of you.

There in lies the Catch 22 situation for Germany. They need the Euro [especially a weaker Euro] to stay competitive in industry. They have a captive market in Europe itself that will go away with the breakup of Euro-currency. The German Euro will move back to DMs and as against the prevailing Euro rates, the DMs will become twice their worth in exchange making them extremely noncompetitive. So they have a double whammy effect; lost customers as well as lost businesses. There is a vested interest on part of Germany to keep the Euro-zone intact for as long as possible. However, they face a backlash back home with tax payers who are slogging it out whilst peripheral countries are just enjoying life

So if any trade pundit says that there will be a catastrophe, it is fairly logical. When such fundamental changes occur, there is bound to be short-term negatives. That being said, it is not the end of the world. If anything, it is going to make things better from the current state of affairs. From an Indian perspective, today, a Europe tour package costs about 1 lakh INR per head for about 8 to 10 days. If the Euro-zone break up happens, that will bring down the bill by about 50%. Just as travel portals are wooing you for a budget trip to the Far East, suddenly you will be bombarded with advertisements to travel to peripheral Europe. 4 Day Spain visit for INR 27k, Greek island visit for 25k etc etc etc

And how do you make fund provisions for that? When [there is no question of IF - the Euro-currency collapse is inevitable] the contagion hits, there will be sharp falls in equities all over. Rather than succumb to fear seeing bloodbath on streets, at least in India we should look at building an equity portfolio. As I mentioned in my earlier post, the technical bottom for Nifty is about 7200-7400. In cases of extra-ordinary events like credit crisis, there may be short term pain perhaps even testing 5900-6200 levels. All that is nothing but great opportunities to increase portfolio holdings. Even if we go down to 5900 levels, the eventual target for Nifty is 10k [that will perhaps come in a couple of years] The fall to 5200 in Aug '13 was the sweetest spot to go long on equities. Likewise whenever the next catastrophe roils the markets, the entire 5900-7400 zone are sweet spots to buy. The purchases made in this period will translate to about 30% CAGR in a 36 month period.

To summarize - Euro-zone crisis is bound to roil markets globally. Either tax payers in Germany or people in peripheral countries will ensure that it happens [each for different reasons though] Despite all the austerity discussions, ECB will try its best to keep the Euro-zone intact for as long as possible for their own interests. When that happens, it is short-term pain but long term gain for everybody having stakes.

Waiting for that collapse to take place personally ;)

EOD CONTEST JUNE 2015

Hello Tweeple and Blog Viewers

From this month, we have a special contest on this blog i.e. EOD Prediction
[By taking your mouse pointer to the text below, you will get the link]

EOD CONTEST SHEET

WHAT?
Predict the Nifty Closing for a trading day
You just need to update your Twitter Handle and/or Email Address and post your prediction on the sheet [Link Above]

Rules
Only one email address / Twitter handle per user to be used
Entries for a trading day should be done latest by 2pm IST

Scoring Guide
[Given in the link above]

Prizes
There are special prices for the top 3 scorers at the end of June series.
Winners will be contacted individually

Outlook For June 2015

So the adage 'Sell In May & Go Away' did not hold fort as far as Nifty goes. The selling happened and there was a pullback with a critical close above 8410 to end May 2015. Yesterday European markets ended sharply lower with DAX taking the strongest beating but our markets went through their own trajectory. Let us have a quick review of charts

Nifty Daily

 Nifty Weekly

 BankNifty Daily

 BankNifty Wekly

Nifty chart is extremely clear with the corrective phase. The 50 DMA line has crossed below 100 DMA confirming a corrective phase. As of now, the upside seems capped around 8625 levels and a test of 7800 is on the cards. Over the last 2 months, on 3 instances, Nifty has hit the 50 DMA and moved lower. Once on 17th April [when downtrend was strongly pronounced], second time on 22nd May around 8477 and on 29th May. Now if it does manage to pierce it with a follow up in first week of June, there is every likelihood of testing the upper end of the channel at 8625 levels. As long as 8625 is not breached on closing basis on daily and weekly basis on upside, the rallies are merely corrective bounces. Have a look at this chart

This is the corrective phase that started in Nov '10 and ended in Dec '12. There is uncanny resemblance in the pattern exhibited on Nifty currently. [However, a similar pattern was shown earlier around Diwali 2014 and it got invalidated subsequently] In the current scenario, the pattern will get invalidated with 2 consecutive closes above 8625 on daily basis or a weekly close above 8625

What is divergent at the moment is the BankNifty Chart

In the Nov '10 - Dec '12 corrective phase, Nifty and BankNifty were pretty much following the same path. The present price Nifty chart is having the same pattern as that of Nifty Nov '10 chart but not the BankNifty chart. BankNifty also had a corrective channel and that has broken on the upside last week. Of course the Nifty index components have changed significantly compared to 2010 and changes in stocks like Asian Paints, ITC, Sun Pharma have a lot of bearing on the index. Even with these exceptions, the current divergence on BankNifty is too high to be ignored.

