31-01-11 to 04-02-11
SUPPORT 5460 & RESISTANCE 5530
Stay side and avoid taking large directional bets
Buy quality stock on every decline
Things could get worse – Uncertainty prevails
One has to brace for high volatility as well
Q-3 Earning, Economic Data & FII Flow
Take a stock centric approach and be extra careful
After some relief last week, the Indian market resumed its slide, with the NSE Nifty falling under the crucial 200-DMA level. Another rate hike, which was in line with forecast, seemed to rattle the markets. Investor sentiment took a fresh knock as FIIs continued to sell amid persistent worries that high inflation and consequent hardening of interest rates could slow the Indian economy. The governance deficit, coupled with a spate of controversies and worsening of the external balance have also been flagged by many as among the key headwinds.
Next week will be important as well. It will be interesting to see whether the bulls can fight back after being battered several times in the past 2-3 months. FII flows will continue to be the critical variable for the Indian markets. Inflation also has to soften substantially from the current levels and the Government has to get cracking on reforms. In this context, the Budget will be a key event to watch out for. Intent may not be enough. UPA II must get its act together and take some bold measures to keep the momentum in the Indian economy going.
While monthly auto sales, trade data and manufacturing PMI will provide further clues on the state of the Indian economy, one also has to keep an eye on manufacturing and services PMI data from around the world, besides US monthly jobs data. In addition, a lot of key companies are yet to announce their results. Technically, the level to watch out for on the way up is 5530 and 5610. In case of a harder fall, the Nifty could find support at 5360. The going will not be easy for some time to come and one has to brace for high volatility as well. Take a stock centric approach and be extra careful before the tide turns in favour of the bulls again.
We think Indian markets have been an underperformer for a long time now. In fact it’s quite astonishing with what India has done vis-à-vis the rest of the world because you have a situation where the US markets are trading at 52 week highs, European markets are doing extremely well, some of the Asian markets till a week back were trading at one month highs, the dollar index was sustaining below 80, crude was sustaining below USD 90 per barrel and despite all these triggers the Indian markets have done what they have done in the last four to six weeks.
So yes it’s been a bit surprising because underperformance by India for as long as 2-3 months is something that we have not seen for a very long time but technically clearly we think once the Nifty broke that 6000-6040 band you had a pattern break down confirmation which was really the first signal of weakness and then we got added conformation below 5760 and at this point of time we think the technical setup continues to be quite weak even though the markets are slightly oversold.
We think the momentum can actually take the markets lower because the weekly moving averages are gone after a very long time, there was this huge trend line that was supporting the market in the month of November and December that has given away in the last couple of weeks and we think the volume activity sometimes gives you a better indication than the price action itself and you have seen in the one month that whenever the markets have pulled back the volume activity has been very low but while the markets have corrected suddenly you see a substantial jump into volumes. So clearly that is going with the trend.
We guess looking at the entire setup we believe that the markets can actually go down to a level of maybe 5410-5360 on the Nifty where there are strong medium term supports. Not to say that those support levels will hold but we will have to re-look and re-analyze the situation once the markets are there.
Having said all of this, we believe that this is still a bull market correction because the market seems to have completed a large cycle, getting back to 5500 levels itself was a big thing for our market and we think that this is the largest bull market correction since the uptrend began in March 2009. So even if we were to correct another 3% - 5% we think we would still remain in a bull market and have the potential to actually take out lifetime highs sometime later this year.
Ø CHART PATTERN:
TREND CHANNEL: The Nifty has made a trend channel since October 2009. The trend has now fallen back into the channel. Technically, this was a very negative development and the negativity is playing out very well. The lower trend line of the channel is indicating a price target of about 5350-5250 for this trend.
MOMENTUM: The medium / long term momentum indicator (MACD) is showing a divergence in its chart. The price chart has made two higher tops (8/1/10 & 5/11/10), but the corresponding levels in the MACD are making lower tops. This suggests that a phase of sustainable weakness is developing in the trend.
OUTLOOK: The medium term charts of the Nifty remain in a very weak position. The momentum continues to support further weakness. The trend channel suggests a target of 5350-5250. Going by the present technical conditions, we expect the Nifty to decline from these levels and the level of 5250 looks reachable.
