Monday, March 30, 2009

Sensex & Nifty Targets

I have received a long & comprehensive query in the ‘Comments’ section of my previous post on the prevailing status of equity markets by one Mr Dark Knight Abhay. Even Mohit has posed somewhat same query related to targets for Sensex and Nifty and their next course of action.

Dark Knight Abhay's query typically depicts plight of many gullible investors who initially go by words of TV Analysts. Most of the times, these analysts may be speaking from short-term perspective which is often implied wrongly as long-term call by many investors. So, in short-term, what may be a bearish call by these analysts is construed as bearish long-term outlook by investors due to lack of clarity of nature of their call. This induces the investors to stay away from the markets in the times of extreme panic and mahyem. Though, there are other analysts who give calls clearly from the long-term horizon. Below is the query posted by the reader (Abhay) in the ‘Comments’ section of my previous blog posting:

Hi Viral,

The markets are making me mad, the Sensex today crossed 10,000 level, all the resistance made by the TV analysts are broken down. When the markets were on 8000- I missed to buy as this people said that it will reach 7000 - 6000..... Now their target is 11,000...

What can u say about the current rally...? I don’t think it will last long as it's doing what it did last time when it reached 7,700 in Oct. and bouncing back to 10,000 and again crashing...

I have sold some of my stocks… And I wanted to know what’s u r target for Sensex for the next few days and after a month. Waiting for your reply…


Recession feeds into severe Recession:

Slowdown leads to further severe slowdown in an economy. Slowdown phenomenon feeds on pessimistic news of slack in demand & eventual cut in production of output. Slowdown is often coupled with falling prices on the back of fall in aggregate demand. Consumers tend to delay their purchasing decisions to a later period on anticipation of further fall in prices in times to come. This leads to postponing of lift in demand led by pessimistic approach of consumers. The cycle feeds on itself leading to a prolonged slowdown or recession.

Gradual Reversing of the Cycle:

But, sooner or later, this cycle has to break its path of movement and the slowdown reaches the trough of pessimistic approach. The slowdown reaches such proportion that price factor of goods and services are rationalized to very reasonable levels. This is further aided by the cause that demand from the consumers which was constantly delayed on the back of negative outlook has to materialize sometime or other and give way for shopping call. This slowly leads in to emergence of demand at lower prices and consequently gradual pick up in aggregate demand over a period of time. Steadily this leads the way out of the economic rot.

However, this is only one way of uplifting economy and the economy does not necessarily operate on such simple & summarized explanation of cycle of economy. The economy needs lift & stimulus from various sources fiscal, monetary, government spending, trade stimulus, policy reforms, encouraging for disbursement of savings into investments and private sector spending among various aspects that contribute towards a complete recovery of an economy from a long-drawn recession.

Analysts feeding on Pessimistic Sentiment:

Similarly, pessimism feeds into further pessimism. When there prevalence of the pessimistic environment, all possible news from different quarters point towards negative sentiment. This inflates a balloon into a football of doom situation. When such is the extent negative sentiment, even so called ‘Analysts’ prefer to go in the line with the prevailing trend. When markets are moving in almost a linear fashion with a downside bias, Analysts prefer to ride the negative trend further fuelling the wave of pessimism.

However, this story is not comprehensive. There are also other types of Analysts who have tendency to walk in opposite direction of the trend and go out of way to give investors the calls which are ‘Contra’ in nature. They present investors with the other side of the story and signify that markets can never be unidirectional on permanent basis. The trend ought to change sooner or later.

Someone has rightly said, ‘Listen to all possible analysts but take your own call based on informed decision.’ Keep your mind open to let in views of all possible nature and sources – positive and negative. But while making your decision to invest your hard earned money, take as much effort to understand about it as you shall be taking while buying any other expensive commodity from the market.

Technical Views on Nifty:

Nifty is currently trading with the broad range of 2550-3150 since many months. Nifty 2550 levels are equivalent to Sensex 8500 levels & 3150 corresponds to Sensex 10500 levels. Stiff Nifty resistance is long standing at 3150 level & strong support lowly sits at 2550 since quite some time now.

Nifty levels of 3150 has been tried and tested for as many as 3-4 times in past 6 months but all attempts in vain against this strong resistance level. Nifty 2550 is the level at which markets had formed a likely bottom on closing basis in the month of October 2008. Within the current broad range of Nifty levels 2550-3150, it has worked out its way for narrow ranges like 2550-2850 and 2850-3150 lasting for several weeks altogether.

