Why Many EW Counts Go Wrong in India???

To begin with, I must admit that I am still pretty a novice with EW counts but have seen a lot of charts, labels, counts made with the aid of EW and yet, most often than not, things don't fall in place. Is it the case that the EW Theory is wrong? Many a time, people feel, this may perhaps be true because even Bob Prechter and his team have got a lot of counts wrong since May '11.

As I have kept mentioning earlier this year as well, the real reason why Bob Prechter and team have got counts / trades wrong is because they are 'looking for what they want to see' and 'what they feel'. It is precisely this own bias clouding judgement that has gotten them all over currently. Is this the first time that it has happened to them? No, perhaps around 2005-2006 itself, they had put some illustrative charts on Fannie Mae and Freddie Mac and predicted that they would become penny stocks. Did it happen? Yes it did but just that it took 3 more years to happen.

Coming back to the Indian scenario and why a lot of applied Elliott Wave Analysis goes wrong. Let us go back to the 'fundamental ground rules' laid down by Elliott for scrips that do follow the Elliott Wave patterns [all covered in Chapter 1 and Chapter 2 of the book]

1] Most commonly applicable on Market Indices
2] Applicable to cyclical industrial stocks and stocks that have healthy volumes [When the volumes are being spoken about here, remember that the initial Elliott Wave principles were laid down in 1920s and 1930s. So even on NYSE, the volume implied 'Delivery Volume' as the proportion of day-trading was minimal]
3] The index or the scrip must be able to follow a hierarchical structure of Super Cycle, Major Cycle, Minor Cycle going all the way down to minuette and sub-minuette levels. [Again remember, the smallest time frame available to Elliott at that time was 15 minutes and he chose to keep the least count at hourly basis]

I have seen many attempts at many forums where people are looking at 2 minute / 5 minute charts, looking for divergences etc but that is nothing more than an 'itch' to take a position or 'restlessness' to see a position move in favored direction. Sometimes, labelling at such fine degrees may fall in place but most times it won't. If one wants to have a good count of Nifty / BankNifty, the smallest time-frame used must be 1 hour IMHO

The other principle of selecting the scrip and ensuring that it is suitable for EW Analysis

First of all take the Monthly / Yearly chart of that scrip and see whether there is a hierarchical pattern with a large uptrend / downtrend and then waves / sub-waves within that. If such a pattern is visible on Monthly / Yearly charts ONLY then it should be considered for counts.

For illustrations

Nifty Monthly / Yearly Charts All-Time

The fundamental principles behind EW are

1. Mankind has been made for progress in the grand scheme of things
2. In progress, one moves 5 steps forward and 3 steps backward

So taking these principles into account on the Nifty Monthly Charts [We are still in the nascent stages of what is called 'Grand Super-Cycle]

The 1st Grand Super-Cycle Wave completed as a set of 5 Super-Cycle Waves when Nifty attained 6357 in Jan '08. After that, it has been in a corrective phase that is still on-going. If you feel that this is so time-consuming, I would encourage you to look at the Monthly/Yearly Charts of DJIA. For more than 6 decades, it was struggling in a range of 50-1000. It is the so-called 'Roaring Eighties' [The Baby Boomer Generation in Marketing parlance] that all resistances became history for a brief period of 5 years.

When will the Grand Super-Cycle 3rd Wave start for Nifty in India? Well that is difficult to answer as I don't have a crystal ball with me. However, the affirmation of the same can be confirmed when Nifty takes out 6357 with loads and loads of buying in cash by institutional investors and with significant delivery volumes. Howe high will that be? 1.618 times the 1st wave i.e. towards the 10K or 11K mark on Nifty. When will that happen? 0.618 times the time taken for the 1st wave to get over. It took almost 8 years for the 1st wave to get over. So it will still need a good 5 years after the current corrective phase is done with.

Before I dwell more upon this aspect, let me show you some charts where EW principles are clearly not applicable

DLF Monthly Chart

Is there any resemblance to the multi-year chart of Nifty? Its just headed one way since inception and that is down south i.e. sooner or later this will go to 0. Does this imply progress? I don't think so. So any trade taken on DLF with the help of EW will be a fluke as the scrip does not meet the basic criteria of EW principles.

ITC Monthly Chart

Does this qualify for EW Analysis; indeed yes as the progression is steady; volumes were high when it was trading at sub-25 levels and now it seems to have conquered all visible resistances and is trying to locate the next resistance.