If this is just a rally on expectations of a rate cut on 2nd June, it will fizzle out. We have to wait and see how BankNifty behaves around the 18800 levels spot and how it pans out. 2 consecutive closes above 18800 on BankNifty implies a large retrace of the fall from 20500 levels to 17200 levels with a minimum target of 19200. On the downside, the 17800-18200 levels should be able to provide support. Failure to hold 17800 levels on a weekly basis will give a steeper cut towards 16800. So the jury is split wide open on BankNifty and the range is too large 16800 - 19200 [Definitely not useful for trading].

From a trading perspective, we have to go with shorter time frames. The first sign of danger for bears will be breach of 18800 on upside on closing basis. The first sign of danger for bulls will be collapse of 18250. By 5th June, there should be some clarity on this front. Keep a watch on the Twitter feed for daily levels.

There are a lot of expectations on the basis of projects announced by the government and people are wondering why equities are not reacting to these news. As the saying goes, markets discount the future well in advance. Positives from these projects at infrastructure level and public spending were already discounted last year.

On the positive side, German elections, UK elections have all played out. There is only negative, impending and that is future of PIIGS in Euro-zone. Greece will be the first one on news and that was the reason for sharp collapse on DAX and CAC yesterday. We need to remember that a lot of that has been factored in and over the last 2 years, ECB has ring-fenced itself well with LTRO and liquidity measures. However, in the unlikely event of Greece getting out of the Euro-block [either being booted out or Greece exiting on voluntary terms], there will be a bout of panic that will spread globally. What will shake institutional investors is not Greece per say. It is the risk of contagion spreading across Europe that will trigger panic. In the short-term, if such a thing happens, there will be a capital flight to safety to the US Dollar and German Bunds. [I will cover the Euro-zone issue in a separate post later today]

Such panic will affect all markets globally but technicals will eventually rule back. So as far as Nifty is concerned, with such a long sustained tenure above levels attained in May 2014, 7200-7400 is the technical bottom. Short term irrationality may taken levels lower but the rebound will be equally sharp and swift [Remember that the technical bottom prior to Lehman Brothers crisis was 3900 but the collapse continued through to sub-3k levels only to recover] Another difference between the Lehman Brothers collapse and current crisis is that Lehman Brothers was an unknown event. Things were hunky dory and it came as a jolt to people across the globe. This time around, at least with the Euro-zone crisis, the surprise factor is not in the picture. The issue has been in the news since 2010 and given institutional investors adequate time to prepare themselves.

However, there could be some black swan events that can happen, triggering a strong correction in markets. As the adage goes, correlation can be established but not causality. During the run-up to elections to 2014, I mentioned how fashion trends, media trends are all pointing towards a strong bull market for 2014 [Yes, I do believe in Pretcher's concept of Elliott Waves as well as Social Mood; that he has got things wrong since 2010 are a result of his biased thinking and self-fulfilling prophecy syndrome]

So what are the social indicators pointing out that a major correction will come through over the next 18-24 months

Box Office Collections: With the multiplex introduction, we have had so many genres of movies hit the box office over the last few years. In 2013-2014, even movies like Fukrey, Vicky Donor had high footfalls and showed that social mood was turning positive. Over the last 6 months, even big names and big stars have failed to set cash registers ringing. On the fashion front, advertisements were extremely bold, embarrassing parents when they showed up on screens during prime time. Now advertisements are getting even more irrational; "Ghar mein lagao HD color???", "Platinum 3G has arrived to Mumbai???" Last but not the least, BFSI companies advertising "This is the sweet spot for equities in the long run" We are approaching a top for sure.

Technology has been a great enabler for making life productive. Smartphones, internet and cloud computing are all examples of how automation and technology makes us more productive. However, when valuations reach maniac proportions, it is sign of trouble. Billions of dollars for whattsapp, bookmyshow, olacabs, zomato are signs of trouble. Google has its base in advertising and the same is the case with Facebook as well. Whattsapp despite being a free platform for users, has an extremely high value for larger hi-tech companies due to the fact that it records the mobile numbers of people and will help business analytics tremendously but 19 billion??? Give me a break. We are looking at the same mania in the internet space at the moment. It is due for consolidation and there will be some clear winners. However, there will be far more flops than hits and the entire funding that technology startups are getting are in the hopes of a good IPO. All the discounts that are being showered now can be recouped with a good IPO. As soon as the credit squeeze hits markets due to geo-political and socio-economic factors, technology funding will take a hit.