Ø TRADING RANGE:
The close was very disappointing and it might have taken a few people by surprise as well. We started on the back foot on the Nifty and the fear is this 5600-5800 kind of range that we have been talking about, is probably set to break down. That is the fear which a lot of people will have that maybe the first signs of a breakdown were visible the day before and we now move a notch lower.
That has been the problem with the Nifty for the last few weeks if you have been mapping it. It has been showing an inclination to just grind to lower ranges. It is not a waterfall kind of decline but everything is selling off 20-25% but its grinding lower. The pullbacks are getting shallower and shallower. You get one or two days of a pullback inevitably ending lower than where you set your sights and then the Nifty moves down to a slightly lower trading range.
A while back 5700 was the floor and it held for a few months and then we slowly moved down to that 5600-5620 which probably got broken the day before. Now you are going to ask yourself what is the new range for the market if that range was taken out and whether we are now drifting down to a 5400-5700 kind of trading range. The next few days will be critical as to what is the new trading range for the market if indeed last 2 day was a breakdown.
Whether it happens immediately or not is a different matter because that is a matter of trading and predicting the absolute near-term which is impossible to do. It could well be that this morning, everybody is bearish and everybody expects an immediate fall down to 5400. The Nifty might do something else. It might just trap the shorts out by falling 50 points and then rebounding, clean out the shorts and then fall.
These things are absolutely impossible to map, particularly, when there is consensus bearishness from a near-term trading perspective as the series has just opened up. But that general grind lower into a lower kind of trading range has been the format of this market for the last few weeks and that still remains in place.
Ø IMPORTANT CONCERNS:
We think our biggest concern right now is some of the best performers during a correction in the last 1-1.5 year as you know which is IT, auto, FMCG, Pharma. These four big heavyweights have actually not been spared in the current decline which is not positive at all because they were always the ones that supported the market and helped the market recover in a V shaped manner and let’s not forget last year we had three or four big corrections but every time the market got to support levels it tested them, rebounded and then we witnessed a V shaped recovery and then went on to make a higher high.
But this time with what has happened in the early part of January the Nifty moving to 6150-6200 and then immediately correcting, that’s really has not been a good development. So yes 3% to 5% downside seems very likely, it could extend on the downside and we think the reason could be global markets because so far the Indian market has been underperforming because of the local news-flow.
Our medium term target of 1300 on the S&P 500, 12000 on the Dow and both these levels are extremely important resistance levels for the US markets and if they were to correct 5-6% from here which we think is quite likely we think because India has already been an underperformer it can crack a little bit more so the setup does not look too good on the face of it.
Ø ROAD AHEAD:
It is difficult to say but if you look at the seasonal aspects of global markets typically, November to early January is a period where equity markets generally do well and apart from India most other global markets have really followed that in the last 2-3 months but India typically in the second week of January is where the markets tend to top out which has really played out very well this time.
We think over the next couple of months we will continue to see volatility. Yes, you could see 3% to 5% downside but anything beyond that is a very difficult to call because we think the US markets continue to be in a big bull market. Yes you could see a 500-700 point correction for the Dow.
But after that we think the US markets have substantially higher targets over the next three to six months and in that kind of a scenario we really do not want to call a bear market in India because as we pointed out earlier even if you were to correct 15-20% from the top we can still remain in bull market mode given the fact that India was one of the best performers last year.
And let’s not forget the month of September where we moved from 5300 to 6300 in a single month so going back to 5300 we think is just a normal retracement from a bigger picture perspective. So we think we will watch once the Nifty goes back to 5400 but we are not ruling out a break of that also.
Ø SIGNIFICANT RESISTANCE:
5760 is quite important because it was an important support, the markets spent a lot of time, rebounded from that particular level a few times. So we think 5760 on a closing basis we think that would now act as a resistance in case we were to see a pullback at any point of time.
We don’t think that the markets will keep correcting on a daily basis, you will see wild swings, you will see pull backs, giving one the feel that a bottom has taken place but we really think it’s going to be difficult for the market to take out 5760 on a closing basis. If it does happen maybe another 100-150 points but that’s about it, we think beyond that it looks a bit difficult.
Ø BANK NIFTY:
That’s really taken leadership on the downside and once again we are not very surprised because you had most of these PSU banking stocks almost seeing an exponential rise in the second half of 2009 and almost the entire 2010.