Why these illustrations of DLF and ITC ? Just to drive home the point that scrips like JPAS, HDIL, IVRCL, IFCI, Suzlon etc etc never complied and perhaps will never be able to comply with Elliott Waves' fundamental criteria.

Bottom-line: EW works perfectly well on scrips that in the larger scheme of things obey the principles of 5 steps forward 3 steps backward criteria. If that is not the case, then forget applying EW principles to those scrips as probability of making losses are greater than otherwise [and we trade/invest for profits right???]


The next part that I mention maybe easier to say on hindsight but it is critical because this again corroborates my earlier comments that there are only a few trading sessions in a given year where in big gains can be locked in. One is free to look at the ticker as much as one wants but for long term gains, positions must be very little but those that garner large gains

Nov'10 onwards [13 month correction]
A:  a: 6338-5690; b: 5690-6181; c: 6181-5177
B:  a: 5177-5944; b: 5944-5196; c: 5196-5708
C: a: 5708-4721; b: 4721-5400; c: 5400-4531
[This entire structure completed a larger degree A, by the way after which the rally from 4531 started]

Again, the structure was a double zig-zag with more swing moves within but this is the larger scheme of things. In a 13 month period, these 3 corrective waves and their sub-waves gave a total of 3000 points. Given the fact that depending on time-frames one takes into consideration and stop losses being triggered etc, even if 2/3rd of these moves were captured by a savvy trader, 1 lot would have yielded 2000 points.

Now this is particularly important as the current downward move is pretty much on the same lines as the correction from Nov '10. Should you be alert and wait as a safe trader for the opportune moment to present itself on EOD basis, there are about 6 more legs of 200-300 points minimum [could go as high as 700 points] waiting to be lapped up. Rather than take a position everyday/week, hold on to the margins and once the signals come in go full throttle with 3 to 4 lots via futures and options.

So to end the entire sermon like post on Eid;
EW principles are absolutely valid [provided the conditions specified are used appropriately]
EW principles take into account Fibonacci ratios, time and price factors, supports and resistances as well
The least count time-frame to use EW analysis is 1 hour [60 minutes]
One should not be biased with one's own trading position whilst applying EW Analysis [or for that matter any form of price/technical analysis]
You just need 3 to 4 trading positions in a year to get whoppers and not positions everyday especially in the FnO segment

Yenjoy...................http://www.youtube.com/watch?v=O0mfq-Ojz00

New RBI Governor Announced - Pros/Cons - Welcome Desi QE

Well a very well read economist selected to head the RBI i.e. India's Central Bank.

First the good parts - he understands that the basket of goods to be used to measure inflation need to be constantly updated. Very sound knowledge of concepts of Game Theory [In fact enjoys good camaraderie with the likes of Avinash Dixit in Princeton University, a contemporary author  in Game Theory, Pankaj Ghemawat, a leading authority in Corporate Strategy who was also instrumental in setting up the big stage for TCS with Ramodrai] and for that matter, pretty well networked with the likes of Ben Bernanke, Mario Draghi etc. So much so for pedagogy and personal accomplishments. In fact, as a faculty in university, Senor Raghuram has been in the top quartile in rankings for most of his tenure as faculty.

This brings in a lot of fresh lease of energy and ideas to the table with a potent mix of student @ emerging nation, evolved @ developed nation, repatriated with a cocktail, back home. FIIs would love the fact that a protegy of FIAT currency policies is finally making it to our own desi RBI and perhaps hope that FIAT currency policies will be replicated here as well. The probability of this happening is very high.

Now there is more than what meets the eye in this selection process. First and foremost, Subbarao has most of his experience home grown, understands the macro-economic situation of India extremely well. He is not the one who buckles under pressure and tries his best within the limited arsenal of tools that he has to stem a currency riot and keep bond yields under check without injecting too much liquidity [knowing very well that his counterparts in US, UK, ECB and Japan are rampantly doing so in turns] He is not the one who buckles under pressure even if the hotline rings from Chidambaram or Manmohan Singh. Fortunately neither is Subbarao like Durga Nagpal nor is Chidambaram like Akhilesh Yadav or else things would have been far worse than 2008 in Indian macro-economy by now!

