Interest Rate Hikes: More to Follow

It was an Action packed week, with RBI Policy, RIL Results and Options Expiry. The week also offers pointers to the future direction of the markets.

1. RBI hiked Repo Rates by 25 basis points and Reverse Repo by 50 basis points. Repo is the rate at which RBI lends to the banks and Reverse Repo is the rate at which it borrows from the commercial banks. The CRR or the Cash Reserve Ratio was left untouched.
2. The RBI sent out a message that further rate hikes were imminent. What does this all mean? It means for one that you would get more interest for your fixed deposits. Already many banks have started increasing the rate of FDs. The reason for doing this also because the credit growth is much than the deposit growth. There is also too much easy money available for speculative activities.
3. By increasing the rates, it would be more expensive for borrowers to borrow, thus cooling down the economy. The whole balancing act for the RBI is to keep the economy growth while at the same time not allow inflation to spiral out of hand.
4. Home loan and auto loans will rise though not immediately. The very fact that there have been 3-4 hikes this year and interest rates of loans have not gone up shows how much excess cash is there in the system.
5. The RIL results were just about ok. No great surprises. The surprises lie in the future with KG Basin gas, Shale gas, and the broadband activities. The stock reacted negatively to close about Rs 1015. If RIL does not rise, the market is going nowhere.
6. ONGC posted poor results on subsidy outflow. I would avoid this stock and go for Cairns instead which is pure Oil play.
7. The Options Pain came correct and we had this series expiry at about 5408. Remember usually the only guys who make money are the Option Writers.
8. The Result season is out, the monsoons are factored in. There are no triggers to move the market yet. The market will continue in this range for some more time or some negative news globally would bring the markets down.
9. The Bollinger bands have contracted and the width is just 130 points. Last time such a contraction happened the markets tanked. Watch for the breach of 5352 or 5449 to go short or long. 5352 on the Nifty is crucial also because it is the low of past 3 weeks.

Option Pain

This is Option Expiry Week and lets look at what Options Expiry is all about?

The definition for Option Pain taken from Optionpain.com is:

"In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group."

In this definition, we can extract the following assumptions:

1. The Options Game is a Zero-Sum Game in which 1 party loses and the other party wins.
2. The Option Writers are usually big institutions with enough Capital to move the Market towards the strike price where maximum Option Buyers will get nothing.
3. This is precisely the reason we find that during many expiration, Markets are held up till Expiry day and once Expiry is through the markets stop rising or vice-versa.

Below is the snapshot from Options Oracle Tool for this expiry. The Max Pain is at 5450. This suggests an expiry between 5400 and 5500. Lets see if it comes true.

Markets Next Week

The markets have certain key events lined up for this week:

1.The RBI Credit Policy on Tuesday 27^th July. A Repo and Reverse Repo hike of 25 basis point is already factored. If there is no CRR Hike and no 50 basis points hike in Repo and Reverse Repo then expect a relief rally

2. The Stress Tests are done with. 7 out of 91 Banks failed. The jury is still out on whether the tests were rigorous enough. Expect the party to continue for a few days more.

3. This rally is 8 weeks old and achieves times equality with previous rally. I expect that this week may end on a negative note week-on-week. If not, then we are onto something very bullish. All Rallies since March 09 have been diminishing time – wise.

4. The Monsoons are no more a worry and the results have been overall good. The only way a downward trigger is from global factors.

5. It will now take a Black Swan event to cause the markets to crash now. Check out what Black Swan means on google.

6. The Breadth is poor and number of stocks making new highs is very less. Classic Distribution? Time will tell. Reliance is stuck at 1060 and for the Markets to comprehensively move up Reliance has to go above Rs 1100.

