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

Outlook For March 2015

Well the budget is out of the way and there are multiple interpretations of the same.

First and foremost, it is a very positive budget on multiple counts

1. Sticky point GAAR is out of the way for 2 years; FPI/FDI norms simplified. Positives for FIIs. Taxation avoidance on Management in India v/s operations in Mauritius to be taxed in India is a bit thorny but that will be sorted out sooner than later.

2. More money in the common man's wallet with tax SOPs

3. A prudent review on fiscal discipline.

4. A roadmap for corporate taxation reduction

5. A good pension / superannuation scheme

On the negative side, higher taxation on Service Tax is going to impose a heavy burden on the common man. There are some more details that need to come out but the intention and direction is in definitely positive trajectory.

For Nifty, it is just a few points shy of making a new high; last month I had indicated that as per pattern targets, 8800 and 7800 are both on the cards. [I had also mentioned that Feb series is notorious for volatility on either side and we saw what happened] 8800 has been taken with conviction. 7800 still remains to be taken out and in all likelihood, will be taken out during the 'Sell in May and Go Away' phase of equities.

For March series, the critical supports remain at 8750 and 8580 levels on daily charts. As long as these 2 levels hold, buying the dips can be profitably from a trading perspective. The tricky point is BankNifty; its all time high is 20907 and recent swing low is 18226 - 61.8% of retracement comes to around 19880 levels (80% retracement is about 20370). Whilst the last week's daily charts have been very positive for BankNifty, IMHO the 20k levels [+/-200 points] may invite a round of profit booking / correction. Only when 20500 levels are taken out with volume and conviction, one can say that the uptrend has resumed on BankNifty.

Since Nifty is now around the 8900 mark, let us recap the intermediate supports

8425 - 8525 - 8590 - 8625 - 8680 - 8720

Only one resistance remains i.e. 8997 and above that is completely uncharted territory.

Pending pattern target on upside: 9200
Pending pattern target on downside: 7800

For BankNifty

Supports: 17500 - 18000 - 18200 - 18800 - 19200

Resistances: 19800 - 20000 - 20400 - 20900

Pending pattern target on upside: 21500
Pending pattern target on downside: 17500

For both Nifty and BankNifty, the pending downside targets are perhaps going to take longer and in all likelihood fructify in May series. In due course of time when clarity emerges, I will update the Twitter feed.

From an equity portfolio perspective, it is time to keep booking profits and reduce net long exposure. For those who are just starting portfolio investments, it is better to stick to the SIP mode. No matter what the media pundits say, current valuations are far too stretched. Equity indices are being fueled higher courtesy liquidity. That does not mean be brave and short but whenever the next leg of correction comes, it will be severe, fast and furious. The longer it takes for a meaningful correction, the harder will it be.

In terms of time, March series will have the most active period from 21st March [Spring Equinox] to 5th April. It will be a trader's heaven with high volatility and large moves.

Make the most of the opportunities in March and hope you will be able to close books for FY15 with good cheer on portfolios as well as trading.

Outlook For February 2015

Well I had some personal work that kept me away. The much awaited correction still hasn't come through and Nifty almost came to 9k levels in Jan series.

As I keep mentioning, this market has gone into an absolutely irrational mode and stock prices are well beyond any fundamental justification. However, for the short to medium term, technicals rule. As mentioned in the earlier post as well, I had clarified that I expect a correction but should there be a breakout from 8625, markets can easily run up 150-200 points on short-covering alone.

BankNifty went past the 20k mark, well beyond the pattern target and has corrected 1000 points from there already. Now the 18500-19000 band remains pretty good support while 18k levels becomes a very strong support. Budget months are very volatile. The last time we had a significantly volatile series in Feb was around 11th Feb 2011 when Nifty corrected significantly lower to 5177 levels and then rallied well beyond 5665 only to expire below 5400 levels.

So in terms of timing the 2nd week will be very interesting. Then of course we have the Railway and Union Budget at the end of the month. The Union Budget is expected to bring in a lot of positive surprises [a lot of which are already in the price]. However, due to the current sentiment in the market and the unlimited liquidity that is flowing from various central banks, it may not be a surprise to see Nifty take a shot at 9200 and BankNifty take a shot at 21400 levels.