The most logical step would have been to give Subbarao an extension of term because with due credit to him, despite so many hurdles beyond control and limited tools awarded by Indian democracy, he has done the fair bit from his side. The case for the same becomes even stronger given that the erstwhile deputy S. Gokarn has joined some other institution. No the UPA government found Subbarao a pain for them to continue their hyperinflationary monetary easing policies. Even more so because having been institutionalized in the Indian bureaucratic system, he knows to have his cake and eat it too.

Whilst the external perception is that Raghuram will bring advanced policies to India, the euphoria will be short-lived. Given most of his career formative stages in US, senor Raghuram will try to replicate the economic models of the west [read US] into India. That is too rudimentary because the US Dollar is the reserve currency of the globe and to the extent this holds true, Keynesian economics will only hold true under such conditions and not an economy like India.

Just as the Government of India is one of the largest clients for McKinsey India [reports are made and filed without action], it will be one of the largest patrons of senor Raghuram and put him on a pedestal in public. He may be given a lot of incentives but the veiled threat will be 'Toe the line or face consequences'

Now time will tell whether Raghuram will do so or retreat into his comfort zone and go back to university. In the opening phases of his term as the RBI chief, his policies will be very very accommodating i.e. very very positive for stock markets [post-election 2014 of course]. There will be asset bubbles in real estate, gold, silver big time; prices of rice, sugar, cereals, wheat etc will double in 3 years instead of the current cycle of 5
Balance sheets of banks will swell and loans will be offered by the dime to almost anybody and everybody.

Then, the next step will follow; CAD issues. He would then apply the ISLM models and ask government to reduce taxes on crude oil and take steps to eliminate kerosene and subsidies. Will the ruling party at the centre bite the bullet? No ways be it UPA or NDA or Third Front - nothing to do with vote bank politics and large chunks of money to be made in taxes and tax evasions will ever be altered [unless GOD comes down and forces it on Indian politicians] Now senor Raghuram will feel cheated having given his share and getting nothing in return. To the extent all his reports and comments will be stonewalled. The story comes a full circle.

More and more NPAs on banks' asset books [perhaps as high as 5% of the loan books], a Rollar near 70 levels and a total systemic collapse. Is there anything we can do to stem this rot? Well nothing - keep yourself tuned to the time and price actions. The story of 2009-2010 is very soon going to  unfold after the next elections. Ensure that profits are booked on time. Enjoy the next mega-bull run post-election 2014 as your next central banker is going to unfurl the Desi Version of QE.

Nifty Achieves Upside Target of 5944 in July '13 and Downside Target of 5532 in August '13

Well this small post is out of rejoice for the forecast given at the end of June '13 in this post
http://niftyparadox.blogspot.in/2013/06/outlook-for-july-2014.html

Nifty has achieved both upside and downside targets. BankNifty achieved the downside target but unfortunately did not meet the upside target.

Tata Steel and JP Associates in delivery based buying fizzled out.

So Trading + Investing put together in the last 2 months helped gain about 600 points on Nifty and lose 30 points on Tisco [in equity segment] and 15 points on JP [in equity segment] so on balance a pretty good result.

Where will the carnage end and when will the relief rally come; I really don't know and the same will be updated on Twitter [you can get the feeds in the top left side of this blog or follow @NiftyParadox]

To summarize, one need not take a position every day; one needs to thoroughly study the charts and price-volume patterns. As I have been repeatedly saying, out of the 200 odd trading days in a year, only about 50 days come with large 250+ point moves in either direction of Nifty. The only ones who get rewarded in the long run are those who sharpen their weapons and take positions at those opportune time-price movements. See the ticker for as long as you want but take fewer positions and garner those points.

Enjoy this wonderful song: http://www.youtube.com/watch?v=TBP5kFOsqO8

Updates on Delivery Based Recommendations

In the last couple of posts, I had mentioned JP Associates [Accumulation Band 35-48 with SL below 35 on closing basis]

Since the broader context of that post was Nifty / BankNifty outlook, some of these charts were missed

JP Long Term Chart

Going below 50 was near certain when prices closed below 65 on closing basis. If we look at the 35 level, that was the point from where a very long term breakout came through during the 2007-2008 rally. Subsequently, during the 2 corrections, the 35 level held out and though the stock never achieved its peak prices, it used to comfortably bounce from 35 and hit 90-100 levels regularly. In fact for almost 4 years now, the broad range has been 35-45-85-105 as critical supports and resistances on longer time frames.

