All set for D-Day: Likely Scenarios

After months and days of speculation, the D-Day is approaching next Friday and let us look at what could be the various scenarios at play here. The rally before the Results does put question mark over the post 16th May scenario.

1. If Modi wins we rally another 5-10 pc. That would be the time to definitely book profits.If you look at 2009, a top was made in next 2 days after the results and then about a 10 pc correction set in. Next 4-5 months, we moved around 4500 which was hit 2 days after the results.

2. If there is uncertainty in forming the Government and if a compromise candidate within the BJP has to be found out then the markets would correct a bit. If there is a hung Parliament, then expect a 15 pc quick correction to take us to 6000-6300 levels.

3. The markets have begun a fresh leg of rally. The first major leg was 5118 to 6340, a rally of 1222 points. This leg began at 5933 giving targets of 7155 or 7910. Now, the tricky part is that if we reach 7155 or there about before the results what next?

4. It could very well happen that the next week may have a significant top in place.

5. As per Elliot, we are on the cusp of 3rd of 3rd wave which is the most powerful wave and will have several strong gap ups in place.

I would post an update on Thursday and Friday based on the prevailing trend which would give us an idea what to expect post the election results.

May - a month of big moves

Historically, the month of May leads to huge moves in the markets. April, as predicted turned out to be a range bound flat month. let us see how May has affected the stock markets.

1. In all election results month of May has lead to huge moves, May 2004 - minus 17.4 pc, May 2006 - minus 13.7 pc, May 2009 plus 28.4 pc.

2. The preceding April 2004 was 1.4 pc, April 2006 was 4.6 pc and April 2009 was 15 pc gain. April 2014 was flat with 0 pc gain.

3. The average high low pct for May is 7 pc above and below April close which gives a range of 6227 - 7124 range for the markets. If we correct before the Results, chances are we may see a rally after the elections.

4. The May low has always been at least 1 pc below April close. So, we should re visit 6600-6650 once before any up move.

5. The present correction is an opportunity to add more stocks as long as the markets remain above 6350. The may high has always been 3-4 pc above the April close usually and hence we should be making 1 more new high in the month of May.

Range Breakout likely

It was another flat week for the markets. The markets have gained a mere 6 points on the Nifty since April 11th on a closing basis. The range bound trading will lead to a breakout or a breakdown in the coming week.

1. The coming week is another truncated week of trading with may 1st being a holiday.

2. The markets seem to be stalling in the 6800-6850 band of trading. since, 6350 is a multi year breakout, the markets will be positive till they hold this area.

3. The FII buying continues but at a much reduced pace. The corporate results are also in and there are no major triggers till the election results.

4. April was predicted to be a range bound month and it has proved to be so.

5. The supports remain the same as mentioned last week, 6610, 6480, 6380 and the markets will be firm sustaining above 6819. This week, the markets could not sustain fresh highs and therefore tanked towards the end of the week.

6. Nothing much is happening in the markets and it is time to be patient waiting for the results of the elections.

7. If a poor monsoon materialized, the sugar stocks could be in focus. my favorite is KCP sugar trading around Rs 19 and giving a dividend of 70 paise. This has been a regular dividend paying company for past several years.

The trick would be to focus on strong dividend paying companies, so that you can hold on, if the markets tank post the results. Live on the dividends and average out the stocks at lower prices.

Truncated Week brings a flat market

It was a short trading week with the markets being in the negative for the first 2 days and making up the losses on Thursday. The highlight of the week were the IT Results.

1. The IT companies posted pretty decent set of results lead by TCS. This lead to a spurt in the IT stocks and the markets. As mentioned earlier, the IT stocks can act as a hedge for a BJP defeat.

2. The FIIs were net sellers on Tuesday ad Wednesday and were buyers on Thursday. The pace of flows has slowed down. In April, they have bought only 4000 crores so far as compared to 25000 crores in March.

3. Reliance results after markets hours on Thursday were ok meeting expectations.With a 3 year perspective, RIl becomes a buy now.

4. Next week is a truncated week with expiry on Wednesday and Thursday being a election holiday. The supports mentioned last week stand and are 6610, 6480 and 6376. If the market crosses and sustains 6819, then we may see new highs.

