Nifty Cracks 8000 - What Next?

Well the fall from 8180 has been sudden and there is a lot of blood bath on the tickers.

This is my take away on the basis of charts for the next 10 weeks. On a daily level, how the trade will pan out is almost difficult to chalk out but the overall path IMHO goes this way

For safe traders who missed the boat last month. 7950 levels is a low risk entry point and the next one will be around 7825 levels.

Regardless of what the media says, this is a technical correction and a very healthy one. Unless Nifty closes below 7800 [especially on a weekly basis] current levels seem extremely tempting to go long.

Options won't be a good bet due to the uncertain paths on daily basis. Cash or futures will be a good bet. At current levels, 1 lot on Nifty futures will lose at the most 150 points [7500] per lot and when averaged at 7825 [if it comes] another 25 points taking the overall risk in 2 lots Nifty futures to 8500

Initial upside is 8180 followed by 8400 levels i.e. 300-350 points per lot on upside. Very few times, such low risk high reward plays come into the picture.

Corresponding support on BankNifty would be around 15700-15800 levels from where another attempt at 16500 can be expected.

Beware of The Tech Bubble

Global stock markets have been rallying significantly over the last 3 years courtesy cheap money policy adopted by most central banks. One segment all over the world that has seen great moves has been the IT sector. We are seeing a lot of 'billion dollar' valuations for a lot of businesses and a huge spurt in dot coms similar to the 1999-2000 mania

There is no doubt that a lot of these technologies are indeed beneficial to people and technology will continue to improve productivity and efficiency as we move forward. What is really disturbing is the mania and asset bubbles that are being created in the name of a technology wave. Particularly in India, IT has been a darling for fund managers and a safe haven, especially given the weak rupee.

There have been a lot of financial models circulated in the blogospheres about perpetual growth rates in excess of 10%-15% and I can safely tell you that all this is BS! Remember that perpetual growth is an exponential function and as the base increases, it becomes increasingly difficult to achieve 10% -15% growth rates when the base itself doubles or triples.

Also, technology space is one area where there is quick obsolete phases and levelling of the playing field for all players. At one point of time, one needed to pay HTML page builders by the hour to write code for a web page. Today, there is automation software that renders such workers obsolete unless they upgrade their skills. Similarly in many computing applications, there is a lot of automation that is coming in and the number of programmers required for that application is decreasing. To summarize, the IT industry within itself will also keep looking for ways to boost productivity and efficiency. So there will no doubt be growth in these areas but profit margins will slowly get eroded and so will the number of employees by a firm.

Another area where the Indian IT segment has been betting on is in providing body-shoppiing [call it BPO, KPO or whatever] where in the cost differential provides an incentive for the developed nations to outsource work to Indians. The last 20 years have seen phenomenal growth for Indian IT firms by this virtue. However, I think we are slowly coming to an end of this party. It is not going to happen overnight but I think this IT wave riding on body shopping is coming to its terminal stage.

Simple Mathematics
On average, an IT worker from the developed economy costs about 6000 dollars per month on a CTC basis

In contrast, the Indian IT worker costs about 3000 dollars per month on a CTC basis.

The core inflation in developed economies is about 1% whilst in India it is about 9%. With this differential in inflation rates, the Indian worker will become as expensive as a developer in western countries within the next 10 years. Add to that challenges of economic recession in Europe and jobs issues. There will also be an added pressure by governments to promote local talent over talent from developing nations.

As suggested by numerical extrapolation, the doom is not going to be overnight. Purely on inflation basis, the doom is at least 10 years away. And even if there are disruptive changes brought by new technology within IT and also disruptive changes brought by governments, the doom is at least 5 years away. And when I say doom, it does not mean that the entire IT industry is going to come down crashing, There will be a Darwinian struggle resulting in survival of the fittest. IT is going to be part and parcel of our lives and the usage will only increase.

However, as investors, we need to bear in mind that stock valuations are reaching excesses and that is something we need to be cautious about. Darlings of the indices like Infosys, TCS, Tech Mahindra etc all have at least 20% more upside over the next 2 years with some healthy corrections in between. However, the IT theme overall has almost played itself out now and wont be delivering those stellar returns moving ahead [in all likelihood I must say as it is a probabilistic view]

Over the next 2 years in India, we will in all likelihood see IPOs coming out for ventures like Flipkart, Ola Cabs, BookMyShow etc and all of these firms funded by Private Equity players have been told that the valuations are in excess of 1000 crores each!