This is certainly not a good time to enter the markets at such high valuations. This is the time to cut net long exposure from equities, mutual funds and move to gold, silver, real estate and FMPs. Stock specific opportunities will always be there and some of the prime contenders over the next 3-4 months IMHO are as follows

Asahi India: The stock is already at highs but this has some more steam to go [looking at around 165-170 levels over the next 6 months]

Kaveri Seeds: The company has become a force to reckon with and is very closely mirroring Monsanto, Bayer etc. The stock still has about 10%-15% upside over the next 6 months

In terms of shocks / major risks, a Russian debt default [or perhaps Venezuela, Iran i.e. any of the major oil driven economies] due to low crude oil prices can derail the global economy.

UK has elections in May 2015 and the market is expected to remain largely up till that major event goes through. Also in terms of statistics, the 3rd year of a US president [even more so if the president is in his 2nd term] marks a new high being made on stock indices, a mania for risk and then a sudden collapse. For those interested, one can just download the data for the US presidential years and look at stocks/index performance during the 3rd year of a presidential rule. The statistics largely favor significant highs in the first part of the year followed by a crash in the second part.

In 2015, a major collapse seems unlikely, given the significant liquidity. However, a healthy correction across the board is very much on the cards. Falls are definitely buying opportunities.

Good luck to investors as well as traders for Feb '15.
[Ps: It is going to be a trader's bonanza in Feb and Mar '15 if one plays out the cards well in either direction] 

Outlook For 2015

Well it has been a very exciting 2014 for global markets and more so for India. From mid-2013 to early 2014, I had sounded enough alarm bells indicating that India will have a strong equities performance, sweetness of which will depend on election 2014 outcome. I had given logical targets of 7200-7500 that would materialize after announcement of results. What was the outcome? Markets went past old highs of 6415 well before election results and the target of 7500 was achieved just a day after the poll results were announced.

That was for the positive part; even taking into account some sort of frenzy and euphoria, 8000-8200 was my best case hypothesis but the eventual values of Nifty / BankNifty were way beyond comprehension. Completely unexpected and that too, post-Diwali prior to which some key supports were broken [albeit a foxy move] So what to expect next? The hyper-bullish phase of clocking one of the fastest rallies is behind us now from Nifty's perspective. From August 2013 to December 2013, Nifty has rallied almost 65% from a baseline of 5200 to 8600 whilst BankNifty , CNX Mindcap and Nifty Junior have almost doubled. We are in the terminal stage of the rally for now and a long complex corrective price action awaits us that should commence by 2nd half of 2015.

Some profit booking session may continue in January and early February 2015 followed by a budget rally in March 2015. The markets have still not had any major negative trigger [Ukraine attack, ISIS, Russian Rouble challenges are all extremely small to have meaningful attacks on markets. There are knee-jerk reactions for a short duration and then the whole reversal is reversed with new peaks!]
Stock market crisis usually is preceded by large scale exits in the bond markets [it happened that way when the South East Asian currency crisis triggered or the Lehman Brothers episode surfaced] Bond markets have far greater investments and when it comes to flight to safety vis a vis a sell-off in local currency and move to safer haven currencies like USD, GBP, CHF, EUR etc, it starts with bond markets and then spreads to equities. Apart from Russia, very small amounts of capital in emerging markets have seen exits so far.

Election years are usually positive and 2014 saw a lot of elections in emerging nations; almost all had positive results. In 2015, the major election is in UK [already developed and has a strong currency base against most other currencies right now] Unless something drastic happens in first half of 2015, the current party in power seems poised to return to power.

For India, this will be the first time the new government will table its 100% self-drafted budget policy, basis an adequate time frame for preparation and a regular scheduled release unlike 2014.

GST roll-out will be a big plus and a rate cut from RBI are almost a given now. One must also remember that most of the medium to longer term positives are already in the price. The rally that will follow these announcements will just be knee jerk reactions for a fortnight before prices rationalize again.

The commodity price crash against strong dollar, bringing down inflation is a very temporary phenomenon. The zone commodity prices are hovering around right now has taken out incentives to produce for a lot of firms. Gold sees drop in production the moment prices fall below USD 1250 / ounce. Similarly for other base metals like copper, zinc, aluminium, there is literally no incentive for major producers to go ahead as market prices are below costs!

If one looks back at my hyper-bullish forecast for 2014, I had also taken into account social mood. Specifically, I pointed towards the general public sentiments in media, fashion etc. I had mentioned how people are lapping up towards unconventional movie themes and different kinds of television shows. I also mentioned general people outlook towards culinary television shows, reality shows and public spend on fashion.

