Saturday, January 30, 2010

Markets: Is a top in place or can we still hit new highs?

It was a turbulent and truncated week which saw a brutal sell-off. By Friday afternoon, the carnage had abated. The question is going ahead is it buy on dips or sell on rallies? Let attempt to see the both scenarios. I think 2 scenarios are clearly possible now and we are at the inflection point:

Bullish Case:
1. As shown in the image the trend line draw joining lows from August have held.

2. The government is having huge PSU divestment in Feb. They will hold up the markets provided global cues are supportive. DII bought 7500 crores from Jan 21st. If FII selling stops the markets will go up.

3. The global markets are also oversold and due for a bounce.

4. If we take rally after the budget from 3918, we can see 4 clear waves:

a. Wave 1 - 3918 to 5181 (1263 points)

b. Wave 2 - 5181 to 4539 (642 points) approx 50% correction

c. Wave 3 - 4539 - 5310 (771 points) Wave 3 is 61% of wave 1.

d. Wave 4 - 5310 - 4766 (544 points) approx 70% correction

e. Wave 5 will unfold 4766 - ???

Now wave 3 cannot be the shortest of waved 1,3,5. So max would be around 750 points which takes us to around 5500 on Nifty. Now wave 3 was 61% of wave 1 and if wave 5 is 61% of wave 3, then 5236 would be the target.

5236-5500 (Sensex 17500 - 18500).

Wave 1 took 3 months and wave 3 took about 2 months to unfold. Wave 2 and 4 took about 3 weeks to correct.

This could mean wave 5 may take upto 1 month, the traditional pre-budget rally.

5. The 1 month rally could well also fall in line with previous history of mega IPOs sucking out liquidity and then the markets tanking.

Now the bear case:

1. FII sold 11000 crores of shares in last 10 days. Market and DII cannot absorb such selling on sustained basis.

2. The trend line joining the lows from July upmove is decisively broken on both daily and weekly basis. This could mean the up move is over.

3. We are just on a corrective upmove of the fall from 5310 to 4766. Retracement levels come to 4973, 5038 and 5100. 4940-4980 is key resistance level for the market. I would buy only above these levels.

4. Tony Caldero talks of a top in US Market. His Elliot count on the S&P has worked very well.

5. The PIGS are in danger of a collapse. Portugal, Spain, Greece and Ireland are identified as potential sovereign debt defaults. If this default does happen, Lehman would look like a picnic.

6. Risk aversion would return, emerging markets would tank and the US Dollar would strengthen. This would be a vicious cycle. The Dollar Carry Trade would unwind further leading to FII selling.

To sum up, 2010 looks to be a time of caution.

Saturday, January 23, 2010

Markets: What to expect now?

The last 2 days of the week were pretty bruising and we had a good amount of fall. The fall leads us to question , is the move just corrective or we are beginnig a fresh round of fall.

Points to consider:
1. FIIs have sold 3300 crores in last 3 days and DII have bought 2500 crores. Obviously attempts to hold up the markets.

2. The rally which began from 4944 to 5310 lasted from 21/12 to 06/01.9 days for up move and the down move has taken 12 days. This is a positive for the markets.

3. The trend line joining the lows from July as attached provided support on a weekly basis. This comes to 4972 for the next week. Also, we got support at 100 EMA.

4. The 5 week low EMA has been broken twice since March and once we crossed that previous 2 times we went much higher. This comes to 5051 for the next week. A close above that is positive for the markets.

5. The resistances would come now at 5051, 5110, 5179.

6. The US Markets fell on news of Obama trying to regulate the big banks. This dragged the world markets down. Lets see how this pans out because Obama is in a tight spot now with election losses. regulating big banks always appeals to public sentiment.

Strategy is simple, go long with hedges only if closes above 5051. Also, watch if 4944 breaks and closes below 4972 on weekly basis.

Next week is RBI policy on Jan 29th and NTPC opens its fresh offering on 3rd Feb. Expect supportive noises from the RBI, provided the world markets help.

I would continue to keep adding Gold to my portfolio.

Sunday, January 17, 2010

What do the Markets hold for us?

The New Year has begun well. The foreign institutions have poured in 3500 crores and the domestic institutions have poured in 4500 crores. On days when FIIs are major sellers, the domestic funds step in a big way. Do you know why?
The Government is offloading almost 20000 crores of shares in the next few weeks before the budget. This includes the NTPC divestment which will net almost 9000 crores. Its in the government's interest to keep the market propped up. If no major upheaval occurs then the government will ensure that there are no sharp falls.
The Indices have stopped moving now, and its the mid caps and the small caps which are jumping now.
Its time to keep track off all the junk in the portfolio and get rid of them. The supports for the markets come at 5192 and 5100. 5080-5100 is a very strong support for the markets and it is unlikely that these will broken. After that the supports come in at 4960 range.
Now, is a good time to add Gold as the prices have stabilized.Crude oil is shooting upto 80 dollars a barrel. Usually one ounce of gold is equal to between 10-20 barrels of oil. When oil rises, gold will also rise.
The below link is very informative.