Ola Cabs: It is working in the radio cab theme which is fantastic but it is not the only player. The average profit tends to be about 3 rupees / kilometer for the parent company and is largely driven by volumes. As long as there are such healthy margins in the business, more and more players will come into the picture over a period of time and as classical economics suggests, the industry will saturate into marginal revenue = marginal cost structure and the space will be crowded. This space will eventually settle at about 2 rupees / kilometer. Assuming that the IPO goes well and the company is able to pay a dividend of 1 rupee and a perpetual growth of 5%, the fair price of this stock will come to 20 rupees / share. Do you think that the private equity groups will allow the share to be listed at this price? The stock will get listed at at least 100 rupees / share and then mass hysteria will drive the prices to at least double if not triple the value in the first 18 months post listing. By 60 months post-listing, the price will settle down to the fair value. If one does decide to invest in this venture, remember that you need to be mentally prepared to take a loss within a month of listing and if you are lucky to get gains, start booking profits the moment your absolute return comes to 50%. The fall in stock price will be very sudden and severe just like Opto Circuits and Educomp.

BookMyShow: It charges about 10 rupees per ticket for booking online and this profit margin is pretty steep. More and more cinemas themselves will come into the picture [as is the case already] and many more players will enter the market space. Eventually the profit margins in this segment will have to settle for about 5 rupees per ticket. The good part about this business model is that it is not very dependent on administrative costs and infrastructure. All you need is a good IT server and 10 people to handle operations. The main source of expense is marketing but even with all these brownie points, 1000 crore valuation for this company is absurd!

I would not be surprised to see this venture getting listed at about 200 rupees a share and then climbing upwards of 600 rupees a share within a year of listing. The fair value of this business is about 40 rupees a share which is where it will settle down eventually.

To summarize, the technology bubble is in its terminal stage globally. The boom in this space is assuming maniac proportions just as was the case in the 1999-2000 period. There is still a very good chance of tech stocks delivering another 20%-25% return from current valuations as far as existing stocks are concerned. There are some new tech stories that will hit the markets and go for a rapid fire doubling and tripling of stock prices [as it has happened with Just Dial] Investors can choose to ride this momentum wave but be very very cautious as far as tech stock holdings are concerned. I have given all the fundamental reasons why this bubble will fizzle out. As and when institutional investors pull the plug and choke funding, a lot of this ventures will crash down. As far as core IT companies are concerned, by the end of the mania, a lot of IT jobs will move out from India back to developed countries over the next 5 years to 10 years.

Enjoy the ride till it lasts and don't rush to create shorts. All that I am saying is be cautious and don't herd in to this tech bubble; you may end up being the last person to board the bus before it crashes!

Outlook For September 2014

So August series closed on a firm note again and this trend should continue towards the 1st week of September as well. An interim top may form around 7980-8025 levels from where a profit booking round towards 7800 may come through. However, that does not imply rushing to shorts; the first hint to create shorts will be when Nifty closes below 7925 levels. Technical indicators are in over-bought territory for almost 2 weeks now but trending markets defy these which reflects the underlying bullishness

For the longer term investments, this is the time to periodically book some profits and move to fixed income markets. From current levels till Diwali, more than 5% upside seems unlikely. Valuations for a lot of stocks are now excessive and correction seems inevitable. It is not a question of 'whether it will happen' but 'when will it happen'. Unfortunately I do not have a crystal ball with me to answer this question. We will have to wait for market action to unfurl the same.

For Nifty, the 7200-7400 band seems a pretty firm support for September series and 7800 can provide interim support. Since Nifty is now in uncharted territory, if it goes beyond 8025, it can go anywhere

BankNifty has closed above the swing high of May. Volumes are low but pretty soon it may scale 16500 levels. 14800 is a pretty good support and BankNifty may just retest this once before it begins its next leg up.

Gold in all likelihood has found its bottom in rupee terms. It entered its lower trajectory last year in dollar terms and correction is still on-going in dollar terms. In 3 years time, we can expect gold to move upwards of 45k in rupee terms.

Silver too may have found its bottom but technically, there is a possibility of visiting 35k once before resuming its uptrend. This too in 3 years time, may scale upwards of 60k

Crude in dollar terms will find support around the 90 dollars per barrel mark and move towards 100 dollars per barrel again. Hence in rupee terms, the 5600-5700 band will be strong bounce back zone for target 5950-6000 levels.

Some potential stock opportunities in the small and mid-cap space that look attractive

Zee Learn: It has broken a multi-month range on the upside

3i Infotech: It seems a value buy at current levels

Disclosure: I do have holdings in these counters

Outlook For August 2014

So after spending the first half of July '14 in a corrective mode, Nifty started marching upwards and scaled a new intra-day high as well as closing high in the second half. I have been reiterating over the last couple of months that this market keeps on giving opportunities to buy and 7800 levels are to be attained. While it is premature to call for a top, now IMHO we are slowly approaching the top end of this rally. Logical targets for the rally were around 7200-7500 and euphoria took the markets much higher. Technicals and ratio analysis suggest that the top for this rally if not achieved already should come around 7900-8000 levels.

