What Exactly is a Market Crash?

What Exactly is a Market Crash?
Summary of an Article from www.stock-market-crash.net:
http://www.stock-market-crash.net/what.htm

The above site which has wonderfully narrated the periodical moves and psyche of investors towards stock market's bull and bear phases. The site has explained the way in which the so-called 'Smart Money' takes entry into the market by way of gradual accumulation at lower levels where valuations are cheap and below its intrinsic value, but retail investors fret to take entry at this point in time due to over-all saggy investment mood.

The site elaborates as to how smartest accumulation takes place at lowest levels & gradually other lesser smart funds take entry at the 2nd lowest step of market with inside news of recovery spreading over. It further elaborates as to how retail investors remain a mere spectator during the above phases of smart money entry into the market and how the gullible lot enter at valuations which could be termed as 'Fair' but not longer cheap. It says that once the retail investors start earning money fuelled by over-all optimistic environment, the sophisticated lot gradually takes the Exit route and moves towards safety net as valuations move forward from 'Fair' levels to 'Expensive' levels.

The site further cautions our attention as to how a number of companies become public and come out with IPO to sell their story amongst gullible retail investors. The optimism reaches such high horizons that the lessons from the just-witnessed extreme bearish conditions are forgotten and 'Money-making' becomes the mantra from tips and recommendations from Brokerage houses and other smaller agencies.

Note: Readers can Read this Article in Detail by Clicking on the Link attached at the start of this post. This is Not A Paid Review Of Any Kind For The Above Site. I've posted this link for the benefit of the new investors who would find this article helpful in determining the different phases of markets without being carried over by the prevailing phase of excess euphoria which has seen Nifty jump from 2500 to 5000 with in a short time span of just 1 year, which needs some sort of consoldiation/correction before the upward journey flourishes in a big way. I was able to co-relate with some of the inputs in the article with the recently witnessed bust and boom rounds of last 1 year in Indian stock markets.

Readers' Comments Are Welcome From Those Who Are Willing & Eager To Share Their Experience & Lessons From Boom-N-Bust Cycle Witnessed Recently.

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 kind/nature for your trading and investment decisions and its consequent results.

Markets in 2010

A fortnight away from the dawn of the calender year 2010 and in trying to address queries from some of the readers as to how will the markets fare in this new year, let us do some crystal gazing about the market levels and it's gyration in the year 2010. Doing so could be as tough as gambling with lowest probability of our prediction coming true. The only base that we have to predict the future course of market for here is- the performance of the equity markets in the preceding year 2009 and development and diagnosis of Corporate fundamentals post economic slowdown mostly inherited from global recession.

First, let me jot-down a few determinants which could go down farther in influencing the equity market levels in the calender year 2010:

1) Steep rise in Global financial markets:'V'- shaped Recovery in 2009.
2) Health of Global economy especially US and European Nations.
3) Pace of development of Emerging economies.
4) Sustainability of Corporate Earnings in line with market valuations.
5) Management of Stimulus measures by global Central banks.
6) Control over Inflation: Crude, Metals & Food Article Prices.
7) Fundamental shift in key Policies & Currency Rates.


Coming back to Equity markets in India, which has seen the most extreme of pessimism and optimism in a matter of last couple of years, the benchmark index Nifty has swayed like more than a see-saw from the highs of 6000 levels to the trough of 2500 in the year 2008, only to bounce back from the jaws of slowdown to reach 5250 levels just as I am writing this. The jump has been a spectacular 100% plus from the extreme lows, mostly aided by global recovery led by stimulus measures from various central banks.

The optimism sensed since last one month reminds one of the peak of any bull run where almost all mid-caps and small-caps have participated in the rally with vigour. But, the point to ponder over here is that we have already doubled from the lows in a span of short time of 1 year. Is it possible to keep posting such spectacular gains time and again? Is it possible to register another 20-30% rally in next 1 year?