5. I have worked out certain post poll scenarios, which I would publish on Wednesday.

Net-net, no change from last week, buy on dips and wait for May 16th continues.

Range Bound Market in the first 2 weeks of April

The markets have gained 1.1 pc for the first 2 weeks of April. The broader market is catching up and the front line stocks are taking a short breather.

1. After a blockbuster rally in March, April was supposed to be a range bound market and so far it has played true to form. In March, the FIIs bought almost 26000 crores worth of stocks and in April the figure has been only 3500 crores with the FIIs having sold stocks on Friday worth 362 crores.

2. The markets have crossed the multi year top of 6350 and sustained above it now for 6 weeks. This now becomes a major support and the market should test this support once before May 16th.

3. The targets for the correction remain 6610, 6480 and 6376.

4. Infosys results are on April 15th and will be keenly watched. Markets tend to correct around the Results season and lets watch out for that.

5. Next week, the markets trades for only 3 trading days. the likely range at the beginning of the month was stated to be 6400-6900. we have tested 6819 and now maybe the time to test 6500-6550.

6. The Gilt fund yields have cooled down a bit to 8.95 % and the Gilt funds may give a good return if the interest rate cycle dips.

We are in a bull phase now and every dip is a buying opportunity to be either hedged at the time of election results with puts or part profit booking.

Buy on dips Strategy continues

The markets closed absolutely flat for the week and the FIIs continued to buy. The markets displayed some very strange behaviour this week but which also implies bullishness.

1. The markets took a dip towards the end of the week. Logically, the Puts should have shown an increase in value where in fact they lost money. The markets corrected 80-90 points from the top and the Puts lost money. I am seeing it for the first time in my life except for event related days.

2.April is a slow month as there are 4 trading holidays.

3. The opinion polls are predicting BJP win which will ensure that markets remain buoyant till the elections results are out.

4. The yields have again shot up, good time to add Gilt funds.

5. Targets for this correction could be 6578, 6456 and 6355. Beyond this I do not see the markets correcting further before the elections.

6. In Diwali Picks I had recommended Godrej Properties at Rs 370 post split at Rs 185 it is now at Rs 225 and Larsen at around 1000 which is now around rs 1300.

Larsen is a good proxy for the markets. If the markets move up then Larsen has to go up.

April seems to be a leisurely month. Buy on dips and wait for the election results.

How have the markets fared in April historically?

March seems to be a very positive month with the markets already gaining almost 7 pc. We are in uncharted territory now, and let us look at how the markets usually behave in April.

1. We have had a rally from 5933 to 6703 almost a rally of 770 points. A breather of 300-400 points is necessary to begin the next move up.

2. Out of last 13 years, April has been negative 6 times which does not say much. Every year, the low has always been at least 3-4 pc compared to March closing which means 1 visit to 6400-6450 zone is likely.

3. Also, the high has always been 1-2 pc higher than March close. So, either at beginning of the month or end of month we will see the markets going to 6750-6800 levels.

4. When March is positive, then April also generally tends to be a net net positive month. April is also a month where there is no substantial downside or upside so a range bound month is likely ahead.

5. The likely range comes to 6400 to 6900.

If we look at the Elliot waves, then some kind of wave seems to be coming to a close from 5933 to 67xx. since, we are in a bull market the correction should bring the market to 6521, 6408 or 6320. I do not see the markets going below these levels in the month of April.

Strategy for the elections:
Looking at the markets at new highs, and breaking the log term resistance of 6358, best is to buy on dips and hence portfolio with Puts nearer to counting day.

Markets continue their consolidation

After a rally of 4 pc in the first week of March, the markets continued to consolidate around the 6500 mark for 1 more week. The markets are taking a breather after a move to new lifetime highs.

1. The Government mopped up almost 10000 crores through the sale of ETF in PSUs and the Axis Bank stake sale. This sucked out some of the liquidity from the markets.

2. The Opinion Polls continue to put the BJP ahead and this is what is keeping the markets up. The capital Goods and the Infrastructure space is coming into the picture slowly.