While that does not imply creation of shorts but it is high time to be cautious with longs created with a longer term view as well. Most of the stocks are exhibiting signs of distribution and topping out [SBIN, LT, ICICI Bank etc] whilst a few select counters are taking the indices higher [Asian Paints, ITC, Kotak Bank etc]
Distribution takes a lot of time and markets will not fall fiercely in one go. Lending credence to the distribution phase is the advertisements of Mutual Funds, Insurance schemes etc continuously on media channels. Historically, excessive advertisements regarding securities on media has coincided with distribution phase and within 6 months of such advertisements surfacing, Indian equities have corrected significantly. In the 2008 period, the largest number of securities advertisements surrounded ULIP schemes like Fortune Plus, Market Plus and similar products from other insurance firms. The ensuing correction got worse due to the Lehman Brothers' crisis. Around October '10, we had a flurry of mutual fund advertisements, especially thematic schemes and we had a correction of almost 40%. The key point to note here is that mutual fund advertisements did not surface in India in 2014 aggressively even when Nifty took out the 6400-6600 levels

The scale of such advertisements only has started increasing now and will perhaps continue to do so until Diwali '14. As mentioned earlier, unless some Black Swan incidents from international markets hit the scene, there won't be any 'crash' or 'melt-down' in the correction that will come. The corrective phase could last about 12-18 months and the downside price targets will be 5900-6200 i.e. the psychological 6000 level will in all likelihood be the new baseline for Nifty [just as 4800-5200 levels were in the previous corrective phase]

I would again like to draw the reader's attention to the point that I am not talking about a correction setting in immediately. All that I am saying is that now we need to be careful about the longer term investments in major stocks as we are approaching a top. Now it is time to slowly book out profits and deploy those funds in FMPs, FDs and if the profit chunks are large, in assets like real estate. The next set of buying opportunities will come later this year or next year and the same will be intimated through the updates.

As long as the 7400 levels hold on daily / weekly basis, the risk-reward is in favor of buying the dips. Once Nifty posts a close below 7400 levels, it will be a potential sign of reversal from the bull trend [weakness gets pronounced if the close is below 7400 levels on a weekly basis] The most crucial date will be with the pivotal date of 26th Aug '14 [3 years ago on 26th Aug '11, Nifty had made a swing bottom of 4728] So one can expect a major upswing or downswing in the 7-8 days around 26th Aug '14

For BankNifty, if it takes out the swing high of 15700 levels of May '14, then it can rally a further 800 odd points towards 16500 levels. The crucial support remains at 14200 levels breach of which will invite a further correction of 800 odd points.

One need not read too much into the stock split of Axis Bank [1:5] It is another sign of distribution. Initially prices may get marked up towards 420-425 levels and then correct downwards to 300 odd levels. Again, no need to rush to build shorts. The same will be confirmed by price and volume action and I will update the same via Twitter.

So for August, the broad Nifty range is expected to be 7400-8000 levels and high volatility in price action expected. On BankNifty broad range can be expected to be 14200-15700 and breach of either of these barriers will bring a large swing trade in the same direction.

For Gold and Silver, the rupee prices have in all likelihood bottomed out at 24k and 38k respectively on MCX levels [though silver still has the potential to test the 35k mark once]

Crude in dollar terms will move in the 95-105 dollars / barrel mark whilst MCX Crude will likely move in the 5900-6400 range for August '14. Falls are buying opportunities.

To summarize, book profits but resist creating shorts till 7400 is not taken out on downside.

Outlook For July 2014

So the initial part of June was good and after hitting an intraday high of almost 7700, it then slipped back to 7500 levels and kept drifting there about. So what next? 7200-7400 band is a very strong support band right now and at least for July '14, seems unlikely that this will be breached unless the budget is bad or there are external Black Swan Events.

Barring that, the euphoric sentiments, budget expectations and reactions to budget can either take Nifty to 7800 levels in July or it may slip back to 6900. 8th to 10th July can witness lots of whipsaws as people will be reacting to sections of the budget speeches etc. The news will try to comment on every little detail barring say a cough or sneeze by the finance minister!