The answer lies in the fact that if the corporate earnings over next 1 year shows signs of as much of robust growth as equity market returns, it could well be a dream come true. But, if the above condition is not fulfilled and market goes on to notch yet another 20-30% returns in 2010, it could be termed as a 'bubble', which is not backed by appropriate earnings growth from corporate world. The bubble could be due to excess liquidity around the globe or any other reason leading to favouritism and growth of market levels in particular area, with little support from corporate growth.

This draws us to conclusion that most probably the first-half of calender year 2010 could be a year of consolidation or a mild correction. Also, if one takes note of the market rally in last one year, it was in line with most of the global markets and in sync with other emerging market rally. If, for any reason, the global rally is to stop over medium term horizon, it is quite likely that Indian markets will also catch the flue and may need some rest time.

However, based on the highlights and performance of the upcoming March and June 2010 Quarters, markets may bounce back around last quarter of 2010 and possibly first half of calender year 2011. This could be the time, if all is well with the globe, when Sensex and Nifty might try inching to a higher horizon, say, cross previous highs and much higher targets. However, above is simply a guess-work and prediction into the future with no guarantee of what will markets do in times to come.

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 kind/nature for your trading and investment decisions and its consequent results.

Market Mantra: Valuation By Time Parameter

"Old Time, that greatest and longest established spinner of all!.... his factory is a secret place, his work is noiseless, and his hands are mutes." ~ Charles Dickens

In this post, we'll see how the ticking time gradually killed the valuations of some of the renowned stocks based on some negative impact which led to under-performance of these stocks on the bourses, even as the over-all market valuations are quite near to those witnessed at the peak of the bull run last time. Read on...

The Adventurous Journey

A year back when equity markets the world over were at the helm of extreme pessimism, who would have imagined that the benchmark index Nifty, which witnessed a trough of 2500, would be at 5000 plus levels as early as December 2009. But, that's how stock markets work, contrary to imagination of most of the market participants. The recover in itself is not surprising but the 'pace' of its journey has certainly stumped most of them including the ones involved in the forecasting job- the Analyst community.

Market's Collective Wisdom

In this post, the discussion will revolve around how markets have valued some of the prominent stocks from various different sectors and industries, spanning the journey from previous bull market to the recently witnessed great recession and from there back to current spate of revival and recovery on the equity bourses. What are the aspects that the markets have taken a prior notice of, before giving the right kind of valuation fit for respective individual companies discussed below.

Factors Determining the Valuations

While deciding the kind of valuation that each of these individual companies deserve, markets have taken into account as to how these listed companies have fared all through it's journey from optimistic bullish times to pessimistic slowing times of global recession. How has these companies managed their all-important 'Cash' reserves? How has these companies fared in the process of cost-cutting and rationalization during the slow-down times? What is the impact on their 'Order Book' due to slowing global demand?

How has some of these companies managed their 'Leveraged Buy-outs' which were executed during the times when liquidity was flush in the system? Have these companies entered into M&A deals which did not warrant high valuations? How capable are these companies in servicing their debt taken to fund their expansion plans? Are they in position to bring down their borrowing costs?

Some other factors that goes into valuing the companies during the journey from bullish to bearish times and back to bullish times are the test that the 'Management' of the company goes through in passing slow-down phases. That's not all, markets also take note of the change in fundamentals of the industry in which the individual companies may be operating in. Say, for example, the Telecom sector - the prospects for the individual companies have worsened after cluttering of new entrants in the space leading to 'Price Wars'.


Now, we shall directly deal with selected few individual companies and see what math has been worked out by the markets in determining the valuation for these companies on the Indian bourses:

1) Suzlon Energy: This much touted stock from the renewable energy space got a rude treatment from the markets based on its performance. The company, which is involved in wind power generation, had taken a huge debt to fund the buy-out of firms like Hansen Transmission and REpower.

The woes continued for the company with the instances of blade cracks on more than one occasion during the operation of the wind turbines. The company had to provide for blade retrofit & replacement compensation to the clients. The markets clearly gave a thumbs-down to this inefficient management and repetitive product accessory-related woes experienced by the company all this while. This stock, whose all-time highs lays some where between Rs.400 to 500 levels, is currently quoting around Rs.80 on the bourses way below its all-time highs.