The mid caps are running away and some good mid caps could be Shri Renuka Sugar above Rs 242, Bharat Bijlee at current prices.

The markets could come down early next week to test their supports ad that may be a good time to add a few stocks for short tem trading.

Saturday, January 9, 2010

What Mr Bajaj Needs?

Last week, we say what Mr Bajaj wanted to live a happy and contented life. Now, this week lets look at what he really needs. Often what you want and what you need to be successful are completely different. If we are able to crack Mr Bajaj's wants and needs we can be successful stock pickers.
India is a country which is woefully inadequate in terms of infrastructure. We takes ages to build good roads, flyovers and sea-links. India needs a lot of new roads and highways. The Golden Quadrilateral was just a start. As Kamal Nath, our Roads Ministers puts it, 20 kms to be added every day. L&T, Gammon, GMR Infra all build roads.
India needs new airports and the existing ones need to be upgraded. The GVK group handles the Mumbai airport and are well on their way in taking a major stake in the Bangalore airport. GMR Infra has Delhi and the Hyderabad airport. The airports have a unique business model as explained in 1 of my older posts.
Next we come to the ports.The Mundhra port has a very unique business model of Container terminals. Maruti uses this port for most of its exports.
India is a power deficient country. The companies which are the power equipment manufacturing companies like BHEL, Siemens and L&T are my favorite companies. The Power generators like Reliance Power, Adani Power all have 1 problem. When by 2012-2013, the supply demand mismatch is sorted out, the power they sell will not have that big margins.
Power and Infrastructure are the sectors to watch out for.
HCC is into construction, nuclear power and they are building a city of their own called Lavasa. Lavasa is what excites me the most about HCC.
If India wants to keep clocking higher GDP growth rates, its infrastructure has to be in place. Already the high base effect will kick in. The low lying fruits of GDP growth will be soon taken away.
What I look i a company is that it has to be in a right sector and the right management. Always in any sector the best and the worst company does well. (The worst does well while the going is good ad then tanks).
Any portfolio covering India has to have Larsen, HCC, (GMR infra or GVK power).
Ideal portfolio will cover Mr Bajaj's wants and his needs. Over the next few months, lets try to get into Mr Bajaj's mind and see what he wants.

Saturday, January 2, 2010

The Key to Stock Picking in 2010:What Mr Bajaj Wants?

Its always a real challenge to pick out the right stocks. 2010 more than anytime else would be a stock pickers markets. With the Sensex giving about 80% Returns in 2009, not all stocks will rise in 2010. So, how do we identify the winners for 2010. The Key lies in identifying what Mr Bajaj Wants?

Who is Mr Bajaj?
He is a young Indian Male in his early 30s employed in one of the Great Indian Back offices making about 12-15 lakhs a year. He is married with a kid.

So, now where would Mr Bajaj spend his hard earned salary?
It would firstly be on Roti, Kapda and Makaan.

Being a family man, he would like to own his own house. So, he would take a housing loan and get set with a EMI for the next 20 years. For this, the best plays would be reputed Housing Finance companies like HDFC.

Having a roof over his head, he would like wheels to move about in town. He would buy a car again on EMI. The Market leader in India is Maruti with about 51% Market share with car models in every segment of the market. From 2 lakhs to 10 lakhs. It has the widest Service Network to boot in India.

Now, what Kapda and Roti.Mr Bajaj would like to do his shopping in malls and hang out over the weekends in places which offer Movies and Bowling. Pantaloon is one the largest mall chains in India with Big Bazaar, Grand Centrals ad Bowling Alleys to boot. They get prime properties at low rentals for being the anchor tenant.
PVR Cinemas offers prime viewing experiences all across India. Given the multiplex ticket prices and the long queue for Movies, this segment cannot be ignored.
UTV Software offers an amazing package of content for Movies to TV Serials to kid programmes. Disney has a 15% stake in the company.

I would look at Indian Hotels and EIH Hotels simply because of the amazing properties they own.

ITC and Tata tea are premium FMCG brands which offer the upwardly mobile Indian just the right products he desires. Tata Tea also has the Mount Everest (Himalaya) premium packaged drinking water.

Coming to Health care. Mr Bajaj would like to access the Best Health care facilities in the country for himself and his family. 2 big pan India chains are Apollo and Fortis. Apollo used to be my favorite, but the aggressive intent and cash rich Shivinder/Malvinder Singh duo tip the scales in Fortis favor. Fortis would have 7000 beds by end of next year.

If the India story has to grow, the above Consumer driven themes cannot be ignored. One of the touted strengths of India is Domestic Consumption. The above companies are best suited to take advantage of the Domestic Consumption Story.
The Great Indian Middle Class is what will drive the surge forward. If we look at companies taking care of their needs, half the battle is won.
The other half of the Battle will be won in identifying companies which help India build the Infrastructure it needs to make the leap from a developing nation to a developed nation.