What the markets really want to know are
1] Outlook for Growth? [Tax Holidays, Government Capex Expenditure etc]
2] Ease of Business [At least partial roll-out of GST, etc]
3] Cost of Capital [Largely domain for RBI]
4] Fiscal Prudence

As long as there is something to cheer for, a 5% upside from current levels is possible on the back of positive sentiments [remember that most of the positives have already been factored in the price] As long as there are no negative surprises here, the downfall is limited. However, since prices have already shot over the roof and lots of positives have already been factored in there is limited scope for upside as well. Until Diwali 2014, the index might manage to keep its head above 7k levels [barring Black Swan Events] The phase of distributing stocks is in process and distribution takes time.

Let us review the charts for Nifty / BankNifty on Daily / Weekly Basis

Nifty Daily

Nifty Weekly

BankNifty Daily

BankNifty Weekly

As seen in the charts and prices over the last 2 weeks, prices have been sideways for the last 2 weeks on Nifty and BankNifty. The alarming aspect on BankNifty are the ominous signs of distribution vis a vis prices and volumes. Nifty on the other hand is showing sideways correction with sectoral rotations.

However, at this point of time, as I keep reiterating on Twitter as well, it is not a time to build shorts. On the longer term equity investment funds, keep booking out and trim long positions. On the trading funds, wait for good dips and buy [futures / equities better than options] The risk-reward is tilted in favor of longs as long as the 7200 levels are held [positional] and 7400 level is held [2-3 days]. Bulls are in control of the market as long as 7200 level holds on closing basis. Of course, from a trading perspective, that will be too far away to book a loss. One can keep SL of 30-40-50 points depending on one's risk appetite. The best buying points in July series will be around 7400 levels or on 2 consecutive closes above 7550-7580 zone for a minimum target of 7700 and ideal target of 7800-7850 levels.

Other Updates
It still seems likely that Gold and Silver may have bottomed out in Rupee terms. Around 25k per 10 gms [give or take 2%] it is a recommended buy via ETFs like GOLDBEES, QGOLDHALF

Silver may test 35k-36k levels once before the next breakout

Oil is temporarily high due to tensions in the Middle East but things should stabilize soon. However, USD 90-95 mark seems to be the benchmark now with temporary blips over this threshold or below this threshold.

To recap, Nifty is approaching the last stage of its rally. Unless there is some major Black Swan event, Nifty may not correct too much as well and stay sideways most of the time [perhaps a budget rally now and a Diwali rally later and a corrective phase post-budget] Enjoy July for whatever upside comes through and wait for fresh signals to emerge. Keep booking profits on equities and deploy them on money market instruments [not NCDs though; stick to FMPs anf G-Sec Funds]

Outlook For June 2014

Well the election results were covered in the previous posts and let us not forget that this is just the beginning for the new government. The real challenges start now and as usual, markets discounted a lot of good things already and profit-booking has commenced.

I keep reiterating that 7200-7500 levels were the logical targets for Nifty and they were achieved much earlier than anticipated. The key levels on daily/weekly/monthly basis are 7200/6900/6600 respectively IMHO. 7200 should ideally act as a good interim support for minimum upside of 7350-7400 levels in the next 4 weeks. If Nifty closes 2 consecutive instances below 7200, the next logical halt will be 6900, at which point all gaps created in May '14 will be filled [there is 1 gap pending to be filled]. Corrections are healthy and good for the market and gives opportunities to re-enter the market.

Although the logical target has been achieved, technicals and euphoric sentiments suggest that Nifty may take a shy at 7800-7900 levels once more in 2014 [either around 21st June '14 or towards Diwali '14] provided no other Black Swan events come through. This is still not the time to short the market whilst equity portfolio gains can slowly be banked. From a trading perspective, in the beginning of June, a swing trade for shorts can be initiated with breach of 7200 levels for a target of around 6900 [+/- 50 points]. As it happens in most instances of 21st June, Summer Solstice, markets tend to bounce back very sharply.

After a lot of months, finally option prices have gotten rationalized and around 21st of June, there is an interesting trade setup; should Nifty be around 7200 levels, one can attempt a July 6900PE + July 7500 CE straddle within a cost of about 150 bucks. Target exits will be 6900 Nifty spot on downside and 7500 Nifty spot on upside within 10 days where a 300 point move can yield 70-80 points per lot [after recovering initial costs] Should the profit booking be more severe in 1st half of June and Nifty spot be around 6900 levels around 21st of June, the straddle can be with Jul 6600 PE and Jul 7200 CE. These are high probability trade setups as most often than not, markets move significantly [250-300 points on Nifty in the 2 weeks around 21st June]

20th June '11 to 7th July '11: Rally from 5177 to 5740
20th June '12 to 9th July '12: Rally from 5032 to 5348
24th June '13 to  1st July '13: Rally from 5550 to 5880

As I keep mentioning from time to time, 21st March onwards, 21st June onwards, 22nd September onwards and 21st December onwards, the markets tend to move dramatically in either direction and with a good swing [albeit, in some instances a bit delayed] and during such instances options are a good bet. Always beware of the India VIX levels and Implied Volatility levels as the IV can significantly impact option pricing. For Longs, one always has the option to buy equity.

