Wednesday, November 4, 2015

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 

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