On the other hand, on the break-out from Nifty 3200 levels, markets are poised for yet another big relief rally which could extend until Nifty levels 3550-3850 on the upside.A weekly Close above Nifty 3200 is crucial for break-out from the prevailing broad range of 2550-3150.

My Targets for Sensex and Nifty on the Downside:

Below Nifty 2550 levels, Nifty is likely to find some intermediate support around 2250 levels which were tested on intra-day basis during the month of October 2008. Below 2250 the next support is reached around 1800 which shall roughly correspond to around Sensex levels 6000-6500. This is the worst case scenario in my eye for this bear market, which my or may not occur in the upcoming future. As of now, Nifty 2550 levels are implied as current market bottom which are tested approximately twice till now.

Usually, in bear markets the bottoms are tested and re-tested for multiple numbers of times to determine the strength of the ultimate market bottom. So, it can not be absolutely ruled out that markets may again come lower and re-test the ‘so-called’ bottom level of 2550 again to check the knot of its absolute effectiveness.

My Expectation: Nifty may bottom out in the range of 2000-2500 (Sensex 7000-8000) what with some bit of positive news have started trickling in by the way of robust numbers from capital goods & steel sector. These two sector forms a core for determining the pace and development of infrastructural growth.

Nifty Upside Targets & Bear Market Rally:

Interestingly, sometimes in bear markets, the rallies are sharp enough to give gullible investors the wrong signal that a new dawn of the bull phase has commenced. Surprisingly, these ‘Bear market Rallies’ last long enough to woe even most seasoned of the investors in be sucked in by such rallies which almost resemble bull market exuberance.

Most recently we have witnessed markets soaring at a dizzy speed on the back of positive global cues and sentiment. Sensex was around 8200 on 12th March 2009 and it has appreciated steely to 10,000 levels in a matter of 15 days period as on 27th March 2009. Nifty has had a dream journey of 600 points in such short span of time. If indeed this is touted to be one of those classic 'Bear Market Rally', this dream run could even extend to another Nifty 800 point rise from current levels, giving sense of emergence of new but 'false' bull run. This spells target of around Nifty 3850 levels if the 'Bear market Rally' fructifies.

Importance of Nifty level 3200:

Nifty levels 3150-3200 have been tried & tested several times in last half year. This simply means markets have more often than not got over bought around this zone. More so, there is a great deal of Supply around this arena which has till now out done any sort of demand factor. If the current rally which has started from around 2600 levels needs to fructify & balloon into a roaring 'Bear market Rally', the break-out from this stiff resistance levels of Nifty 3200 is a must for any sort of survival for a sustenance of a 'follow-up' rally from here on.

Justification of Bear market Rally:

This next likely upside momentum from 3200-3850 could be on the back of sustained action from efforts by various Central Governments all over the world. Several integrated steps of monetary and fiscal measures adopted by the Central Banks the world over. Add to that a series of stimulus packages & government spending by big-league developed companies could temporarily act as a positive trigger on the back of 'false' signs of revival in various macro economic factors.

This so-called revival may prop up Rupee-dollar equation & foreign inflows into the country further giving an impression of bulging forex kitty. Gradually, the economy would record positive news flow in rate sensitive sectors like Automobiles & Real-estate. But, this all could prove false once the bear market rally is up for wrapping and comes in sync with market weakness and negative global cues.

Fate of Large-caps that witnessed sharp Rally:

More than half of the current market jump from Sensex 8200 to 10,000 levels is on the back of few heavy weight Large-cap stocks like RIL, BHEL, ICICI, Infosys and HDFC Ltd. to name a few. Reliance Industries was quoting at Rs.1153 at the closing of March 11 as against Rs.1548 as on March 27, a steep upside of 35% from the then closing levels. ICICI which was floating at lower levels of Rs.262 at the close of 11th March saw a steep upside to close at Rs.385, an appreciation of 45% from its lows. This was followed by HDFC Ltd. which was around Rs.1255 on March 11 and a sharp rally to Rs.1590 to close on March 27.

On the other hand, Cement major Grasim Industries which had recorded a 52 week lows of Rs.831 during October 2008 has almost doubled up to close at Rs.1606 as on March 27, 2009 on the back of strong fundamentals & diversified presence in the business of Cement and Viscose fibre.

Can these rallies in Large-caps Sustain?

Most of the recent market rally was largely fuelled by large-caps & lack of retail participation saw a low zeal of interest in Mid-cap participation in the rally. One striking fact that comes into my mind is that on previous occasion when the Nifty peaked out around 3150, Reliance and Bhel has established the levels prevailing currently. Which implies, this time around these stocks have out-performed markets and have attained those levels on good 50 points in advance on Nifty & 500 points on Sensex.