As a pre-cursor, one can see that the social mood is gradually waning in these segments. After some dream runs for movies like Dhoom3, Kick, Happy New Year and of late PK, the last quarter of 2014 was a disaster for Bollywood. Superstars, mega-budgets and high profile marketing could not bring in too much cheer to Box Office numbers. A reality show like KBC with a 7 crore prize could not garner TRPs like the earlier seasons. These are pre-cursors indicating what to expect over a 6 month to 12 month horizon on capital markets.

So what do we expect for 2015;

The big picture is that the spectacular and unexpected rally after Diwali 2014 has kept hopes of testing 8800 levels on the upside. On the downside, it is safe to assume that we can test at least 7440 levels once in 2015 before any major rally. Looking at historical data [Jan '08, Nov '10 etc] whenever Nifty has rallied too much in very short time frames, there is a lot of consolidation and profit booking. The severe correction in 2008 was the result of unforeseen dangers externally; likewise, the correction post Nov '18 was a profit-booking correction that went on for almost 18 months in terms of time and apprx 30% in terms of price.

Whilst the correction in terms of price may not be so steep for Nifty in terms of scale, safe to assume that time correction will be on expected lines. Remember that this is the outlook on the basis of lack of external events. Also note that markets tend to discount the future well in advance. So most of the positives as I mentioned earlier are already in the price.

On the downside, a normal correction without externalities will take us to about 7440 levels. What news will trigger the same, I cannot say. However, Im reasonably sure that this critical level will be retested in 2015. Should there be any major external trigger like Lehman Brothers, the correction may extend further to 6600 and the worst case downside is expected to be 5944-5970 levels.
Please note that I am not suggesting this will happen. These price levels are in cases of extreme conditions that trigger flight of capital from India.

As I have been mentioning earlier in 2014 as well, the new technical bottom for Nifty is in the 6080-6200 band [similar to the 4800-5200 band in 2011-2012] The 7200, 6800 and 6600 levels are extremely strong. It will take a lot of downward pressure to break the 6800-7200 zone. Similarly 6415-6600, which was a major resistance band when the upward march above 6300 levels took place are going to be extremely strong. Also it is very difficult to contemplate extreme events that can lead to such price levels.

So staying on the rational course of accumulation, distribution and consolidation, stocks appear to be in a distribution phase. 2015 under normal circumstances has a range of 7400-8800. This is not really going to help on daily/weekly futures trading. These will have to go as per support / resistance levels.
From an investor's perspective, this is not the time to enter any of the major Nifty 50 stocks. Even if one feels left out, for now it is better to go on SIP basis. The major Nifty levels where one may consider additions are 7200, 6600, and if 6000 levels show up, it will be a bonanza for delivery based buying.

Assets that can provide healthy returns in 2015 [with a 2-3 year outlook]

1: Gold: In terms of dollar pricing, the 1000-1200 dollars an ounce is a fantastic zone to accumulate. In rupee terms for India, considering range for USD-INR from 56-66, INR 23k / 10 gms is a fantastic bottom [21k worst case scenario]. As I have been saying time and again, gold had a dream run for almost 13 years from USD 400 / ounce to USD 1900 / ounce from 2000. It is fairly logical for a corrective and consolidation phase after such a massive rally. We are already through a major corrective phase in gold over the last 20 months. It is very rare for assets like gold to have such a prolonged period of consolidation giving ample time for investors to buy into gold in physical form or ETFs. With a 3-5 year horizon, gold will resume its next phase of bull run and surpass INR 50k / 10 gms mark.

2. Silver: Whilst the industrial utility of silver is much lower in the world of electronics and nanotechnology, there is still no doubt that silver has a lot of value. The longer term price target remains INR 75k / kilo.

3. Crude Oil: Unfortunately in India, there is no way of lapping up crude oil. It has corrected over 50% from recent highs and the most it can correct is about 10% to 12% further. There are rumors that MCX Crude may soon be available in mini-contracts. If the mini-contracts come through, then the delta factor will be about 1:25 [Spot to futures impact]. With adequate margin, one may look into buying into crude mini futures with a 2-3 year outlook to more than double the investment.