2) Punj Lloyd: This company which is one of the biggest Engineering & Construction player after L&T, and specializes in laying pipes and building oil and gas storage tanks and terminals, got no better treatment from the bourses. The stock corrected from its all-time high of Rs.600 to a trough level of Rs.70 when Nifty bottomed out at 2500. However, during the rise of the benchmark index from 2500 to 5000, this fast-growing mid-cap engineering stock could merely double with currently quoting at Rs.200 on the bourses, as against its all-time highs of Rs.600. The company's results got negatively impacted due to litigation between its UK based subsidiary Simon Carves and SABIC Petrochemicals.

While comparing the stock with L&T, the markets have given thumbs-down to Punj Lloyd with respect to the fact that most of the L&T operations are domestic oriented. So, during the global recession, it is but quite obvious that Punj Lloyd was largely impacted with it's wide presence across the slow-down infected globe. Also, during the ongoing recovery, India has shown sharp recovery (and hence better recovery in stock price of L&T) as compared to other developed and developing markets where Punj loyd has more prominence. Thus markets have tagged a few genuine reasons for the under-performance of stock price of Punj Lloyd vis-a-vis L&T; like slow global recovery than in India, decline in oil consumption & consequently its capex requirement due to low real demand for oil and gas, among others.

3) Alok Industries: This company is a leading textile manufacturer whose order book is full and providing good revenue visibility. The company has also witnessed a sustained growth in its revenues and profits. This stock had witnessed an all-time high of around Rs.100-105 during the peak of the bull run at Nifty 6000 levels. However, currently the stock is quoting at around Rs.20 since quite a long time. A sharp run-down in the stock price as compared to it's all-time highs.

The stock has everything positive about it; right from catering to major retailer like Wal-Mart and having domestic presence in form of H&A stores in the retail segment. However, the major aspect that is going contrary for the company's stock valuation is it's High Debt-Equity Ratio. Though, with the recent Right issue by the company, the high debt ratio is likely to moderate to some extent. Most of the company's interest liabilities for its long-term debt is subsidized under textile promotion scheme. But, certainly, markets have clearly given a thumbs-down to a good business model of alok Industries due to its High Debt-Equity Ratio.

4) Aban Offshore: Oil services firm Aban Offshore which lets out oil rigs for hire bought Norway's Sinvest three years ago in 2006. The company has about Rs.16000 crore of debt on its books with exorbitant high debt-equity ratio. The markets have given an extreme thumbs down to this company when compared to its all time highs of Rs.5000 to 6000 during the bull run as against Rs.1200 quoting currently.

Apart from this, the global slowdown & collapse in crude oil prices led to fall in capex towards oil exploration activities leading to slump in letting-out rigs to oil companies. This slump in demand for its services along with high interest rates payable towards acquisition of Sinvest led to fall in income for the company.

5) Tata Steel: On acquiring Corus, Tata Steel went on to be the world's 6th largest Steel maker. The Indian steel maker had acquired Corus for about a whooping $13 billion two years back in a bid to have a global presence. However, the subsequently following global crisis led to demand destruction for steel in reduced demand in sectors like automobiles and construction, particularly adversely affecting Corus performance & operations. Tata Steel incurred a consolidated net loss of Rs.2710 crore in the quarter ended September 2009. The stock made an all-time high of Rs.900-1000 during the peak of the bull run & is now quoting around Rs.550, indicating a steep discount to the peak prices then.

6) Bharti Airtel & Reliance Comm: Bharti Airtel, along with Reliance Communications, are the stocks from the Telecom sector which are under-performing big time on the bourses due to the intense 'Price Wars' among the telecom operators. During the previous bull run, when these stocks were distinct out-performers the record subscriber additions & rising ARPU's were the major attraction.

However, as time passed the Tier 1 cities have almost turned 100% wireless by now, more so leaving the scope of expansion only in the rural India & somewhat Tier 2 and 3 cities. Not to mention the upcoming Mobile Number Portability which will intensify the competition. This all reflects well in the current low valuations even in rising markets. Reliance Communications whose all-time highs lay around Rs.800 is quoting at a fraction of its peaks at Rs.180 currently.