From here, even if markets were to rally forward by witnessing a break-out into a new range above 3200, it is highly unlikely that the current constituents of the index which have contributed majorly in the recent up move would participate aggressively as most of these heavy weights are somewhat in short-term over-bought zone. This would indicate that index may have to spurt on the support of remaining major constituents like ONGC, Bharti Airtel, Reliance Communications, ITC and HDFC Bank among others.

Non-active participation of heavy weights like Reliance, HDFC Ltd, Bhel and ICICI would mean that there shall not be a sustained & a consistent up move from here, inflicting a case of highly volatile & fluctuating game for the bull and the bear cartels of the market. Every rally will be consciously met by retail investors exiting at higher levels.

My Sensex & Nifty Targets based on current News Flow:

It is not possible to consistently forecast the market trend & movement as it depends on various factors ranging from investor sentiment, forecasting future earnings, facts and rumors, macro environmental forces, commodity cycles, monetary policies and global linkages among various other factors. We can only conduct our own research and form an opinion based on prevailing facts & guesstimates of corporate earning prospects. As the economic situations changes consequently effecting earnings of the companies, the estimates may have to be adjusted factoring in all possible good and bad news.

From the above, for the time being, I can conclude that Sensex and Nifty may find its bottom around 7000-8000 and 2000-2500 points respectively. Though, the worst case scenario of Sensex 6000-7000 can't be absolutely ruled out in case global markets, especially, the developed markets go for a complete tail-spin and deep long-drawn recession. In any case, a much deeper correction is not feasible for a relatively faster growing and emerging economy like India.

On the other hand, for any sort of sustained 'Bear Market Rally', I see it difficult for Nifty to surpass stiff resistances of 3850-4250 levels.

Strategies for Traders:

For traders active in engaging in various kinds of trade, can have a keen eye on weekly closing levels of Nifty 3150 levels which has acted as a strong resistance on the upside in the last 6-8 months. The confirmation of the break-out can be expected with a closing above 3200 with a Stop Loss at 3020 and initial target of 3550.

Contra Traders: Traders willing to go an unusual bet can approach the markets by shorting around 3100-3200 zone with a Stop Loss of 3250 with an initial target of 2900 , the call based on Technicals of the Nifty movement. This call is 'Contra' in nature, as it is not usually advisable for traders to act in direction contrary to market trend which is 'up' as of now unless Nifty sustains above 2850.

Traders at Side lines: Traders with no open positions should wait out for the time being. They should either wait for a substantial dip and a consequent opportunity to go long around Nifty 2900 levels. Currently, markets are quite over-bought in very near term period. Quite possibly, markets may show a very limited up move as possible from here, & get back to test lower levels of around 2900-3020 in very near term as a 'Breather' pull back.

Last Stage of Bear Markets:

The current rot in global markets finds its roots in the crumbling fundamentals of housing markets with its contagion effects on the Financial sector. Such scenarios are often deep and painful to recover from, especially, if it stands out to be a long-drawn process. Housing & Financials for a major part of any economy as they are indirectly related with many related and ancillary industries that thrive on these benchmark sectors.

With as much as pain witnessed in last more than 1 year, economies the world over would find it difficult and an elongated process to revive themselves from the current rot with wide spread impact which have gradually affected the fundamentals of all possible industries dependent, directly or indirectly, on housing and/or finance sectors.

Slow pick-up of Revival:

Stocks markets the world over has till now witnessed almost a linear fall since more than last 1 year, which signals that the bottoming out process has just yet started. And, bear market bottoms tend to be long 'U' shaped like curves rather than 'V' shaped recoveries that we usually witnessed during the small bull phase corrections.

Bear markets are often characterized by depressed and mouth watering valuations for long time before they see any sort of pick-up in demand from genuine long-term investors. Usually, buyers lack interest in buying during such pessimistic scenarios where the returns from equity have turned negative, leave alone the positive prospects & depressed valuations of the Corporate world. This lack of interest in buying equity as an asset class & a general shift of investors towards debt instruments providing rationalized returns calls for a long-drawn revival over a period of time as sentiment rationalizes from being overly-pessimistic.

Note to Mr Dark Abhay Knight:

"The markets are making me mad, the sensex today crossed 10000 level, all the resistance made by the TV analyst are broken down. when the mkts were on 8000 i missed to buy as this idiots said that it will reach 7000 - 6000."...