4. Real Estate: I know that I have myself forecast a major real estate bust cycle this decade in my other Great Indian Banking Paradox blog article. However, that can only happen when there is an outrageous mania in the real estate segment that usually is accompanied by excessive heating of REITs. In India, we will see the introduction of REITs over the next 2-3 years. Going by historical data across mature economies where REITs have been introduced, the first 5 years after REIT introduction into an economy inflates real estate prices by 2x-4x. Although current valuations for real estate in major metro cities look stretched, it is safe to assume that this is the beginning phase of the boom.

So if one has a reasonably good sum by booking out of equities this year, it makes a lot of sense to invest in Indian real estate. A piece of land or a flat is something that one has to take a personal call on depending on preferences, willingness to pay, convenience of resale etc. Just as we saw a phenomenal rally in Indian equities in the last 18 months, a similar rally can be expected in Indian real estate after the REIT boom kicks in.

5: FMPs: Our good old Fixed Maturity Plans will continue to deliver 11% post-tax returns. Whilst FD rates keep changing as per RBI's benchmark rates, most FMPs have an inverse correlation to benchmark rates. The lower the benchmark rates, the higher will be the asset values in most Fixed Income instruments.

Longer Term Nifty Charts
Nifty Monthly

This is a very long-term chart taking a support line through the major bottoms for the last 15 years. As per this chart, it is very difficult to go below 7400! However, remember that when we are looking at such longer term charts, there are spurts above / below such lines. The crucial level is 6600 and that is where one may see a lot of buying. The markets may go down further from those levels only to reverse back. To have a look at such a trend, look at the Tata Steel charts for the last 3 months. The firm technical bottom was about 250. A lot of accumulation took place here though prices collapsed further to 200 only to reverse back spectacularly.

Also the above chart now shows how the earlier resistance band of 6300-6350 is now a strong and firm support.

Specific charts for trading Nifty and BankNifty in January '15

Nifty chart is clearer; for the next 3 months or so, it has an incomplete pattern on downside for about 7800 or so; at the same time, it has an incomplete pattern of 8800 on upside. Which end of the range comes first, time will tell but from current levels, there are some good moves expected on either sides.

BankNifty has moved completely in uncharted territory. As we can see from the charts, once BankNifty moves a significant quantum, it spends a lot of time in consolidation. The current uptrend in BankNifty should likely see a topping out around 19200-19400 zone after which there will likely be a price correction of about 1500 odd points but the time correction can be expected to be greater.

For January, the critical levels for Nifty are 8380 and 8280 on downside on daily basis [8225 on weekly basis]. On upside, the critical number is 8625. In Dec '14, we saw a fall from 8625 to 7965. 61.8% retracement comes to 8380 and we are there. The current uptrend has steam to go to 8425-8480 levels also. However, one must not lose sight of the larger trend and that has kept both bearish n bullish scenarios open pre-budget.

For BankNifty, the crucial support band is 17400-18k levels. As long as these hold, the chances of a sharp bounceback in case of falls will be fairly easy. Since the upside is in uncharted territory, it is difficult to hazard a critical number on upside [though the pattern is suggesting a likely top around 19200-19400 zone]

Please note that these levels are on daily / weekly basis and hence keep changing almost daily. The twitter feed will be updated as and when such critical numbers develop. To summarize, the first quarter of 2015 will be very exciting for traders. A lot of opportunities are anticipated on both upside and downside. Investors have had their bonanza already ;)

Wishing all readers a very prosperous 2015

Outlook For December 2014

So we are coming to the end of an exciting 2014. Stocks created record highs; much earlier than election results and much higher than anticipated levels [7200-7500 was my expectation]
The rally has gone almost 15% above 7500 levels. Record highs were recorded in almost all segments whilst some of the old front-liners retraced back much of their earlier levels.

The correction in October below 7800 was a red herring and now a lot of people are feeling left out of the rally. As I have been reiterating for the last 4 months, this is not a time to be brave and enter markets. These highs should be used to book profits in long term investments and cut net long exposure. Trail the remaining positions but don't rush to create shorts as well.

December tends to be a volatile month with large moves closer to 21st December [Winter Solstice]. 61.8% retracement of the rally from 7730 to higher levels comes to about 8100-8200 levels that in all likelihood will be tested before 2014 gets over. These shorts can be initiated when Nifty posts a close below 8480 odd levels [these daily levels are dynamic and will be updated in the Twitter feeds]. Similarly, for BankNifty, the corresponding level will be about 17950-18000 levels.

