Prakash Kumar

Indian equity markets were caught in a global vortex and a market which was broadly speculated to test various resistances past 5200 on Nifty was actually using resistances to rest at sub 5k levels. Massive unwinding of call/long positions coupled with fresh puts/shorts took out various critical support levels with seamless ease. As margin pressure grew the vicious cycle took out additional support levels both for Nifty and individual stock futures.

Most depressing thing of this bear hug was that market was crashing on very high volumes – which are a very bad sign. Day after Obama signaled some sort of curb on Banks towards their exposure to riskier asset class – we traded highest daily volumes every recorded in Indian trading history. Additionally, China triggered tightening of liquidity and demand for oil has dropped inspite of a bad US winter. These are indicators of a nervy sequence of events.

 

Two three days in a row we saw a gap down opening, followed by a technical correction to a point which as per common sense is the best position to initiate fresh shorts. This trend however appalling was used by almost the entire financial intermediaries. Only savior during this fall has been the DII’s who approximately bought around 65-75% of what the FII’s sold. If, DII’s had turned bearish – market would have been on a free fall trajectory.

 

Difficult to understand why Indian market fell to global tunes when neither fundamentally anything changed at the onset of 2010, nor the numbers posted by various companies were any muted. IT, Reliance, Auto, Cement, Sugar, Oil and Gas have all come up with stellar numbers. Only muted sectors have been Telecom and Bank – but they too are ahead of expectations. Yes, the expectation was high –but then they were met as always. However market punished even the good companies for what was happening outside peninsular India.

 

Two sectors traditionally are defense sector – in a sell off scenarios, investors are seen taking refuge in Pharma and FMCG. Same trend was seen during Jan’10 sell off.  So, altogether market caught the recent downward journey by surprise and is resorting to known techniques of hiding. Mid-cap and Small cap always take the brunt of these sell off – and so was this time around. Broader market which saw huge run up on various counters in the past 2 quarters is looking very weak technically.

 

What do we say – in existing situation? Opinion is easy to get and everyone has one – so here we go.  In our opinion, market is giving too much weightage to Global indices, pending Reliance-ADAG case, credit policy and forthcoming Union budget. However, this justified the old age logic that market does not like un-certainty and better these are behind us – market can look ahead and secular Bull Run might return.

 

Many readers had asked me a question – why Nifty could not break 5300 significantly in first half of January when all indicators pointed to a breakout. Reason is simple. Nifty – the index the way it is structured is far too much weighted on Oil & Gas sector. Reliance and ONGC in particular – this is one sector which did not participate at all in the rally. ONGC always has the “iff” factor on account of its public sector credentials and Reliance is lost in a pending court case, selling of treasury shares ahead of result, a shrinking refining margin.

 

All dips are good buy for quality stocks like Reliance. Investors should not panic – however the upside is limited to an extent. Budget is expected to be tight on tax front and we expect market to run up to the budget – only to lose its shine on budget day. RIL-ADAG case – is a Boolean outcome for ADAG – a massive fall or a massive rise (high beta component) while it is expected to be a more +/- 10% thing for Reliance either way.

Credit policy will tighten nose around interest rate to tap inflation and we might see further downside to Nifty in its run up to the Credit Policy.

 

Bernanke most likely will get another term – backed up by Obama which at best would mean a continuation of polices and US as of now has no option to leave its interest rates unchanged and not play its monetary policy. US however would need to see the ratifications of proposed health care bill and its skyrocketing current account deficit – impact of both will be huge.

 

Action Items:

1.      Hold of Blue chips at current level. Buy on dips. Exit before budget.

2.      Avoid leveraged position both on long and short side.

3.      There is no compulsion to trade – this is take it easy times.