When you say the above mentioned lines, it is clearly visible that you were attempting to TIME market entry based on Analyst views. To me, trying to time the market is the worst possible act that investors can do. One can not be successful all the time while looking to time his entry/exit. Not even the best of the analysts can predict such market movements on a consistent basis.

Please don't take it as anything personal against you. In fact, same is the plight of most of the other investors who attempt to TIME market entry/exit.

You should look forward to read my 1st ever article on this blog based on 'Strategy for Investment'. It demonstrates as to why you should not look forward to have pre-set targets either while plunging into markets and even while exiting the markets. There are various benefits linked to using this strategies.

A Request to Readers:
Readers are requested to post their view/query/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive Comments section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.


Anonymous said...

Dear investor/expert
This is one of the best blog I have come across after a year or so thanks for the same.. keep posting good updates.
comming to investing i think one company godrej industries can be added to core portfolio as it has diversified business and good land bank for godrej properties.. also it has signed a MOU with gujrat for $1 bn to make residential propertied on SG highway.. wikraoli property is also plus point.. please look at it also

Amar said...

Hi Bull

Great job, knowledge sharing with all the readers with updated situation will be highly beneficial for all the readers. thanks and keep updating us with your useful vision and knowledge

Thanks & Regards

mohd said...

Hello Viralji
thanx for writing a very good article about SENSEX and rationale of its movement in past and future possible movements. its very informative and make me understand about Baer market rallies. it is not possible to time market and after burning my fingers my conclusion is that follow a plan and stick to it. thank you for sharing with us your ideas.

Shabu's said...

Dear Bulls,

A very much timely and commendable Job. Keep it up.

Anonymous said...

Avoid stock market until july 2009.This is my fourth post here,i warn every investor,big fall on cards in month of may-june- Screen will show new lows-- Sensex below 8000 & possibly @ 7200. 20-25% fall in may-june month.Stay away from market.

Mohamad Shaved said...

Hi Bull,

I am following your blog since last few days.
You explain everything with so much details and logic.
Hats off to you Sir.
You are really doing a great work.

Mohamad Shaved


hello viral.

thank u vey much for the reply.!

i am actully not trying to time the market ut looking for a margin of safety,that iam some where near the bottom when invest..

again thank u for the reply and i have been follwing ur investin stratergy ever since u posted it..


Mohit said...

Hey bulls,

Thanks for wonderful post, what do you think would be impacts of the US Auto Gaints failure to indian markets......which companies do you think other than TCS would be most affected.

Viral Rajnikant Dholakia said...

Dear Readers,

Today (2nd April) we have seen Nifty closing above crucial 3200 levels on the charts. Technically, there is still a minor hurdle around 3250 for this benchmark index. But, this almost seems as a break-out led by global cues. Though, some times break-outs could also be 'False' in nature & such rallies tend to fizzle out sooner rather than later.

So, we still need to see whether Nifty manages to attain one more weekly close (or 2 consecutive close) above 3200. If yes, we're certainly in that new break-out range (which i expect to be a broad one, say, around 3150-3550-3850).

But, investors should not get swayed by any such rally. It could just be a 'range' break-out & confirmation of market trading in a new range altogether. But, by no means, in a new bull market. The bear phase is here to stay for quite some time. Bear phases do not end with just 1 year of sideway consolidation.

Traders can play their game depending on the market movement. They can create fresh long above 3250 with a Stop Loss of 2950 & Target of 3550-3850 in the medium term. But, first let the trend break-out confirmation come by checking the next week's close or a close above 3250 for 2 consecutive days.

Investors should remain cautious & not get fooled by the 'Bear Market Rally' as commencement of a new bull phase.

Dear Mohit,

Other than TCS, even Wipro has some exposure to GM outsourcing deals. But, for TCS, the auto giant finds its place among Top 10 clients in its list.

In fact, I would say, if by chance GM goes Bankrupt & TCS sees value erosion in short run, it would be a good pick around Rs.400-450 for long-term investors.

Apart from TCS & Wipro, there may be small auto ancillary companies that are involved in supplying parts to the auto giant on the verge of bankruptcy. But, it needs to be seen whether US government is a mere spectator in allowing this auto major to file for Chapter 11 clause related with Bankrputcy.

More than auto-part suppliers from India, US auto ancillary market may be more severely hit on the back of GM and Chrysler in a weaker position.

Shalu said...

Hi Viral, in your opinion, which small cap stock/s, if held over long term period can give substantial gains? Thanks

Viral Rajnikant Dholakia said...

Dear Shalu,

My next posting is dedicated towards equity stocks from 'SMALL-CAP' category.

I hope you can find the answers to your specific query on small-cap stocks in the next blog post.