Hence I was categorical of the Stop Loss @ 30. Now that 30 has been taken out on closing basis, it is very difficult to predict where it will find a bottom. Of course some dead cat bounces will keep coming in but strength can only be confirmed when 50 is taken out on upside and we also have to look at how the broader markets perform. For all that one knows, this stock is pretty much likely to join the likes of Suzlon, Opto Circuits, Educomp etc. Depending on how prices pan out in the next 6 months, it is highly likely that JP Associates will be taken out of the Nifty 50 Index next year.

However, just like Suzlon, it may continue to be in the FnO space as these counters are highly liquid in the FnO space with large lot sizes enticing a lot of speculators to make a quick buck.

Tata Steel

Daily Charts

Monthly Charts

Taking into account dividends and some throw unders, the 200 band is the last point of hope on Tata Steel. Once 200 gives way [especially on Weekly basis], the next logical destination is 150 levels where multiple supports and breakouts have taken place. If 200 is taken out [dangerously close to getting there], one should simply exit and re-enter at 150 levels. The annual dividend is around 15 on average and Tisco has a lot of positive factors in the domestic market space. However, these fundamentals apart, we also need to look at technicals and if 200 is taken out, one should just exit the delivery based positions.

Another point to remember is that over longer time frames, it is Tata Steel that leads the direction of the Nifty followed by BankNifty and then the other sectors keep churning. Steel is most critical for all manufacturing based companies and it is only the proportion of steel dependence that varies from company to company. Banks signal the flow of credit [in and out] and when banks are stressed, it is pretty clear that the economy is in a mess.

I personally don't believe in holding on to stocks because I felt it was a good buy or just to keep them in hope. As my angel critic always keeps reminding me, an exit plan is a must regardless of whether it is a trading position or investment position. There are some upside targets and there are some emergency exits to be defined. I would rather humbly take a nominal loss on my holdings and salvage what I can than just watch with hope to see the entire investment wiped out.

This is also the very reason why I keep insisting on keeping maximum exposure to the index than individual stocks. Suppose one has x-number of NiftyBees and y-number of BankBees, it simply does not matter which stocks move into the index and which ones move out [this happens every year]. Also there is a very strong co-relation between stocks that are marked for moving out and their falls [Suzlon, Siemens, RPower etc are all examples how much more they were beaten down once the exchange decided to disband them from the Index] The same will happen in BankNifty. The respite for investors; 1 Unit of NiftyBees = 10% of Nifty Value at any given day and likewise for BankBees. The only downside is that the dividend payouts are one in 2 or 3 years @ 10 per unit.

Also, whether it is the index or individual stocks, the falls are far more faster than the rise [literally a bungee jump] Take Wockhardt - 1 year of gains were wiped out in less than a month. MCX and FITL were meant to go to doldrums anyways but what has been very disturbing is the lack of circuit breakers being placed until late into trade yesterday. Whether the breaks would have made a difference is a different story but it is a clear case of games being played by big fish to go one up.

The FMCG stocks will crack later if not sooner as the valuations are stretched and same is the case with the IT pack. Stocks like Apollo Hospitals and Fortis have generated good returns but going by the under-lying assumptions in the prices, they too will sooner or later become the next Ranbaxys and Wockhardts.

To summarize, conserve cash and make use of FDs while rates are high. Use falls as buying opportunities but focus maximum on indices than individual stocks right now. 

Outlook For August 2013

So the upside targets have been achieved on Nifty but not on BankNifty. BankNifty not only broke down 11k levels but went all the way down to 10400 levels. Historical data from 2011 suggests that 10400 has been an interim samaritan for bulls because once 10400 breaks, within 3 months of that, BankNifty cracks a further 2000-2500 points.

Upside for now seems capped and in all likelihood interim tops are in place. So where do we go from here?

Let us review the charts first
Nifty Daily Charts

Nifty Weekly Charts

BankNifty Daily Charts

BankNifty Weekly Charts

As stated in the July Outlook, both upside and downside signals were given in June itself. Now that the upside target has been achieved, we should look at the potential downside. From the EW perspective, for the larger trend, both Bullish and Bearish possibilities are still alive

Bullish: Current falls are profit booking corrections that will be bought into and Nifty is on its way to make new highs. This possibility is negated with 2 consecutive closes below 5280

Bearish: A top is in place and the last corrective wave to the earlier tops [6357 in Jan '08 and 6338 in Nov'10] is unfurling for downside targets of 4373-4531-4770. This possibility is negated with 2 consecutive closes above 6280. Please note that even if this view is correct, the time and price patterns of the correction will be similar to that of the fall from 6338 to 4531 in Nov'10 to Dec '11 period i.e. 13 month correction with 3 strong relief rallies in between.

