Wednesday, April 1, 2015

Outlook For April 2015

So we had an exciting March series. Nifty made a swing high of 9100+ levels and also corrected almost 10% from there in a fast and furious way. The March 21st Spring Equinox did spring the large moves [repeating the downside]. I hope those who took straddles managed to take some money off the table.

As I keep saying options are usually a slow death instrument but there are times when option straddles can be profitable. In terms of times, the most potent times are
Spring Equinox [21st March]
Summer Solstice [21st June]
Fall Equinox [22nd September]
Winter Solstice [21st December]
Most often than not, option straddles taken in the 10-12 days around these dates as pivots tend to pay off. The other occasions when they pay off are when the 3rd waves and C waves [as per Elliott Waves] play out.

For the fundamentals on why such sharp falls were seen; close of financial year - simple! For DIIs, it is that time of the year when bonuses decided in appraisals have to be paid off. Cashflow provisions need to be made for advance tax payments, new salary bands etc. Also it is a time to dole out dividends and bonuses to fund subscribers especially when the markets have had a phenomenal run. Rather than tap other market sources, it is best to withdraw funds that are in profit and that means placing sell orders on holdings. Remember that even DIIs are also large fund houses and have significant chunks invested in the markets. Now all this is extremely common and tend to get done with by 20th March in any year. And as I shared some statistics with you last month, 21st March onwards, markets tend to rally. I gave 5 years data points; if we taken the last 15 years data into account, over 75% of the instances, markets tend to go up after 21st March.

In March 2015, the Euro made a spectacular plunge coming almost to parity with the dollar. What this meant was that a significant chunk of money that was parked by European funds waiting for an opportune moment to repatriate funds got a major opportunity window. So regardless of what RBI did and what the budget did, fund houses need to take hard and fast business decisions when opportunities present themselves, This is not only true for fund houses for businesses as well. Most European companies used the soft Euro-Dollar exchange rate to repatriate funds from India back home with a near parity of Euro and Dollar. That is for the fundamentals

From technicals, on all time frames daily/weekly/monthly/quarterly were in highly overbought region at 8800 levels itself. So a correction was very much on the cards and just that the fundamentals accelerated the fall. Corrections are extremely healthy for the market. TV commentators are harping again and again that money will not flow out of India. They are wrong. From the time Shanghai Composite was at 2100 levels, I have been saying that China is going to outperform most markets and that is exactly how the scrip played out.

For all the television jerks who tend to oversimplify things - they just need to remember one basic factor - "Money is like water; if it stays at one place it gets stagnant. It has to keep moving and circulating to stay productive" And smart money likes to bottom-fish - they like to buy low and sell high. So money will move in to the most ripe opportunities and move out of areas where significant gains have been made.

Some basic global market statistics: Whether we like it or no, currencies as well as equities are largely tied  to the USD and DJIA respectively. The dollar strength is hurting other currencies. DJIA has already made spectacular gains and profit booking will be logical there as well.

Whenever the US has had 2 consecutive runs of a president, the 3rd year of the 2nd term tends to mark a peak in markets followed by mayhem. I won't go too far in time

Ronald Reagon: 1981 - 1989. The first part was marked by a period of boom called the Roaring Eighties. 1987 marked one of the largest crashes in global economy after 1929

Bill Clinton: 1993 - 2001. A fantastic recovery post 1987, a boom in dot-com that topped out around 2000 followed by a crash worse than 1987. Nasdaq crashes over 60%

George Bush Jr: 2001-2009 A spectacular recovery post 9/11 followed by the Lehman Brothers crisis, Market topped out around 2008

Barack Obama: 2009 - on-going. Another recovery with unprecedented unlimited QE. This is the 3rd year of his term. Will history repeat itself - I think it will

Fibonacci Analysis
1987 - Global Crash triggered by Bond Market crash
1987 + 13 = 2000 Global Crash triggered by dot-com bust
2000 + 8 = 2008 Global Crash triggered by Lehman Brothers
2000 + 13 = 2013 Crash expected, It turned out to be a routine correction followed by swift reversal
2008 + 8 = 2016 A major global crash expected as multiple cycles are co-inciding. Euro crisis is as usual threatening to create issues. Eventually the music will stop and countries are expected to go back to their old currencies [Repeat of South East Asian Currency Crisis in Europe]
All the bonds lapped up by banks turning worthless

Well these are things way ahead in time and the objective of spelling these is just to make sure that we don't lose sight of the big picture. Will that be the end of the world? No way. The world came back to its feet after world wars, after 1929, 1987, 2000, 2008 and will bounce back after the next crisis as well.