Also, there is remarkable complacency in markets overall and that is not a very good sign. The longer it takes to bring in a correction, the greater will be the ensuing one and  in all likelihood a fast and furious one. I wouldn't be surprised to see a revisit to 7200-7400 levels before Budget 2015. However, that is not going to help the trading plans for December.

For December 2015, the trading plan is simple; trail existing long positions and avoid creating fresh longs at this stage. Initiate shorts when appropriate levels come through. Whilst it is pleasing to see green symbols and higher levels on the ticker, one must also understand that the euphoria is excessive. The situation on the ground has not changed as well as what the indices indicate. This is indeed a major asset bubble as current prices are reflecting potential benefits over the next 3 years!

That being said, we cannot say that we are in a bear market anymore. Even the strongest of corrections over the next 2 years will likely keep the base in the 6k levels [+/- 100 points] All falls will be opportunities to buy. The baseline for investment levels have also gone up significantly

A view on frontline stocks

Axis Bank will have a new baseline of about 325 and SBIN about 180-190

Kotak Bank has been rallying like crazy and although technically the new base seems at around 680-700 levels, I would be wary of this stock. Despite the ING Vysya move, Kotak Bank is relying heavily on a corporate loan portfolio. We have already seen enough evidence that corporate loan portfolios go bust and / or get significantly restructured. It just takes a couple of bad portfolios to get impaired and then counters go for a tailspin. So as far as the banking space is concerned, I would still bet on the regular SBI, Axis, ICICI Bank in individual counters and BankBees ETF to invest when the next severe correction comes through.

Similarly, the new baseline for NiftyBees will be about 625, InfraBees about 180 and JuniorBees about 130. Give or take a few points here and there, investments at these levels will be lucrative over a longer term.

They say History repeats itself and the same can be expected on Nifty. It had a strong upsurge to record 6357 levels in Jan '08 followed by a 3 year correction. Once the current top-out process is done, a similar 2-3 year corrective phase can be expected. One critical point to note is that the next correction when it comes, will literally provide no safe haven like FMCG or Pharma or IT. It will be an across the board correction and this correction is much required. It will be healthy for the markets.
As I keep saying always, when a stock market top is nearer, the frequency and quantum of 'best time to be in equities', 'equities as most superior asset class' gets louder and louder in the media space. We have been in that phase for the last 2 months now.

Also there have been a string of IPOs lined up and a lot of disinvestment counters lined up in the PSU space. The government is strongly [and rightly] keeping sentiments high on bourses for better valuations and realizations. No matter how attractive the markets look at this stage, this is not a time to get into front-line stocks IMHO. Its all about booking profits and reducing net long exposure. There will soon come a time to re-enter equities.

On other asset classes, Gold, Silver, Crude and Real Estate are the most exciting places to be in at the moment. Gold had a 13 year bull market from 400 dollars to 1925 dollars an ounce, After such a long rally, a 2-3 year period of correction/consolidation is fairly logical. 2 years of correction / consolidation are through and we have about one more year left at the most. This is the right time to pick up gold in electronic format and SIP route. Most of the downside in dollar terms is already done and at the most about 15% downside in price can be expected [and this may or may not happen] Likewise, Silver has crashed over 50% from previous highs and there is very little downside left. Any price below INR 40k / kilo is attractive to invest with a 5 year horizon.

For crude, one of the best indicators is statements from Goldman Sachs. In the 2007-2009 frenzy, when GS predicted crude to boil from 120 to 200 dollars, it moved slightly higher and then crashed below 90 dollars. Subsequently when it predicted crude to sink below 30 dollars an ounce, crude found a bottom around 40-42 dollars and tripled in 5 years. In the current scenario, I find it difficult to see crude below 65 dollars a barrel and within 12-18 months, it should be able to reclaim the 90-95 dollars per barrel mark. Any fall below 65 dollars is a golden opportunity to lap up more crude oil with a 3-5 year horizon.

To summarize, RBI policy will not really be a major game changer for December unless there is a major rate cut. As long as Nifty holds around 8480 levels and BankNifty holds 18k levels, shorts are risky.

On a side note, I had reviewed the long term charts of Asian Paints and had anticipated a top at 740 odd levels. The prices over the last 2 days have gone way beyond that. Since the time-frame was weekly / monthly, It is critical to see whether the stock closes weekly / monthly above 745. If this event does happen, then Asian Paint will be a complete game changer on the bourses as a weekly close above 745 indicates break-out of a 8 year weekly chart. And if it happens on a monthly basis, it will perhaps go on to become an equivalent of ITC / INFY / TCS / RIL etc with over 10% weightage on Nifty. Even in case of a strong correction, 550-600 seems to be the new base for Asian Paints!