I am leaning to this possibility unless negated. As was proved in that corrective period, blind shorting never paid off. One has to look at Resistances / Support Breaks before creating shorts. And also as a trader one should buy into relief rallies or stay away.

The reason why I am getting more inclined to this view is the form of the corrective wave. Within this C wave [which will unfurl as a 5 wave pattern] the 2nd wave is very very deceptive. It deeply retraces the first wave and is full of deception for both bulls and bears. So far this story has played out. After hitting 6200 levels and going down all the way to 5566, a pullback came in to almost 6100 levels. Now as long as prices stay within 6100 levels, the next leg down can be very lethal.

Adding credence to this view is the Head and Shoulder pattern on the Weekly Charts of Nifty. However, as many senior and wise people say, prediction is one part but trading / investments should follow price action.

No matter how strong one's own conviction of the larger trend, trading/investment actions must follow prices on the ticker. [and this can be seen on my Twitter updates put regularly @NiftyParadox]

The sectoral churning is overdone IMHO and unless Banking and Capital Goods don't pick up and the Rollar doesn't come to reasonable levels, the Index management can only work upto a certain extent. When margin calls and bearish sentiments dominate, all cookies will end up crumbling. Over the last 5 years, this is the first time, BankNifty and Nifty are not moving in tandem and names like ITC etc are having about 10% weightage on the index

Just to illustrate the euphoria in FMCG stocks
HUL: Fundamentally, the stock has less delivery volumes in outstanding shares in the market.

Dividend Growth Model: This model basically picks the average dividend over a 2-3 year period and assumes that this dividend [D] will be constant. Then it takes into account average growth rate [G]
D/G gives one estimate of the fair price. In case of HUL, D = 25 and G=5%; D/G = 500

P/E Multiple Value: Using 35 PE due to steady performance and dividend payouts, EPS is about 17.5 giving a fair price estimate of 600. Currently the stock is trading at a 40 PE multiple which is excessive even with the consumption story. The growth is not going to be perpetually north and higher the base, the greater the difficulty in achieving growth.

So as some people rightly say, stocks hardly trade at fair values; they are excessively over-priced or under-priced. Due to shortage of time, I could not work on the Discounted Cashflows method but I am sure all models plus prudent judgement will not peg the HUL stock price above 600 levels and realistically 500. Also one must take into account that the dividend payouts may take a lot of beating now given high degree of parent company holding. It is extremely difficult to grow volumes at 5% and yet maintain high EPS growth

Going by the same logic, Dabur, ITC, Nestle, Asian Paints etc are all going through euphoria and maniac price actions. We have seen what happened to Wockhardt within a span of 12 months. The same thing can be expected on all these consumption theme counters as well though the proportion of falls may be less severe.

No matter what the current euphoria in the IT pack, the fundamental macro-indicators show that they will fall severely once the rupee starts appreciating and work permit and taxation rules get more stringent in the developed economies.

Other Updates

Gold / Silver in Dollar may have found their bottoms; nevertheless, in rupee terms, difficult to see the bullion go below 23k per 10 grams and silver below 35k per kilo. The dips should be used to buy for buying in physical/electronic forms.

Crude Oil: There is a temporary aberration with Nymex n Brent both prices converging in dollar terms. I track Nymex in dollar terms and the range for the next 18 months is $65 / Barrel and $120/Barrel with 70% instances towards $100 / Barrel.

In rupee terms, with 90% dependence on imports and a 5.5k crore rupee annual subsidy burden, petrol is headed to 150 per litre over the next 5-7 years [5 years if UPA government comes in and 7 years if NDA government comes in power in 2014] As I have been repeating time and again, gold imports is not a big drag on Indian economy but crude imports is. Now we have petroleum ministry reiterating that in-house gas fields should be developed. That is a very wrong way to address the problem. When the government is okay to provide subsidies, the subsidies should be extended to clean and green energy sources like Wind Power and Solar Power. The advantage of this being that these subsidy measures will be a one-time drag measures than perpetually subsidizing imports and hurting the exchequer.