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 kind/nature for your trading and investment decisions and its consequent results.

Structural Shift in Momentum

Change of Baton

1) From what was clearly a tapered rally from expensive Large-caps to under-valued Mid-caps, is now turning its head from Mid-caps back to the Large-caps. There was no possibility of the benchmark indices moving higher without the support & participation of the leading heavy weight counters.

2) The expensive heavy weight stocks are back in the vogue what with an all-important event in the form of Union Budget not so far away. However, mid-caps are not the absolutely forgotten lot. There is still a bullish tend prevailing amongst the mid-caps but in ones which are left behind in the race of mid-cap momentum or the ones that stand to benefit majorly from the Budget announcements.


Passing the Parcel

This shows to a great extent that mid-caps, which had under-performed big time during the last 3 months to their larger counterparts, are no more in 'Comfort Zone'. Speaking comparatively, even large-caps are no less cheap than their smaller counterparts. But, perhaps, they can support the ongoing phase of euphoria more strongly on the base of their superior fundamentals.

It is difficult to predict the top of this 'Mini' bull phase of last 3 months. But, we can keep tracking the signs the markets are providing. Like, for example, we saw Large-caps bloom in the initial part of the rally from Sensex 8000 to 10000 levels. Later, from Sensex 10000 to 12000 levels, we got to witness large-caps being valued in the 'Fair Valuations' Zone. At the same time, mid-caps which had under-performed from Sensex 8000 to 10000 levels , started catching in the later part of the Sensex journey from 10000 to 12000 levels.

In the later part of the excess euphoria from Sensex 12000 to 15000 levels, based on combined effects of excess global liquidity & re-rated fundamentals of India on the back of Political stability and likely Reform movements, we witnessed large-caps attaining euphoric valuations which needed support on the base of 'Forward Earnings' estimates. Mid-caps & Small-caps rised vertically as if there is no tomorrow.

Now, we're witnessing that the baton is being passed on from mid-caps to Large-cap as benchmark indices are up to test newer highs. These are times of euphoria where 'Greed' factor takes the front seat and if investors do not exercise caution, they may be in for some sort of pain when markets witness even a mild correction in the rally. Investors should adhere to patience and not make fresh purchases until there is a meltdown of the over-exuberance in the short to medium term horizon. Though, they can ride the momentum on the back of their already invested portfolio.

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 kind/nature for your trading and investment decisions and its consequent results.

Time to Re-think Strategy

Indian equity markets have rallied a whooping 80% in last 3 months. The rise was linear in fashion and a non-stop rally as if resembling a 'Mini' bull run. Indeed, valuations of most of the large-caps, especially selective index heavy weights, are no more in the 'Comfort Zone'. In fact, some stocks are way ahead of their current earnings performance & to support their high valuations the Analyst community have to use Forward Valuations method while recommending such stocks to their audience.


How to Shield oneself from Euphoria?

During such times, when euphoria is strong and momentum seems unstoppable, investors don't like to sell stocks with valuations beyond their comfort zone. The hope that stock will rally forward even from prevailing high valuations, does not allow the investor to book profits. Their calls are led by emotive decision to keep holding their paper profits. They are reluctant to book even part-profits.

During such times, there are few options that investors can exercise to take cautionary steps. I will divide this strategy into 2 different options in detail:


1) Book Profits in Small parts & Accumulate Cash:

Under this option, selling should carried out in those stocks where valuations are beyond the support from current earning performance. As markets rally further, the ability of such counters to appreciate further in terms of their stock prices is limited to the extent of their valuations. In fact, many-a-times, it so happens that until the over-all market momentum is up, such stocks may rise along with markets but not in line with market performance.

It is advisable to book profits in small parts on every rise in such counters. When markets starts it course of correction, these will be the stocks which will be hit hardly in the initial part of the down leg as panic is fraught where valuations are excessive or fundamentals are not up to the mark. Over here, in large-caps, the fundamentals may be sound; but valuations may be on the higher side, thus triggering sharper correction when market downturn begins.

As smaller tranches of these stocks are sold, investors can accumulate cash from sale of such stocks in anticipation of market weakness over a period of time.