Outlook For November 2014

So Nifty did spring that Diwali rally surprise and also moved ahead to post a close above 8025 levels. As long as Nifty stays below 8180 levels, especially on closing basis, there is a potential downside risk of retesting 7550-7650 levels once. This has been confirmed with 2 consecutive closes below 7800 levels and it is only a matter of time when the same happens.

The jubilant rally after Diwali has stumped many people incl me especially after giving 2 consecutive closes below 7800. Some may say it was because of additional QE by Japan or whatever - but the fact of the matter is most people expected a rally upto 8150 [incl me]. I had mentioned that 8025 is a crucial hurdle and should we get 2 consecutive closes above this, Nifty may top out around 8150 levels by Diwali and start the downward march. Now we are in completely uncharted territory on both Nifty and BankNifty. It is very difficult to hazard a guess as to where the top will be. Going by historical price patterns a potential top area is 8380-8480 zone. However, shorts at this stage are not recommended till the downtrend asserts itself.

The earlier resistances on the way up i.e. 7800-7925-8025-8180 will be supports on the downleg whenever it starts. Of these 8025 and 7800 will be the strongest supports followed by 7450-7550. As mentioned earlier, it is not a question of whether 7450 will come but a question of when. As and when the signals are available, I will post the same via Twitter.

Charts uploaded for review

Nifty Daily

Nifty Weekly

BankNifty Daily

BankNifty Weekly

One should remember that Nifty is poised to test 7440 levels prior to budget 2015. This confirmation has come with 2 consecutive closes below 7800. If we recollect the historical price movements, it was known that Nifty would make life-time highs with 2 consecutive closes above 6280. This happened, Nifty went to 6415, came down to test 5950 levels twice [5971 once and 5933 once] and then went on to make new highs and rally relentlessly. It took about 4 months to make new highs.

Most people got the current move wrong including me and did not expect any major move above 8150. [I got a royal double whammy in this move; was expecting 8350 levels provided 7800 is not breached on daily/weekly basis. That happened and then when I thought the Diwali rally will last upto 8150, markets sprung the surprise!!!]

From an EW perspective, an alternate view was that an Expanded Flat is a possibility. However, even with my limited knowledge, an Expanded Flat cannot be attributed to this upmove. If prices had just hit say 8200-8225 and reversed, that possibility could still have been there. But certainly a move well beyond 8325 cannot be classified as an Expanded Flat. It was a very powerful and impulse wave rally. With multiple banking and cyclical stocks making fresh highs, it is an impulsive wave.

What this also tells us is that one should not rush to build shorts. 8425 levels is the basic pattern target. It has steam to go further up also but we are in a frenzy area. The rally is in the terminal stage and will fall at some point of time. The fall will be fast, furious and relentless just as the case was with the fall from 8180 to 7730. However, one should wait for the correct confirmations to emerge and then go with that trend.

November and December are both likely to be highly volatile months. Remember that most FIIs have to close their books as per the calendar year and hence they will need to book some profits and repatriate earnings back to their home bases by Christmas holidays. So both the pending upside and profit booking will be rapid towards the end of November with a consolidation in the middle phase of November.

Silver and Gold are time and again giving good opportunities to buy. Over a 5 year horizon, silver will retest old highs and likewise for gold. This is a good time to book profits in equities and move funds to fixed income, gold and silver. Gold had a relentless rally for almost 13 years and hence a pause / consolidation for a couple of years is fairly logical. Likewise silver [in dollar terms] has crashed almost 60% from its life-time highs. Eventually, they will come back to normal levels if not inflated and one must make use of current opportunities to buy.

MCX Crude should be able to find a bottom support at 4800 a barrel. [note that MCX crude prices are following support/resistance levels of Nifty in the 2010/2012 period]

5600 broke, it came down to 5200; 5200 broke it came down to 5032; 5032 broke and now its hovering around the 4911-5032 mark. So the logical support for MCX crude comes to 4800 and if that also fails [unlikely] then it will drift further to 4400 levels. Difficult to go below 4400 a barrel in rupee terms as necessary market steps will be taken by OPEC.