On the new banking licenses, the government is going over-ballistic on new licenses. The order of the day is to consolidate existing banks and ensure that they are well-capitalized. With consolidation, the pension burden will decrease drastically and also one will gain economies of scale with higher productivity of existing staff members.

As far as the RBI measures to control the tsunami on the rupee is concerned, it is moving in the right direction. As it happens in global markets, too much liquidity in the system is not resulting in transmission of benefits to the common man and SMEs. Most of the injected liquidity finds its way to the capital markets and predominantly in the Futures n Options space. With more and more FTAs being signed with ASEAN partners, it may be prudent to peg rates in local currencies and do away with dollar settlements. The prime need of India right now is to minimize the demand for dollars/euros/pounds to the greatest extent possible.

There is a lot of correction pending in global equities that should accelerate by end-September. 22nd September is Fall Equinox and Germany's Merkel re-election verdict is expected by 24th September 2013. So lots of action awaited around this time-period.

Indian Mango People - Subsidize The Rich and Political Brass

Well this article just intends to highlight how the Indian middle class ends up subsidizing the super-rich and the real inflation persistent in the country.

Every second day, we read in the business news papers that loans worth 4500 crores [Winsome Diamonds Case], 7500 Crores [Kingfisher Airlines] are going sour and as I explained earlier in 2013, this is a theme that is here to stay. At this point of time, we are not even getting into the loan restructuring issues [Corporate Debt Restructuring - the used jargon]

To begin with, the claim seems boisterous that it is the middle class that subsidize the super-rich. Just sit back and think about it for a minute. Banks charge about 20 to 40 rupees per user per month for SMS alerts. This charge is applicable by a conservative estimate of 300 million accounts [the real figure could be as high as 650 million accounts] Taking 300 million @ average 25 / month for SMS alerts over 1 calender year generates 9000 Crores of Revenue with an 80% profit margin! So 2 accounts like Winsome Diamonds can easily be wiped out. Who pays? The Indian Mango class. Who profits? The super-rich

Then we come to the interest payable; apart from the Fixed deposits, you get banks trying to woo you with 6%, 7% interest on your savings account. How many actually read the fine print? That amount is only payable on the MINIMUM balance between 10th and 25th of the calendar month When it comes to car loans, personal loans, home loans from the banks, do they allow this? The very moment the loan is disbursed the recovery mechanism starts ticking.

For some reason if a middle class person is not able to pay his car loan EMI for 3 months, his car will be towed away. Even if the Mallyas or Roys hold back on 2000 crores of payables, they can move around freely. How does this happen. Simply because the banks are paying you interest for 15 days at 6% whilst they recover from you anywhere between 10% and 18% for 30 days! This surplus is used to bail out the super-rich by means of write-offs

The other part that is hitting the middle class badly is inflation. The reported inflation figures are simply bogus. Let us get a perspective on simple items for an average middle class home of 4 members

Since we are in 2013, I have intrapolated in 10 year slabs going upto 1983. I have kept the basket of goods very simple and focused on essentials [Milk, Gas Cylinder and Home Loan/Rent I have not mentioned in this list] Just look for yourself what is the value of a 1000 rupee note in 2013 - why is money power eroding so much? because India is not going through inflation but through hyper-inflation.

Petrol is now going at almost 75 / litre and within the next 5 to 7 years it will go to 150!

There is a very smart gimmick that the government employed with the Right To Education Act and promotion of CBSE syllabus. The Right To Education Act basically brings in a lot of votes from the lower income segment. However, the average Indian middle-class up-bringing and values do not permit this kind of mixture at the moment. There have been many cases when children come back home from school learning a lot of filthy knowledge and definitely parents don't want their own children to get exposed to such language and behavior. They look for alternatives i.e. CBSE and ICSE schools and what at some point of time was an expense of 200 bucks per year has shot up to 1 lakh per year. Who owns these schools? Politicians and cronies/kin of politicians. Just a few days ago, the government of Maharashtra proudly put in a page full of propaganda in a leading newspaper that they gave green lights to 100s of 'self-funded' schools within a very short period of time. What they missed out on telling people is that the 'self-funded' schools are CBSE/ICSE schools run by their own brethren in Mantralaya :D Now don't get me wrong I am completely in favor of Right To Education because we need education and literacy to trickle down right to the bottom of the pyramid. Only then can India experience some real and positive changes. However, mixing up Right To Education with conventional schools is not the solution.