2) Shift to Defensive Category Stocks:

If you don't wish to follow the above mentioned strategy of staying in Cash during an up turn, the other optional strategy could be Selling aggressive stocks or stocks with high valuations. And later switch-on to stocks from defensive category and low beta characteristics. The stocks from Defensive space holds limited potential of correcting when markets are in mid of a down turn.

At the same time, investors' wish of not liquidating even a small part of their portfolio could also be fulfilled as they do not have to liquidate their portfolio but re-jig it depending upon the current situation. They can still take advantage of the up turn in the markets to the extent of price appreciation in the defensive category stocks which of course would be limited to a certain extent during the up turn.

Summary:

1) Liquidate a part of portfolio especially where valuations have gone for an over-drive. Accumulate cash to the part of the portfolio that is liquidated & use it once the down turn is more sustained and the over-exuberance is out of the context. However, you can still benefit from any incremental rally from here in the remaining major part of the portfolio they should would be still intact and invested.

2) Liquidate a chunk of the aggressive stocks and shift the accrued money to stocks from Defensive category which tend to correct relatively much less than over-valued stocks when the tide turns on the bourses. This will also ensure that you need not sit on hard cash just as the up turn wears out its last stage of euphoria.

Some stocks from Defensive Category:
Cipla, Dabur India, ITC, Marico, Glaxo Smithkline Pharma.

By using the strategy of latching on to Defensive stocks, your portfolio may underperform for a while unless the up turn continues its remaining steam. But, one another possibility which can not be ruled out is that, if indeed this is the last stage of the ongoing 'Mini' bull phase, usually such euphoric rallies end with a last leg of rally in all left-out stocks and sectors including Defensive stocks.

So, if this scenario turns out to be true, you can still benefit from price appreciation from Defensive category stocks too. One such recent example is a lagging 'Hotel' sector which showed a good move even on a slightest of a good news in the industry.

(Note: The above mentioned strategies can be used not just in the context of over-heated large-cap stocks but also any other stocks be it mid-cap or even small-cap which have appreciated substantially over last 3 months. Take, for example, you can sell some 20% of your portfolio where the stock prices have over-heated in last 10-15 sessions and shift to Defensive stocks from the accrued money.)

Dated: June 01, 2009
High Risk Call -Opportunistic Trading Bet:

Bajaj Holdings & Investments (CMP Rs.390/-)

Buy Around: Rs.370-400
Target: Rs.422-470-500
Stop Loss: Rs.355-340

Rationale: This mid-cap stock has been an under-performer in the ongoing mid-cap momentum. Bajaj Holdings & Invst. is the holding company for Bajaj Auto & Bajaj Finserv. Both the companies have rallied sharply on the bourses in last 2-3 months.

But, this holding company has not much to show in terms of price appreciation. It has fared only as a market performer & not an out-performer like other mid-cap stocks. Traders who wish to play on this aspect of under-performance can bet on this stock with above targets and Stop losses.

Its a high risk call as markets have appreciated sharply to the extent of Sensex 1000 points since last 1 week.

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 kind/nature for your trading and investment decisions and its consequent results.

Has the Market Trend Changed?

Two queries are posted in the 'Comments' section regarding the Trend of Indian equity markets and its prospects from here, now that there is a major positive in terms of political stability and likely reform movements expected to be announced in the upcoming Union Budget. In this posting, i will try to address both these queries which has a common base and content as my reply.

First query was from Mohit which he had posted on May 16, 2009, the day when poll results were announced. I had purposely kept his query pending as the trend was unclear for next few days. And that it would have been more prudent for me to let the high volatility, which would follow after such a sharp unilateral move, to subside and find its feat in next one week time. So, now I will take up his query in detail in this posting. His query is as follows:

Dear Viral,
What do you think would be new developments after good election results do you think long term investors should invest now or wait for some time. Please write on new entry prices for blue chips and core portfolio stocks.