Enjoy the upside till it lasts; don't rush for shorts. However, be prepared for a fast and furious fall prior to budget 2015 and enjoy that ride as well!

Outlook For October 2014

So we had an extremely eventful September; in the first half, Nifty went on to make new highs and in the expiry week gave up all the gains of the last 6 weeks or so. I was expecting Nifty to stage a pullback from 7925-7950 levels which did happen once only to fall back again. The most critical support is in the 7800-7850 band from where a strong bounce is expected. 2 consecutive closes below 7800 or 1 close below 7800 on a weekly basis sets the stage for a deeper correction to 7400-7500 levels. This seems unlikely as of now in October series considering the run up [anticipated] for the Diwali rally.

As mentioned in my previous post, a weekly close below 7800 will imply that the bull party for 2014 is over. The eventual fall from the current euphoric levels will lead to 6900 levels on Nifty, most likely in the second quarter of 2015. However, I doubt whether the deep correction will set in before the Diwali rally [which mutual fund houses need to be able to distribute stocks into and get the retail suckers in for infusing funds!] As long as 7800-7850 levels hold, I personally will still look for opportunities to go long.

Some of the ripe opportunities

Asian Paints in the 580-625 band for target of 675 with SL EOD < 575
Axis Bank in the 360-390 band for target of 435 with SL EOD<355
LT in the 1375-1400 band for target of 1650+ with SL EOD<1450
SBIN in the 2150-2350 band for target 2650+ with SL EOD < 2100
Tata Steel in the 400-450 band for target 560+ with SL EOD<385

BankNifty was expected to stall in the 15400-15600 zone which has not happened. It now has opened for a deeper correction to 14680 levels though it may not happen in one go. A meaningful rally in BankNifty will be from the 14680 odd mark [give or take a few points]

The Nifty and BankNifty charts should help illustrate these points

Nifty Daily

 Nifty Weekly

 BankNifty Daily

 BankNifty Weekly

Now coming to the sectors and so called defensives and safe bets. Overall, in terms of fundamentals, the entire market space is trading in excessive valuations. All sectors are over heated with likely asset bubbles and at some point of time, when the deep correction unfolds, all counters will go for a tailspin. So it is critical to look at where the logical supports for some major themes will be

IT:
This has been a darling sector for the last 18 months, thanks to the equities rally overall and a weak rupee.

This is the weekly chart of CNXIT. It has been in a secular bull run from the lows of 2008 from an investor's perspective. It is currently hovering around the 11100 mark and may test 12k levels soon from where a significant correction is expected. The technical supports for this are in the 7k to 8k zone which will come at some point of time within the next 12 months or so. When it is oscillating in the 7k to 8k mark, is the time to lap up technology shares.

So, the new bases for TCS will likely be the 1400-1800 band, INFY in the 2400-2800 band, Wipro in the 350-400 band. Does that imply these stocks won't correct below these levels. For all you know, they may but from a longer term investment perspective [3-5 years], corrections below these support levels will just be aberrational blips.

Pharma:

This is the CNX Pharma chart that has again been in a secular bull run for a prolonged period. As can be seen in the graph, the run up of 2013-2014 has been much higher than usual and will correct sooner than later. The base for CNX Pharma is around the 8000-8500 mark now where one should accumulate. This implies a 20%-30% correction in names like Lupin, Sun Pharma, Cipla etc from the peaks whenever they come. Any fall below 8k levels in CNX Pharma will just be a blip.

One can see a similar pattern in the FMCG space as well. Names like HUL, Nestle, Dabur, Britannia have all rallied significantly. They are all due for a 30% correction from current levels which will be opportunities to buy. One hears calls for 50%-60% correction due to the fact that most have doubled or tripled but that seems very unlikely. These are products that have definite consumption in a lot of categories and an exponentially growing market due to high population. All though perpetual growth of 5%-10% will be challenging due to the base effect and margin pressures will be there due to high marketing expenses, this is a segment one can comfortably bet on in the long run. If timing the buy is challenging, just go for an SIP on the consumption theme as it tends to give a CAGR of 15% to 18% in a 5 year period.