Cardinal Climax

Have a look at this interesting read.

http://seekingalpha.com/instablog/234091-hewitt-heiserman/61457-rare-cardinal-climax-planetary-alignment-this-summer-puts-stocks-at-risk-says-veteran-sky-watcher

Archie Crawford is one of the best financial astrologers living

Bharti Airtel

I had written a guest post for Subhankar's blog. Here is the link for those interested in knowing about Bharti and the Telecom space.

http://investmentsfordummieslikeme.blogspot.com/2010/07/bullish-case-for-bharti-airtel-guest.html

World Economies: Where do they stand

There are 2 very important indicators which I like to track to see where the World Economies are moving. Stock Markets are just an Indicator of the Real Economic Activities. They may or may not reflect the actual underlying strength or weakness of the economy. They may run up ahead of the fundamentals based on hope. A hope of a better future.
Job Growth and the Housing Market are key barometers of how well a country is doing. why jobs? Jobs offer employment to people giving them money to spend.Most of the World economies are driven by consumer spending. If the consumer has no money to splurge who will buy luxury items? Housing markets indicate how well the real economy is doing in terms of construction activity, steel consumptions, again jobs for people, the spending power of the people.
Lets take a look at America. The Case-Shiller Index is a benchmark Index for housing. The 20 city index is about 30 pc down from its peak and is at 2003 levels. As per them, home prices do not show any sustained recovery. If Housing has not recovered in spite of the stimulus and waivers given by Obama, US still remains in a hole.




More Details can be got at:
Case-Shiller Index

Lets look at the jobs data.
The unemployment rages between 9-10 pc officially.Now this data is on lower end of the estimates. Why? It does not include people who have stopped looking for jobs or had to take up part time employment since they cannot find full time jobs. Real unemployed may well be twice of the estimates about 20 pc.




Now, the Dow is 10200 levels. Where was it in late 2003? The Dow was at 9300 with an unemployment rate of 6.3 %. The economy had just bottomed out and was beginning the boom years.
Unless Housing improves and the market improves, the Dow is overpriced right now. A good correction of 2000 points should be on the cards.


As for our markets, the dollar index weakened to 83 odd levels. It should run into support areas at 82-83 which would be a reversal point.Also, FIIs were dormant during the week, except a huge purchase on Friday of 1100 crores.

Counter point to Paul Krugman

We read what Paul Krugman said on Third Depression.Bill Bonner tears away Krugman to pieces.

Enjoy Reading:

http://www.equitymaster.com/DailyReckoning/detail.asp?date=7/9/2010&story=3

Bottomline: We are still where we were earlier. Nobody suggests how to get out of the hole.

Taran Marwah Posts

I have been tracking Taran Marwah for the past couple of years and he proved right more often than not. I am listing his website below, so those interested can have a glance at it.

http://www.afund.com/afundindia.html?

Enjoy Reading!!!

World Markets Down: Why are we holding up?

It was a tumultuous week for the World Markets. Europe, Shanghai and the US markets tanked. Indian Markets have fallen barely 3 pc from the peak. Why this divergence. In the first part, lets look at the charts.

1. Check the Dollar Index, it topped out on June 7th and a corrective down-move began. This led to a sharp up-move in the Indian Markets. The reason is clear FIIs have been buying no-stop since that day. This is the hot money which chases fast moves. For our markets to tank the Dollar Index will need to reverse.




2. In Oct 2007, The Shanghai Index topped out first. It led the fall and the rest of the world followed 3 months later. In terms of percentage of falls, Indian markets fell later but caught up with the Shanghai in terms of percentage fall.



3. In this year 2010, Shanghai as fallen about 30 pc from its peak. The Indian Market will follow suit and roughly that should amount to a cut up till 12600 in Sensex and 3750 Nifty at the bare minimum.



4. The World markets are all coupled together. The Divergence happens only in the time frame as in they need not tank at exactly at the same time. If the World markets fall, then we will not continue rallying. This is because the FIIs will book profits in India and deploy them elsewhere. Till the time, the Indian retail and Domestic Funds become stronger this will continue.

5. In the next part, lets try and explore the fundamental reasons why we are holding up yet.

Volumes

This week we started at 5269 and after 4 days we are nowhere as yet. On Up days the Volumes are more than down days in the past 4 days.

That means short term markets have more likelihood of rallying than breaking down.