Do you think we have missed the bus and the new highs would me made in markets and we would not see previous lows or even 10k levels in coming times

There is somewhat a similar type of query but a little more detailed in nature from Santy in the 'Comments' section of my previous post. The query revolves around scepticism about current index valuations and as to what could be the right time for investors to jump into markets from next few years of time horizon. His detailed query is as follows:

Hi Viral,
Unlike most people predicted, that the market will lose 10-15% post the election , it has surprised everyone and is now trading in 14k zone. Look like unless something major like Satyam happens we don't see the market going down much from here.I have couple of questions in this regard?

1) Do u think it is right time for investors to jump in and start accumulating keeping in mind a 3-4 year horizon?
2) Don't you feel the valuations are too high now?
3) If we do have to start accumulating , then till when? Till Sensex reaches 17-18k mark and then put a hold ?One just gets the feeling that we have missed the bottom and no way market is going to go back to the 8-10 k range. So why wait ?Please let me know your thoughts.


Global Economics:

You just have to visit a few steps back to the last quarter of Calendar year 2008 when pessimism was at it peak and the road to recovery seemed as far as at least 2-3 years of time frame. The bear phase triggered by a deep recession in the Western countries and a sharp slowdown in the next Growth engine of the world - the emerging markets, seemed vicious and entangling the world into more and more signs of trouble.

However, gradually, as the pessimism witnessed its catastrophic low during the October 2008, global markets were back on its way for some consolidation at the higher levels. Some specific parts and industries of the Global economy witnessed a mild recovery in the early part of the Calendar year 2009 which triggered a sharp rally in the global financial markets.

Political Stability:

Indian equity markets swung along with positive cues in the initial part of the rally. Gradually, it seemed that Indian markets lagged a bit behind as compared to other emerging markets. However, the day of May 16, 2009, proved to be a game changer for the Indian markets in terms of fundamental shift for the Indian economy.

The Congress-led UPA were elected as a winner by the Indian public. UPA emerged as a virtual majority for the shot at forming new Central Government, this time without the support of the Left party which proved a major hump in the UPA's stint during the previous 5 year term. Indian benchmark Indices BSE Sensex rose2000 points on May 18, 2009. It was the sharpest rally that the any markets of the world had ever witnessed in a single trading session. The Sensex jumped from 12000 levels to as high as 14000 in a single day.

Is there a Fundamental Shift?

Foremost question that comes to the mind of any investors or traders is whether there is any fundamental shift on the ground level to support this kind of euphoria?

The answer could be nothing has changed in one day except the political stability for next five years. Fortunately, that in itself is a biggest positive phenomenon to happen for the Indian economy. A stable government on the centre with a free hand towards pushing Reforms and Disinvestment process would prove to be a major booster to the economy in the years to come.

There is nothing on the ground that the economy can boast of for a change in fundamentals right away. But, markets don't work on present scenario. Markets are way ahead of the ground reality & it speculates right into the future. The current euphoria clearly factors in that the new government will kick-off new reforms movements & likely disinvestment plans in major PSU companies to raise funds and act towards tightening high fiscal deficit in next few years.

The dream of a stable government for next 5 years in itself could be a big positive for markets. Now, that this prospect of stability is coupled with Reform movements, Disinvestment plans & further incremental Stimulus package for the economy, it is but obvious that markets would give a big thumbs-up to all recent developments.

Will FM Disappoint?

The role of Finance Ministry assumes great importance in the eyes of equity markets. Pranab Mukherjee has been delegated the portfolio of Finance Minister. It is said that India, indeed, needed a FM with political background rather than a technocrat for this elite post.

This is from the perspective of new reforms and other initiatives which could be kicked-off more smoothly under a leadership of an able minister. The Union Budget is expected to be out around July end and markets are having a close eye on sectoral reforms & social reforms for the stability of the economy. The FM is also expected to raise money from crucial funding exercises like disinvestment in major PSU companyies. The proportion of disinvestment could be range from as little as 5-10% in profit making PSU's and as best case scenario it could be as high so that government reduces its stakes in these companies to as little a majority 51% stake.

Even a small 5-10% stake sale would garner a big substantial sum for the government which could be used to develop infrastructure projects, filling fiscal deficit, spending for social sectors like education, rural unemployment, rural health programme, etc.