So Bank Nifty moving down to levels of 9900-10000 seems very likely. So a 6% to 7% fall from current levels and thereafter we see another pull back and we will have to see whether they are actually bottomed out around 10000 or not.
Ø FII ACTIVITY:
So much noise about FIIs going underweight on India. You tend to worry about what will happen if FIIs actually did sell significant quantities if they pulled out USD 1.5-2 billion in a very quick time. Barring that one week at the start of the month when FIIs sold USD 1 billion, it has been pretty or patchy from there.
We don’t think they have sold a whole lot to justify an 8% down series. It is the fear of their selling probably, which has caused the damage so far but the actually selling in that proportion has not happened. The day before, however, was a bad number of Rs 1,600 crore, maybe it was expiry day but it is still alarming to see a large FII figure in the context of a market which seems to slip down from its trading range. So that was not comforting at all.
We hope that post the monetary policy, FIIs have not become even more alarmed or concerned about the macro or the inflation situation and how India is trying to tackle it. Thursdays’ sell figures are an indication of that. If that is the case, then you need to be quite alarmed.
The Put writing is going lower and lower. Now, 5500 Put’s on the February series is where the action is. The smart money is probably saying we are now grinding down to those levels 5400-5500 and on the way up 5800 Call. The indication is the range is probably shifting a bit lower for the February series, to those kinds of goal posts and participation is thinning. If you look at the Stock Futures at the start of the series, people are slowly getting away from the market because of the volatility and the hurt that they experienced in January.
The results announced so far have been mixed. Earnings of firms which beat market expectations include the country's largest lender State Bank of India, two-wheeler maker Bajaj Auto, engineering and construction firm L&T, cigarette and packaged foods maker ITC and IT giant TCS. Others such as energy giant Reliance Industries, IT bellwether Infosys, drug maker Dr Reddy's and consumer products firm Hindustan Unilever lagged expectations.
With the rise in key policy rates by the Reserve Bank of India (RBI) recently, interest cost will only rise in the coming quarters that could hurt earnings going forward. If raw material costs keep rising at a fast clip, companies will feel the heat of slowing sales growth and rising cost of operations that could start eating into profit growth faster than they have till now.
The combined net profit of a total of 683 firms rose 20.1% to Rs 49158 crore on 20.2% growth in sales to Rs 415367 crore in Q3 December 2010 over Q3 December 2009.
Shares of car major Maruti Suzuki will react to the firm's Q3 results when trading resumes on Monday, 31 January 2011. The company unveils Q3 results on Saturday, 29 January 2011. BPCL, Infrastructure Development Finance Company (IDFC), NTPC, DLF, and Sun Pharma are due to report earnings on Monday, 31 January 2011. Bharti Airtel and Hero Honda report third quarter results on Wednesday, 2 February 2011, to be followed by ACC and Ambuja Cements on Thursday, 3 February 2011. Suzlon Energy reports Q3 results on Friday, 4 February 2011.
Ø MONTHLY NUMBERS:
Auto and cement firms will be in focus as companies start unveiling monthly sales data for January 2011 from 1 February 2011.
On the macro front, the data on HSBC Manufacturing Purchasing Managers' Index for January 2011 is likely to be announced on Tuesday, 1 February 2011. The index, indicating the performance of the manufacturing sector had eased to 56.7 in December 2010 from November's reading of 58.4.
The data on HSBC Markit Business Activity Index for January 2011 could also be released next week. The HSBC Markit Business Activity Index, indicating the performance of the services sector, had eased in December 2010 from a four-month high in the previous month, reflecting a slightly slower expansion in new business. The HSBC Markit Business Activity Index, based on a survey of around 400 firms, fell to 57.7 in December 2010 from 60.1 in November 2010 -- its strongest reading since July 2010.
Ø CHINA RATE HIKE:
Fears of a rate hike in China to tame inflation may cap upside on global stocks. There are talks of a rate hike from Chine before the onset of the Luner New Year holiday. The Chineese stock markets are shut from 2 February 2011 to 8 February 2011 for the Lunar New Year holiday. The Chinese government recently announced increase in the minimum down payment on second-home purchases to 60% from 50%.
Ø SECTORIAL WATCH:
CNX DEFTY: As per our expectations, the weakness in the medium term momentum has worked in the trend and the last three weeks has seen Defty come down strongly. We expect this trend to sustain as indicators continue to be weak and the index can decline to 4000 in the near future. We remain bearish on the index.