The automotive and related categories' space is the one which is in most over-heated territory. The most common themes are related to the fact that more and more people are buying cars and the fact that commodity prices are falling that is helping the bottom-lines of companies. What is missing in most analyses is that only 1 out of 4 car models launched actually becomes a hit. With more and more car variants and brands coming up, it is very unlikely for any particular variant to sell more than 100,000 cars per year. Gross margins at manufacturing level are around 6%. At some point of time, the discounts due to lower input costs will have to be passed on to the customers and there will be a lot of margin pressure due to marketing expenses and competing to generate business volumes. Most vulnerable to a severe fall are the tyre companies like CEAT, Apollo, MRF, JK Tyres etc. I have no clue as to how much more they will rally but this segment is sure to crash by at least 50%. As far as counters like Tata Motors, M&M, Maruti are concerned, they are also due for a 20% to 30% correction from current levels. Of course those falls are buying opportunities.

To summarize
The short-term upto Diwali seems bullish and an assault at 8350-8400 levels likely by bulls [A weekly close below 7800 negates this view or 2 consecutive daily closes below 7800]

The medium term is bearish and Indian equities are very highly priced. Valuations are excessive and a correction is likely. The fair value of Nifty IMHO is around 6600 with all the positives of the new government, low price of oil, government divestment in PSUs etc etc. However, as we all know, stocks never trade at fair value. They trade at excessively high or low levels. This upleg that I am talking about is in its terminal stage. Once the Diwali rally and distribution is complete, Nifty is expected to slowly drift down to 6900 with stops at 7600, 7400 and 7200.

The long run is still bullish for India and 5950-6280 zone is the new base for Nifty just as 4800-5200 was in 2011-2012. Corrections beyond this new base will just be temporary aberrations. For instance in the severe correction post-Lehman Brothers, the logical stop was around 3800-3900 for Nifty. It didn't stop over there and went well below the 3k mark. For somebody looking at the chart on hindsight [moi included as I entered the market in 2011] the bars below 4k levels are mere blips and the numbers statistical aberrations. Same is the case for the fall below 4800 in December 2011 which was troned out within 2 weeks. The investments made in such periods of mass hysteria and bloodbath tend to be the most rewarding ones in the long run!

Take for instance SBI; any price below 2000 levels is a good buy. The carnage may go all the way down to 1450 or even 1225 levels - doesn't matter. In a period of 3-4 years, it bounces back to 2450-2650 levels. It has been almost 3 years now that it has not been able to breach the 2750 levels with volume and momentum. Whenever that breakout comes through, it will go on to post new highs, higher than 2010 levels also IMHO. The more it falls below 2k levels, the more should one buy the counter as long as it is part of front-line indices. Many a time, people don't manage to hold their nerves enough to go through the tide [moi included] It is just like picking shirts and trousers in a sale. The same shirt in May in the retail store costs 3500 rupees whilst in the July End of Season sale costs 1800 rupees. Most shoppers are smart enough to understand that it makes more sense to add on to the wardrobe collection in July or January End of Season sale when one can buy 2 shorts for the MRP of 1 shirt. So how is picking stocks different? The other challenge during downtrends is that people have a tendency to hunt for names that will double or triple or quadruple and end up picking counters like Educomp, Opto Circuits, Suzlon etc with the logic being they have already corrected 80% or 90% from their peaks. That according to me is the wrong approach. What is important is to see the market capitalization and the core strengths of the company that make the frontline indices like SBIN, AXIS, LT, TATA STEEL, Tata Motors, M&M, HUL, ITC etc


Last but not the least, the above summary is the broader picture from an investment perspective. This no way helps the trading perspective. From a trading perspective which is much shorter time frame, Nifty is still bullish on the monthly time frame. The fact that it closed below 8025 levels on 26th September keeps Nifty weak in the daily and weekly time frame.  As long as 7800 holds, bulls are in the game but staying below 8025-8080 will likely see some sell-offs elongating the pain for bulls. For the first half of October, expect Nifty to consolidate in the 7800-8080 zone and build a base. [These levels are dynamic on shorter time frames and will be updated via Twitter feeds on the top left hand space] A breakout of 8180 levels on upside will vindicate the bullish stance given in the previous post. A breakdown of 7800 levels on downside will mark October in favor of bears

Immediate Support levels
7800-7850-7880-7925

Immediate Resistance Levels
8025-8080-8125-8180

Prices closing above or below these points can turn resistances into supports and vice versa

Gold and Silver are at good accumulation levels for the longer term. Crude Oil (WTI) should find an intermediate bottom in the 90 dollars per barrel mark.

Wishing all of you a profitable October and greetings for the festivities.