For shorts, one needs to have a technical confirmation  before buying Puts or shorting futures.

Let us review the Nifty and BankNifty charts once to get a handle of the levels

Nifty / BankNifty Daily / Weekly Charts

From an investment perspective, the A-group counters were already identified from August '13 onwards with levels and most of the counters achieved their targets as well. Now it is just a matter of trailing positions and cutting long exposure to equities in A-group shares. Even in the mid-cap space, ETFs like JuniorBees, InfraBees have played out their stories for now. Accumulation in these counters should now be only after a 15%-20% or more correction and that will be updated as and when such opportunities come through.

Opportunities for quick long/shorts will be updated regularly via Twitter on the top left hand side of the blog.

Gold is coming to a good buying point again. It may retest the lows of last year once around 24k-25k levels where it should consolidate for sometime and then slowly start moving upwards again. QGOLDHALF and GoldBees remain preferred instruments to buy the same. Silver should find a bottom around the 35k per kilo mark and buying physical units makes more sense.

Enjoy the bull run till it lasts and for now ignore calls for 9k, 10k etc on Nifty. There is only so much that an index can rise in a particular year and markets discount a lot of news in advance. Keep cashing out from time to time so that it can be redeployed when needed.

Nifty Election Outcome - Compare with Prediction 2014

Well well well - the big day has arrived and Nifty is almost there at 7500 levels. In the Outlook for May itself I had given a BankNifty estimate of 14500 and we are well past below that. I mentioned PSU banks outpacing over Private Banks in May and that too has happened.


Let us review my investment picks given over the last 6 - 8 months

SBI: Accumulate below 1850 all the way to 1450.
Avg Investment Price = 1650; LTP is 2485 Gain: 50% ROI in 8 months

Larsen: Accumulate below 900 For 1450 target.
Avg Investment Price = 725; LTP is 1445 Gain: 99%

Tata Steel: Accumulate in 240-270 Range; Target 425+
Avg Investment Price: 225; LTP 480 ROI 210%

Yes Bank: Accumulate below 300 all the way to 240
Avg Investment Price: 295; LTP 581 ROI 97%

NiftyBees: Buy below 580 levels relentlessly
Avg Investment Price: 600; LTP 750 ROI 25%

BankBees: Buy below 1000 levels relentlessly
Avg Investment Price: 900; LTP 1550 ROI 72%

Bottom-Line: Buy when the market is fearful and there is no need to buy too many stocks. The only buy call that failed was JP Associates. Also there have been some personal picks and trades that did not pan out on expected lines.

I am still seeing a lot of buy calls coming through and targets of 8000, 9000, 10000 being spoken about on Nifty. I reiterate my stance: Anything beyond 7500 is a bonus. DO NOT BUY NOW; THIS IS TIME to BOOK PROFITS.

That does not mean you liquidate all your holdings. But as far as the India story is concerned, almost all positives are being priced in. Euphoria may take the markets another 10% to 20% higher but this is time to start cutting long positions. Book those gains and start looking at the next leg of gains.

What we are seeing now is the repeat of 2008, 2010 etc. The buy calls come towards the end of the rally and thats why retail investors lose money [because they buy at potential tops]

If you look at the fundamental story, nothing has changed over the last 12 months. This rally is fuelled by optimism and euphoria and that will die down soon. Last but not the least, don't short this market. But certainly don't buy in. Looking at the way the Rupee-Dollar is moving and assuming that Bond Yields will soften, there is more money to be made in Debt Instruments, Gold Silver now.

The buying time for equities went away long ago. With a stronger rupee, gold and silver will correct in Rupee terms further. Rupee-Dollar should move towards the 54-55 mark by end-June when the budget comes through. Should that happen, the next significant return yielding instrument will be the gilts.

Every 1 rupee appreciation in Rupee-Dollar exchange rate, the gilt instruments appreciate 5% to 7%

To summarize, enjoy the bull run till it lasts but don't rush to buy in now. Keep raising your stop losses. The way things are poised, the euphoria may bring more gains but that is not a sustainable rally. Please do take moment to review the election updates that were shared here as well over the last 6 months.

'Jaanoge toh maanohe' - Jai Hind

http://india-election-2014-niftyparadox.blogspot.in/