Where are Market Headed Next?

In the medium term horizon, markets will remain range bound. Sensex has graduated to 14000 levels from 12000 levels with a big cause. It would be naive to believe that we would test those 12000 levels again any time soon. Most of the large-cap stocks are no more as cheap when compared to their Earnings performance. This will further bind the market to remain in a tight range if it wants to sustain in the Nifty 4000-4500 range.

That is the reason as to why mid-caps witnessed a sharp rally in last one week. They were laggards to a big extent when compared to valuations in large-cap stocks. Most of the mid-caps have already rallied 70-90% in a week’s time & some have, in fact, rallied more than whooping 100% by margin.

Markets are currently gasping for breath in the form of News & Events to sustain at current higher levels. The next news event is still at least a month away in the form of Union Budget or Corporate Results which ever is earlier. Until then, markets can be expected to hover from Nifty 4000 to 4500 levels.

Medium-term Downside Risk:

Nifty consolidated in the range of 2500-3150 for almost 5 months. Later it witnessed a break-out raising hopes of a new range altogether which could span from 3150-3850 broad range. But, poll results proved to be a complete surprise. Markets had clearly not factored in this case scenario of a clear majority for any specific Political Alliance.

The win of Congress-led UPA alliance came as a surprise to the markets which got reflected in ‘Panic Buying’ by the market participants raising market bar by almost 20% in a single session. The new range has come on the anvil at Nifty 3800-4500 range.

With this, the risk of re-test of previous 52 week lows of Nifty 2500 could be ruled out once and for all. Now, speaking about worst case scenario (whatever it's triggers be), would bring downside risk at Nifty 3150 which is an extremely strong support zone. The all-important resistance at Nifty 3150 for the old 5 month trading range of Nifty 2500-3150; would now prove as a very strong support from here on. The corresponding figures for the benchmark index Sensex would be rougly around 10500 levels.

Is Re-test of Nifty 3150 eminent?

A re-test of Nifty 3150 may not necessarily be eminent. But, a re-test of Nifty 3150 would put Indian indices on a very strong footing as that would amount to big consolidation commencement a start of a new bull wave. But, a re-test of Nifty 3150 won’t be so easy to come by now that we’ve a very stable government at the centre. Possibly only the negative global cues could act as a trigger if we were to re-tests Nifty 3150 over medium-term horizon.

However, there are other crucial supports on the downside from current levels, the re-test of which could be more eminent over a period of time than perhaps Nifty 3150 levels which could be more so a target for the worst case scenario. There are crucial supports at Nifty 4000 and 3500 which will provide a strong guard against any further downside risks.

Are Valuations Too Expensive Now?

Valuations in many large-caps are, of course, expensive. In fact, valuations of some heavyweight large-caps like RIL, ICICI and HDFC to name a few, are way ahead of their current earnings performance. Even particular large-cap FMCG stocks looks a bit over-valued as they have not under-performed during the pessimistic times.

Oil & Gas major Reliance Industries currently trades at a P/E multiple of 21 times at the prevailing stock price of around Rs.2200/- levels. Even financial conglomerate ICICI Bank trades at a steep premium valuation of 22 P/E multiple. Housing loan provide HDFC Ltd. quotes at a steep premium of 27 in terms of P/E multiples.

However, there are still some large-cap stocks which could provide some bit of value even from current levels especially from PSU Banking sector. Though, even they have appreciated quite a bit in last couple of months, they atleast don’t look excessively expensive as compared to their private counterparts.

Is it Right Time to Buy for Long-term?
Have you missed the bus? Don’t fret…

When speaking from investment for 3-4 years perspective, I feel that valuations of most of the large-caps are a bit over-valued at this point in time when compared to their earnings performance. That does not mean that markets will come down very soon. Momentum is strong right now. When Momentum and liquidity takes front seat, valuations have to temporarily take the back seat. Eventually, a jolt will ensure that the fundamentals start dictating the terms again once exuberance is built in excess quantity.

Also markets have rallied to the extent of whooping 75% from Sensex 8000 to 14000 without any time consolidation. This makes the rise too steep, too soon. Markets can not keep on rising unilaterally permanently. It has to take a breather at some time once excess are built to a big extent.