3. The markets hit a bottom on the 4th of Feb 2014 and then have been on a up move for about 32 sessions. April may well be a month of correction after a up move of about 650 points in 32 sessions.

4. If the markets correct, they would be correcting the move from 5933 to 6575. targets on the downside would be 6424, 6330, 6254 and 6179. Considering that the markets are so bullish, we may not go down below 6330. Also, the 6350 have been the previous top many times and would now act as a solid support.

5. There are select stocks which are still available at good valuations. Godrej Properties, L&T finance, Sunil Hitech are a few which come to mind, where the risk reward ratio is favorable.

6. The next triggers for the markets will be the full year Results after the 10th of April. Till then, in the absence of major triggers the markets may keep drifting aimlessly. also, around 7-10th April, the last round of Opinion Polls will hit the wires before the freeze comes into the picture at the time of elections.

The next week may see the markets being held up to dress up the NAVs of Mutual funds as the year bonuses are dependent on them. I expect the early part of ext week to continue the buoyancy in the markets.

FIIs continue to Buy

It was a week of consolidation for the markets and they had a minor correction to close the week about 0.3 pc down. The coming week is a truncated week with Monday being a holiday for Holi.

There are several key points to focus on:

1. The FIIs continue to buy. As a result, the rupee is strengthening and hence the export oriented IT and Pharma stocks are correcting. also, people are booking profits in these sectors and moving the money to beaten down stocks.

2. The economic data is coming in good as far as inflation is expected ad hence the Banking stocks will continue to rise as the probability of a rate hike in April recedes.

3. The Opinion Polls continue to point to a BJP victory. so, till the election results are out there will not be any major correction, some minor dips which will be bought.

4. Preparing for the worst case scenario, one can get rid of dud stocks in the portfolio right now and focus on high quality stocks. If there is a Hung Parliament, expect the markets to remain down for 1-2 years.

5. Technically, right now a correction can be expected to 6350-6400, the rectangle from which the breakout happened.

There can be 2 scenarios right now, we immediately correct to 6350-6375 or first rally to new highs and the correct.

The fresh up move from 5933 is nearing maturity now. Post this, we will have the correction to this entire up move.

Then if the wave counts are correct, post the Results there could be another blockbuster rally.  What the pre-election rally has done is that it has give people a chance to exit their positions at least once and book profits.

Will the markets sustain the new highs?

It was a stellar week for the markets gaining around 4 pc to close at new all-time highs. The rally was on the back of FII flows anticipating a Narendra Modi led NDA victory. The rally also leads to a few troubling questions. Let us try and answer them.

1. The rally has been led on the back of FII flows of 2500 crores in the first week of March. This is almost same as what they had put in the month of Feb'2014.

2. Now let us look at 2 scenarios post the election results and markets being at 6500-6800 at that time.

a. Narendra Modi wins.

The victory will already been have factored in and what is left on the table for the markets to rise further? A few 100 points further being turning back?

b. Third Front comes to power

If this happens, we will definitely see a down circuit or two. The dust to settle will take a couple of years during which times we will re-enter a bear market.

In both situations, a rise for the markets right now is very dangerous and speculative. Opinion polls do not have a spectacular track record and have a tendency to fail. they usually only point to a trend not absolute numbers.

The current assumption is based on BJP doing spectacularly well in UP and Bihar with seats going from 12 to 50 in UP and to 16 to 30 in Bihar.

Elliot wise,

As per Elliot, we had stated,

A rough labeling of the waves from 5118 can be as follows:

1. 5118 - 6142 (1024 points)
2. 6142 - 5700 (442 points)
3. 5700 - 6415 (715 points)
4. 6415 and on going was the earlier hyopthesis.

Now, the 4th wave ended at 5933 and the last wave up is in progress.

It has potential targets of 6648 and 6957. This would also imply that the rally would exhaust within 3-8 weeks.

We are already 4 weeks from the lows and the rally could terminate within the next 1 month or so. It would make sense to take some money off the table and sit in cash.

The markets have always give chances  to buy whether it was Dec'11,Aug'12, Apr'13, Aug'13. Patience pays.

April-May'14 may just provide a similar buying opportunity.