The point is that as far as equities are concerned, this is a time to keep trimming long positions and booking out gains. FD rates are dropping. But there are other avenues opening up for investment. Gold, Silver, Crude, Real Estate. Gold has corrected significantly in dollar terms and may slip a further 10% from here but that should be just about it. It had a spectacular rally from 400 dollars an ounce to 1800 levels over a 15 year period. So both from time and price perspective, a correction and consolidation period was very much on the cards. It has been about 18 months of consolidation for Gold and Silver. After a rally of 400% over 15 years, time-wise, a 2-3 year consolidation is very logical. So gold may continue to be range-bound for another 18 months at best and that is good news to park surplus profits from equities to gold. They will still continue to appreciate about 10% per annum compunded in dollar terms. And over a 5 year period it will surpass old peaks and go upwards of USD 2000 per ounce. With the range for Rupee-Dollar at 55-68 over the next 5 years [with most of the time around the 64-66 range] the rupee prices for gold will go well over 50k / 10 gms over the next 5 years [highly likely] Even with gold price at 1000 dollars to an ounce and Rupee-Dollar at 60, very very difficult for gold to go below 21k / 10 gms [would be surprised to see prices below 23k / 10 gms]. So Gold is definitely an asset class to tank up on now when it is at a discount to the previous peaks. Silver has lost momentum in the industrial segment due to nanotechnology and semiconductor / optical fibre usage. However, the food segment is [premium desserts especially in India] will have voracious appetite for silver. Likewise silverware [crockery and cutlery] will be an aspirational need for a lot of wealthy people [just as it was in olden times]. Industrial usage will not go down to zero. It will still be at least 60% of earlier requirements. So don't be surprised to see silver trade above 75k / kg in the next 5 years.

From an Indian perspective, gold and silver both have a lot of upsides remaining and this prolonged consolidation is screaming out as an opportunity to buy. Likewise for Crude Oil, ignore the commentary about US inventories and OPEC not cutting production etc. It will also bounce back smartly in due course of time. In fact, for 2015 itself, a technical bounce to 65-75 dollars per barrel on Nymex is not ruled out. Crude will continue to spend most of its time in the 90-100 dollars per barrel mark for most of its time globally as well as in India. In rupee terms, crude oil prices have crashed over 60% from the peak. At a minimum the old highs will be tested if not more.

For Gold, ETFs are the best option, for silver - physical unit is the best option. For crude, one can keep adding long positions on MCX with 3/6 month mini contracts [to minimize cost of carry and pace of roll].

I have been saying that a major real estate crash lies ahead of India but also remember that it is still at least 5 years from now. REITs are slowly beginning to gain traction. The greater the volume and participation in REITs, the greater will be the influence on the real estate sector. I know prices in Mumbai, Pune and Bangalore. Safe to assume that the same unrealistic prices are valid in other metro cities as well as Tier1/Tier2 cities. With a rising population [that too with so much demographic dividends], real estate prices will tend to go way higher. although current valuations are stretched, there is a further doubling or tripling from current levels on the cards over the next 5-8 years.

Last year, around this time, my recommendation longs on delivery based equities, followed by fixed income, gold and silver. This year, my recommendation on investment outlay for India is as follows
30% allocation to FMPs
40% allocation to real estate
20% allocation to equities
10% allocation to gold and silver
[These are purely my personal opinions and the quantum is immaterial. Whatever is your investment capacity, the allocation must be made along the following lines. Real estate - be very careful in terms of the loan component. If the loan component is high and the repayment is not done within 5-7 years, the upside will get negated by the interest in loan component.

I am hazarding a guess for the second time in the last 6 months [I had called for a top around the Diwali rally itself and that failed :(] However, the bull party for this year is over in all likelihood this time [although there is an outside chance of hitting 9250 levels on Nifty - the odds are heavily against this after yesterday's close]

In all likelihood we will see a relief rally followed by a sharp correction. Technically, 7200 is turning out to be a major support zone even in case of extreme correction but should global cues be against the markets, it may temporarily slip to 6600 or 5944 [In 2008, the technical bottom was around 3900 but stocks plunged further before making smart recovery]

When such falls, come through, one can withdraw from FMPs and invest back into this market. So much from the investment outlook.

For the trading outlook, I have already put it on the chart illustrations the expected tops and bottoms for Nifty / BankNifty for April series. For the daily / weekly levels, keep looking for the Twitter feed on the top left side of the blog

Wishing all of you a very profitable FY16

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