Decisive Week Ahead

The Markets gave up almost all their gains on Friday and closed up only 0.4 pc for the week. The next week is crucial because the RBI policy is on Friday which will give further directions to the market.

1. If we take the rally from 4720 to 5169, retracement levels come to 4997. 4944 and 4891. Only a close below 4891 will indicate fresh new lows.

2. There could be 2 possibilities of this corrective up move. 1 is that the entire up move is done and we are on a fresh leg down. The other is A-B-C up move and only the A leg is done. B downwards till 4891 max and a final rally up to 5232 or 5350.

3. The rupee has weakened to 46.57 which is way above its high of 44. What this means is that the FIIs are losing money. To take out dollars, they have to convert rupees into dollars. They need to convert more rupees to get same amount of dollars they put in.

4. Crude Oil imports cost goes up and also price of Gold increases in INR terms.

5. The NCDs have mopped up almost a billion dollars of worth and there are no further prospectus lined up. Later during the year, we have NTPC ad NHPC coming up with NCDs with 10 year maturity.

6. Gold has held up very well. It has bounced up after every fall. In rupee terms we are almost trading at all time highs. Gold continues to be buy on dips.

7. The Obama Job plan has nothing concrete in it. In US, thanks partly due to technology jobs continue to be lost and they are not going to come back. For the Eurozone worries also, nothing concrete is in place and that is why the markets keep falling after bounces.

8. Elliot gives 2 possibilities. Of C wave down from 5944, the current rally is the 4th wave of the 3rd down. This means after a fall to 4500-4700 we have a rally till 5300-5400 and then a final fall to maybe 4000 on the Nifty.
It could also be that the current up move is the 4th wave of C and then we shall have 5th wave till about 4300 - 4500.

Whatever the possibilities, upside seems limited and downsides still appear to be about 20-30 pc.

9. The Earnings of the Nifty have gone up by 31 pc in the 3 years since we hit the bottom in 2008. Equivalent bottom of 2008 comes to 2952 on the Nifty or 9832 on the Sensex. If we consider the closing low, it comes to 3276 on the Nifty.
Hence 3300 to about 30 pc above 4300 represents a buying band.
The range between 3300-4300 on the Nifty represents absolute value. In P/E terms this comes 12-15.5.
Strategy could be deploy 20 pc funds at 4300 and 20 pc at every 200 points below it. Which means 4100, 3900, 3700 and 3500. This is just a rough guideline. If the markets rebound, then one could also buy a bit higher.

For those interested in stock picking in the downturn, I am enclosing the link of Lakshmi,

I am enclosing the link of Lakshmi for those who are interested in bottom fishing of stocks.
http://vipreetinvestments.blogspot.com/2011/09/wanna-shop-with-me_10.html

P/E:An update

The Nifty P/E is at 22.89 as of 01st October.

It has exceeded these levels only during the bubble crashes of 2000 and 2008. In 2004, it briefly flirted above this level before falling.

We have 2 scenarios now:
1. It keeps rising to about 28 creating a bubble like scenario. It would break the previous high or thereabouts and the a mega fall.

2. Correct from anywhere here to 5200 zone. Every time it corrects, it comes down to a P/E of 14-16 which would be equivalent to 3200-3600 range.

Right now, the liquidity is gushing with FIIs pumping in 1000 crores daily. I have not seen even in the earlier bull run.

We have the dollar carry trade like the yen carry trade with hedge funds borrowing at low interest rates in the US and leveraging these dollars in India.

These positions will be unwound when the dollar strengthens, (it would take more rupees to buy the same dollars invested) or interest rates rise in the US.

The dollex is showing some signs of rebound on Bernanke comments. Interest rates rising in US will take some more time.

Troubles in China or at home in US could reverse the flows.

Time not to invest aggressively and keep taking profits with trailing stop losses. I would keep a stop loss of 4900 for my investments.