Before we get next big up move in longer-term, I expect markets to consolidate or test lower levels as a step towards showing more solidarity for a larger up move. Take one more case – suppose even if the current momentum-led drags market to higher levels from here, sooner or later the much needed cool-off will be witnessed & the current levels will again come sometime in future. In fact, may be even lower levels. So, long-term investors should not get a feeling of left-out from the rally. They should stick with their present portfolio & ride the ongoing momentum. At least, they could see their losses getting trimmed out.

Note: I would rather recommend like to ask why would investors like to TIME the market entry? There is nothing guaranteed in stock markets. Neither downside, nor upside. Go for a Strategic approach. Buy some small quantity even now & more only on larger dips. I would like to remind investors of the strategy that i had posted in my 1st ever blog post of this site. Please go through it again, it makes decision-making process easy & less dictated by emotional calls. It saves one from timing the volatilty of the market.

Near-term Outlook

Coming to very near term, markets have crossed Sensex 12000 with a cause of a big positive from Political front. This would ensure that we’re not to go back in the old zone so soon. Markets will hover around Sensex 13000 to 15000 zone for some time. Later it has to be seen what kind of resistance is being witnessed at higher levels. It has to be determined as to what kind is liquidity on the side lines makes the beeline for the market entry.

Many left out Mutual funds with huge cash positions have to ensure that they deploy the cash gradually into the markets to shield themselves from the ongoing momentum led bullishness. This will ensure that an able support is determined at every dips and lower levels.

The Big Bull:

A very big resistance and a test for markets will be around Nifty 5250 & Sensex 17000 levels. By above, I do not mean to convey that these levels could be tested. I just need to convey that this is the zone which could differentiate between a dawn of a new bull phase and lingering in the ongoing bear phase. Markets will find strong resistances around Nifty 5250 zone and Sensex 17000 levels. That will be the true test of the current rally.

Summary of the Post:

1) Are Large-caps Expensive?: Yes
2) Are Mid-caps Expensive?: Partly Yes
3) Is it Right time to buy for Long-term?: May be Not
4) So when to Buy for Long-term?: Wait for a substantial Dip.
but at that time don’t fret to buy when there is all-round selling.
5) What are Medium-term Supports?: Nifty 3800-3500-3150
6) How much has Indices appreciated from Lows? : A whooping 75%
7) Short-term Outlook: Range bound in Nifty 3800-4500 zone
8) Are Indian Markets still Coupled with Global cues: Yes
9) What could be the best time to buy for Long-term? Around Sensex 12000
10) Will Markets test Sensex 12000 soon? No, it will test patience.

Trading Call for Short-Term:

Power Finance Corporation (CMP 190)
Buy in 2 Small Tranches:
1st Buy around CMP 190-194
2nd Buy around Rs.175-180/-
Stop Loss: 169/- (Closing Basis)
Time Frame: Around 45-60 days
Target Expectation: Rs.225 when Nifty reaches 4500 levels
which is the upper band of our short-term range.


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 kind/nature for your trading and investment decisions and its consequent results.

Stock Market: The Barometer of Economy's Health

Stock markets are barometer of the economy's health & prospects for the times to come. Markets are nothing but a decisive way towards collective trend of thinking of its participants. The market trend specifies the direction of thinking, regarding optimism or pessimism, in the mind of the market participants. Likewise, a volatile market reflects intense fluttering of ‘UNCERTAINTY’ in terms of whereabouts of forces that dictate market trend.

Stock markets are usually ahead of the ground realities like actual GDP performance and Economic conditions of the country. Like, for instance, the Indian equity markets started plummeting from the early part of the calender year 2008 around the month of January, whereas the worst was experienced by the actual economy in the later half of the same calender year 2008 around the quarter October to December of the same year.

Due to this specific nature of market's tendency of estimating visibility into the future, the movement of the equity markets are based on estimates of the company's future earnings prospects and visibility. That is the reason as to why market's shall often forgive the disappointing performance of company in current period of contention, only if its future earning prospects is healthy and clear.