BSE PSU: The medium term momentum in the PSU has turned weak. The index will continue with its decline in the coming week.
BSE BANKEX: Banking index may continue with its weakness in the coming week. Technical support exists at around 11800 level. But we expect this support to be broken.
BSE IT: IT index appears strongest amongst sectoral indices. Strong support exists at around 6400 levels and only a decisive move below it can open up new downsides.
BSE CAPITAL GOODS: BSE Cap Goods had declined in line with other sectoral indices. Medium term technicals are weak and suggest that the index can decline further. Technicals indicate a target of 12400 in the medium term.
BSE AUTO: The BSE Auto index has declined in the last few weeks. It is currently trading weak and technical indicators suggest further weakness ahead with targets of 8500.
Ø GLOBAL WATCH:
S & P 500: S&P500 continues to make new 52 week highs. However, its upside momentum may be losing a bit of steam. A decisive move below 1270 may lead to weakness in the trend.
BOVESPA: The Bovespa market slipped last week. A break below 69600 has seen an acceleration of momentum on the downside. Support is expected to come around 67000 level.
SANGHAI SSE COMPOSITE: SSE took support from the levels that we had mentioned last week. It moved sideways with a negative bias making a low of 2661. Short term strength can develop if it crosses the level of 2760. Support is expected to come around 2650 levels.
HANG SANG: The HSI uptrend remains in force as long as the levelof 23500 is not breached on the downside. Only a breach below it will negate the uptrend which can then take it to levels closer to 23000.
NIKKEI: The Nikkei recovered from the low of 10250 during the week. It is currently trading in a wait and watch zone and only a breach above 10650 or below 10250 will lead to a sustainable trend.
FTSE: The FTSE uptrend may have reversed below 5900. Weakness is likely to continue this week which could see it test 5800 or lower. Stiff resistance will come around 6050 level.
MSCI-EMI: The MSCI EM is looking weak and may see further declines this week. Technical support is seen around 1110.
Ø DERVIATIVES ROLL OVER:
Series on Series Nifty registered a loss of 8.15% as it closed at 5604.30 vis-à-vis previous series close of 6101.85.
Broader market rollover was at 80.75%, close to its previous rolls average of around 82% and Nifty witnessed a lower rollover of around 54.08% as compared to its previous rolls average of around 60%.
Such nominal rollover along with lowest rollover cost in the last four months suggest possibly what ever rollover has taken place it is on short side further suggesting that February series has began on a negative note.
Series on Series Nifty in January series has closed in premium of 23-24 points vis-à-vis premium of 28-29 points in December Series.
Day on Day in December Series out of 24 trading sessions none of the sessions ended in a discount where as for January series out of 19 sessions 4 of the sessions ended in a discount.
Going forward the high Put build up @ 5500 level and high Call build up @ 5800 level has defined the broader range for the market in the February series which suggests going forward 5500 will act as good support and 5800 as good resistance. Till either side is breached the market is likely to be seen within the given band and in consolidation mode.
Stockwise highest rollover was visible in GTL Ltd followed by Glaxosmithkline Pharma Ltd, Dish TV India Ltd, Aditya Birla Nuvo Limited and Jet Airways (India) Ltd.
Sector specific Sugar witnessed highest rollover followed by Textiles, Infra, Telecom and Finance.
Textiles, Chemicals & Fertilizers, FMCG, Shipping, Finance, Power, Real Estate, Auto, Banking, IT, Telecom and Metals have seen an increase in rollover in comparison to the previous month.
Media, Infra, Capital Goods, Cement, Sugar, Oil & Gas and Pharma have seen a decrease in rollover in comparison to the previous month.
Market tested the level of 5460 before settling above the level of 5500. It has tested and closed near its 50 -weeks average of 5536. Technical selling pressure and pessimistic view on the fundamental factors had the effect on the Nifty. For the coming week, level of 5530 should be watched cautiously. Failure to close above the level of 5530 will invite the further unwinding of longs and selling pressure. On the downside level of 5360 is the next major support for market. On the higher side pullback can be expected if Nifty stays above 5530 for the level of 5610 minimum and maximum to 5700 levels. Broader strategy should be to reduce longs at each major resistance levels. Sector to remain in limelight are banks, oil, gas and engineering.