Fibonacci Timing
2-3-5-8-13-21-34 are critical Fibonacci numbers. 2016 marks an 8 year period from the Lehman Brothers crisis. 2015 marks a 5 year period from the time Euro-zone crisis that first surfaced. [And 2008 marked the 8 year period from the 2000 economic debacle busting startup technology] The social mood and Fibonacci points towards a correction globally. That being said, it is difficult to know exact timing of events. Blind shorting can create challenges as markets are irrational. Suffice to say that beware - sudden negative surprises can spring up at a time most unexpected

Statistical Significance
I mentioned this in my earlier post this year as well; historically, the 3rd year of the 2nd term of a US president marks a strong correction in markets. Let us look at extremely strong global market corrections over the last few years [Taking into account 2 consecutive terms of the US President]

Roosevelt started his presidential term in 1933 [when recovery from 1929 was underway] and extended and ended with World War 2

October 1987 - 2nd term of Ronald Reagon [President from Jan '81 to Jan '89]

October 2000 - 2nd term of Bill Clinton [President from Jan '93 to Jan '01]

October 2008 - 2nd term of George Washington Jr [President from Jan '01 to Jan '09]

Currently Obama is serving his 2nd term and is in his 3rd year!

I am only taking into account 2 consecutive terms of a US President over the last few years and global economic scenario. Truman was the only exception when there was no major economic collapse globally. All countries were trying to bounce back from the debacle of World War 2.

What is important is that there is 'statistical correlation' with 2nd consecutive terms of US presidents, especially in their 3rd years of the 2nd term. We are not blaming the presidents here for economic debacles - please that should not be the inference. As Naseb Taleb says in fooled by randomness, "Don't look for patterns in what could just be a cinnamon roll"

From my personal outlook, social mood, Fibonacci and statistical outlook when all these converge towards one outlook - it is too strong to be ignored. Last but not the least, the surge in global equities has in no way created better job situations on ground. So if one keeps on shorting the market looking at these factors on a stand-alone basis, the odds of losing money are higher.

Even globally, there is a remarkable shift in the underlying principles of capital markets be it bonds, stock indices or currencies. DJIA = Dow Jones Industrial Average
What are the major components of DJIA today? Apple, American Express, Visa, Microsoft, IBM, Verizon, United Technologies. From the conventional manufacturing and industrial space, we just have names like Boeing, GE, Merck, Coca Cola, Mc Donalds, Chevron and Du Pont. Boeing is highly cyclical and is on the verge of topping out, GE is increasingly shifting to cloud computing and services as manufacturing is taking a hit. Nevertheless, if Apple, Microsoft, IBM could propel Dow to new highs, these very stocks can pull them down as well.

As interest rates reduce, currencies were expected to behave in a certain manner and hyper-inflationary pressures should have triggered economies. 5 years of rampant money printing has had little impact on the US dollar [it has only strengthened], commodity markets have collapsed, and people are flocking to US Treasuries and German Bunds. This is simply because the rules of the game have changed. US dollar and German Bund are perceived as safe havens for separate reasons and hence classical theories no longer work. In older days, the job market and economic activity were positively correlated with equity indices. That is no longer the case.

Precious Metals and Crude
I keep repeating this every month. Gold and Silver have had a 13 year mega-bull run from 2001-2013. So a 3 year correction is fairly logical in terms of time. In terms of price, I think prices have found bottoms in dollar terms. For gold, any severe correction due to deleveraging of institutional speculative positions will still arrest prices within the 1000 dollars per ounce band. All said and done, at sub-1200 levels, most gold mines are making losses. And sub-1200 per ounce prices trigger a great demand for physical deliveries of gold by a lot of eastern nations. Since we are at the fag end of the correction in gold, over a longer term horizon, one can still expect a 10% appreciation per annum over the next 5 years. Silver as an industrial metal is losing sheen but is finding uses elsewhere. It is poised to grow higher again by about 10% per year.

Crude oil, for all the negative commentary in the media, prices have already regained some gains and from a technical perspective, the fall from 105 levels on Nymex to 45 levels will create opportunities for a 50% retracement towards 70 dollars a barrel by the end of this year

To wrap up, Nifty trend will get clearer by 5th June. The period from 15th June to 30th June will be highly volatile with 21st June Summer Solstice being a critical turning point. As of now, the range for the Nifty is at 7800 on the lower end to 8625 on the upper end. Should there be a change in this outlook, I will update it on the Twitter feed.

From this month, there will be a special contest for all viewers of this blog. Predict the Nifty closing level for each day on Twitter with #NiftyParadoxContest on twitter and also update your entries on this document EOD JUNE CONTEST. The top 3 winners will get gift vouchers. [To participate, you just need to share your Twitter handle and/or email address. The entry must be done by 2pm of that trading day]

Enjoy a happening and exciting June series.