On one side, a lot of state run schools are citing a dearth of teachers despite the 50% reservation quota. On the other side, a lot of middle class people well-qualified, NET/SET cleared are waiting for getting a teaching job. They get frustrated and join at low paying jobs in these private schools and make up for lost compensation by form of tuitions and coaching classes. The best way to ensure Right To Education is to keep separate schools for the under-privileged children and staff them with the jobless youth by relaxing NET/SET rules.

Today, the governments are proud that as a tax payer you have right to education, right to health care which is taken care of by the ESIC contributions. However, with a population so gigantic in India and the changing demographic dividends, the average middle class person would like to chose a private hospital for healthcare. Private hospitals are more than happy to charge whatever they like because of mediclaim settlements. So the middle class gets a double whammy. They pay taxes to subsidize healthcare for the lower-income groups and yet spend again on their own health-care. Take a careful look at the proliferation of private hospitals over the last 2 years and who in-reality owns them; predominantly business houses and politicians! [One should go through the assumptions of budgets of Apollo Hospitals and Fortis Hospitals; they have estimated an average revenue of 1 Crore per bed per year since most of that will be covered by healthcare insurers!!!]

One argues that the salary levels have risen exponentially over the last 10 years and that is true to an extent but then look at the other aspects as well; education spend has grown by 1000% over the last 5 years and will continue to grow at 15% per year. Housing has already grown 400% over the last 10 years and will now  grow about 300% over the next 10 years and will crash land eventually. Fuel, Milk, Pulses, Cereals will all continue to double every 5 years and this is a very hyper-inflationary trend in India.

Business houses and politicians are taking sound advantage of the aspiring Indian middle class and creating asset bubbles exactly where it hurts the middle class the most; can anybody change this trend?
No it is not possible and asset bubbles will keep getting created, destroyed and look for newer avenues. The only thing that the middle class can do is to keep themselves financially secure.

These days there is a popular advertisement for some retirement plans; investing 5000 / month for 20 years will yield 11000/month on maturity. There are a lot of hidden clauses in that as well. The fact of the matter is that 5000 rupees invested per month for 20 years amounts to almost 55000 rupees at maturity @ 9% interest rate. Stay invested with stock markets i.e. buy low and sell high. Keep maximum exposure to the index itself via NiftyBees, BankBees and those who are busy to track markets on a regular basis can simply opt for SIPs. Regardless of bull or bear conditions, when you buy through SIPs, over a 5 year period the cumulative returns are well above 15% [When the markets tank, you get more units of the ETF and viceversa] So over a 5 year period, regardless of where the market is, your total networth will be greater by 15% and if one is tuned enough to buy more during the lows and sell more during the highs, the returns can be as high as 25% to 30% annualized. The index exposure acts as a natural diversification strategy because regardless of which companies get in and out of the index, the ETF derives its value from the index itself.
Liabilities like home loans should be offset by 8 years at the most and car loans, personal loans should be offset by 3.5 years at the most.

Bottom-line: The political brass and the corporate brass wants to take out as much value as possible from your wallet. Make sure all your income is planned till the age of 42. Technological revolutions and that too disruptive technological revolutions will come in, thereby reducing the number of jobs drastically as we move ahead with time. Enjoy your weekend and don't get stressed at all :D A few good steps in fiscal prudence will help you stay secure and you can do it yourself. Self-help is the best help.

Outlook For July 2013

So 5740 did not hold and RBI did not cut rates and Rollar breached the 60 mark [in the futures market]
Wild swings that were expected in the 15th June 2013 to 26th June 2013 came through as expected

Where do we go here from now?

Let us review the charts first;

Nifty Daily

Nifty Weekly

BankNifty Weekly

Nifty gave both the signals i.e. 2 consecutive closes above and below 5740 thereby telling us that the 2 major targets for the next 6 to 8 weeks are 5408 on downside and 5944 on upside [one bounce has come from 5550 levels {5566 this time}One more test of this level will fall through IMHO]. Please note that markets will try to consolidate and the moves may not be so linear. This is the range for a 2-3 month period and weekly charts showing a potential Head and Shoulder formation.

BankNifty has cracked a lot and has taken support at the 11k mark this time; last hope for BNF bulls lies at around 10200-10400 band after which falls will be accelerated. However for July series, the range is split wide open at 10200 on downside and 12400 levels [61.8% retracement of last fall]

Both possibilities mentioned in previous 2 series stays intact

Bullish View: Current falls are profit booking / consolidation rounds and the bull market is intact. This possibility is only negated with 2 consecutive closes below 5280

Bearish View: We are in the last corrective phase downwards [previous tops of 6357 in Jan '08 and 6338 in Nov '10] giving downside targets of 4373-4531-4693-4770. This possibility is only negated with 2 consecutive closes above 6280 levels.

As usual I'm leaning to the bearish possibility for reasons as usual; secular bull markets in India usually need Rollar below 48.25 levels; we have an election year coming up and hence we should expect markets to be buoyant only after political certainty. Also there are a lot of global uncertainties that can wreck havoc at any given point of time.

However, I will be keenly looking at falls as buying opportunities in the equities segment as the chances of them paying off handsomely by end-2014 are very very high.

2 stocks that IMHO are approaching buy zones on delivery basis are Tata Steel and JP Associates

Tata Steel: Buy zone is 240 - 270 zone; the stock pays a good dividend and though 2013 is weak for steel, the stock seems oversold and when markets do recover, this may be a good candidate [expecting a target of 475 in a 3 year horizon plus 45-65 to be made on dividends in a 3 year period] One should exit the position with a weekly close below 200 on this counter [Maximum 5% of investment corpus]

JP Associates: High Beta stock that has been badgered due to its dollar denominated debt. 35-48 is the accumulation band for a 2 year target of 80+ levels. [Maximum 2.5% of investment corpus] Dividends are not great and the counter has a strong potential to join the likes of IFCI, IVRCL, Opto Circuits as well. Hence caution on the corpus as well as a strong case for exit should the price fall below 35 on weekly charts.

Other stocks are still quite a distance away from the accumulation band and I will update the blog as and when prices come to those points.

Stocks to Avoid:

IT pack is rallying on the back of a weak rollar; as the headwinds in the western world unfold, there will be increasing pressure on IT companies to promote local talent and barriers to Indian IT firms will go up. The IT sector is poised for a royal downside IMHO

Automotive Pack: Most of the upsides for 2013 have already been priced in; this pack is poised for a strong corrective leg now and the downside will be far more severe in the event of a Euro-zone break-out as the peripheral European countries will end up being far more productive and cost-effective than Indians

Global Markets Update:
Gold and Silver are in accumulation zones right now; there is excessive pessimism because of margin calls and flight to safety for dollars. But before one knows it, all pessimism will be forgotten and the longer term trend is UP for both gold and silver; 2 year targets are USD 1925 per ounce for gold and USD 40 per ounce for silver.

China contrary to what is being reported in media is actually in accumulation zone now and IMHO will outperform global indices over a 3 year horizon

FTSE, Dow, DAX EuroStoxx are all set to fall 20% from current levels. As in India, even in these cases, its just the indices that are being stage managed.

Bond Markets are showing signs of cracking [be it the mortgage bonds of Denmark, Eurobond trades in Sweden, Asset Backed Securities in transportation or Municipal Bonds - the stage is pretty similar to the case prior to the Saloman Brothers case in 1987. One should read the book Liar's Poker by Micheal Lewis to get an insight on this point] Bond Markets signal very early on what to expect in equities and global economies over a 6 month to 12 month period.

One should not read too much into the housing market recovery in US / UK; as mentioned in April, it is very common to see buying interest move up when the mortgage payments get aligned with the rental outflow. Barring a couple of locations in the West Coast of US where the buyers are from the high-tech industries of Silicon Valley, there is not much inventory added. [If the recovery was so stellar, then San Franciso price hikes should have had a similar effect on homes in other parts of California and Nevada where prices are still reeling and are nowhere close to previous peaks]

Most of the housing inventory is formed by the foreclosed homes post-2008 that were subsequently written off with the aid of trillions of dollars of QE. Now the same homes are re-appearing on inventory so it is not real growth!

Nevertheless, the crux of this blog is to focus more on Nifty and stay with the big picture here; range for the next 2 months expected to be 5408 - 5944 and that gives alert and sharp traders to do well. Except at crucial points like 5944, 5740 and 5532, one should resist the temptation to build OTM Straddles via options [give or take 20-30 points on either side]. These are the only 3 points where straddles can yield good pay-offs IMHO.