Buy with a Stop Loss of 728 level for Intra-Day Gains. Target at 832 level.
Sensex (16,429.5)
The positives and negatives of the Union Budget balanced themselves to have little impact on stock prices. But Pranab Da, in a very subtle way, pleased market participants by giving them what they wanted the most – a clear plan to revert back to fiscal prudence. It may be recalled that not outlining a road-map for curtailing fiscal deficit was one of the prime reasons for the 870 points plunge in Sensex on the Budget day 2009.
Higher disposable income in the hands of the small investor through changes in income-tax slabs was a bonus. Since the Government needs a buoyant stock market to meet its colossal disinvestment target of Rs 40,000 crore, market is unlikely to face any unpleasant policy changes, at least in the ensuing months.
FIIs were net buyers on Friday though they have net sold almost Rs 2,000 crore so far this month according to BSE data. Domestic institutions continued to sell through last week. Volumes remained buoyant through the week and spiked sharply higher in the budget session. Expiry of the February contracts has resulted in the open interest coming down to a more sedate Rs 88,000 crore.
There was hardly any movement in the Sensex in the first four sessions, as the index oscillated in a very narrow range between 16,200 and 16,300. Friday's surge led the index to the intra-week peak of 16,669 but it could not sustain there for long and ended the week below 16,500.
We had outlined three possible routes that the Sensex could take on the Budget day last week. The index followed the second path -unable to move beyond 17,000 and closing the week at 16,500. The Budget day is a non-event as far as its impact on the market trend is concerned since it has altered neither the medium or the short-term trend.
It is interesting to note the similarity of patterns in the charts of all the global benchmarks. The medium term trend is down in all the indices since the mid-January peak. A mild pull-back is currently on since the beginning of February. This pull-back has however not progressed sufficiently to signal the end of the January correction.
To put it differently, all global equity markets are moving in tandem and the fate of Indian equities are strongly interwoven with that of the other markets. Since the Union Budget has not been able to scratch even the surface of the market trend, it is back to watching Greece, US, China et al to decipher where we are headed.
The medium term trend in the Sensex continues to be down and inability to move past 17,000 keeps open the risk of the third leg of the down-move from 17,790 peak unfolding that drags the index down to 15,347 or 14,530 in the days ahead. The 200 DMA at 15,910 is the critical support that most market participants would be watching in the event of a decline. A strong close above 17,000 is required to negate the current bearish medium-term view for the index.
The short-term trend in the Sensex is up. But since it is nearing key resistances at 16,775 where the 50 DMA is also poised, investors ought to stay cautious. The index could get back to a lacklustre state in the week ahead and decline to 16,280 or 16,040. The near term view will turn overtly negative on a close below the second target. Resistances for the week would be at 16,670, 16,800 and 17,000.
Nifty (4,922.3)
The Nifty too was confined in a narrow band between 4,850 and 4,900 in the sessions preceding the Budget before Friday's spurt took the index higher to 4,992. That the index was unable to move past 5,000 on the Budget day implies that the medium-term trend in this index continues to be down. If the third leg of the downtrend from the 5,310 peak unfolds now, it can drag the index to 4,599 or 4,357. The 200-day moving average at 4,680 would be the minimum target for a decline. Close above 5,070 is needed to mitigate this bearish view.
The short-term trend in Nifty is up since the trough at 4,675. But it is possible that this uptrend ended on Friday and the index could now decline to 4,870 or even 4,796. Traders can initiate short positions in rallies with stop at 5,025. Target on a move above 5,000 is 5,067.
Global Cues
Globally equities had a tough weak as worse than expected economic readings from the US and resurfacing of the Greece sovereign debt issue dragged stock prices lower. European and Latin American indices end the week 1 to 3 per cent lower. Asian benchmarks were relatively stronger and many of them such as KLSE Composite, Nikkei, Philippines Composite, Shanghai Composite and so on ended the week marginally in the green.
CBOE VIX spiked to 22.6 on Thursday before ending the week down at 19.5 implying that investors continue in a sanguine frame of mind. The dollar index appears to have formed a short-term peak at 81.4 and that should give some relief to emerging market equities and commodities.
The Dow could not move past the key short-term resistance at 10,400 and reversed mildly from there. Support for the week would be available at 10,200 and 10,100. Decline below the second support would mean that the downtrend from January 19 peak is continuing. Conversely rally above 10,400 would send the index to a new 2010 high.
The S&P 500 has also recorded a hanging man pattern in the weekly chart that is a reversal pattern. Key resistance for this index is at 1,110 and it is currently struggling to move over this. The week ahead is critical for defining the short-term trajectory for this index.
Index Strategy: Bear put spread on Nifty
Well, the Union Budget is over now and with it perhaps also the euphoria. As market participants wake up to the real impact of the budget proposals, it is quite likely that much of initial jubilation may die down. We suggest traders to set a bear put spread on Nifty to benefit from such a weakness. You can do this by buying Nifty March 4,900 put option and simultaneously selling Nifty March 4,800 put. This would result in a net initial debit as the strategy involves buying in the money put as against selling one that is out of money. In this case, you will have to shell out Rs 105 for buying Nifty March 4,900 put, while you will receive Rs 70 when you write Nifty March 4,800 put. On the whole, the spread will cost you Rs 35/share.
You can time the purchase and sale of options depending on the day's market movement to optimise your cost. Note that for the coming week, we expect the markets to trend upwards first before it begins to fall lower.
Maximum profit potential: The maximum profit for this spread will occur when the Nifty moves below the strike price of the sold option, i.e. 4,800. The maximum profit, however, will be limited to the difference between the two strikes minus the net debit paid or the cost of setting the spread. In this case, it will be Rs 65.
Maximum loss potential: When your spread is totally out of money i.e. when Nifty value is higher than the 4,900, the maximum loss that you can suffer will be limited to the net debit paid, Rs 35 – that is the money that was spent initially in setting the bear put spread.
This means in essence you would be taking a maximum risk of Rs 35 to earn a maximum profit of Rs 65. Traders with a slightly more bearish view can tweak the strike price of the sold option lower to 4,700. This will result in a slightly higher risk-return payoff. Traders can also consider going short on Nifty with a stop at 5,025.
When to exit?
Traders should consider booking profits and closing the positions as soon as the underlying trends below the strike price of the sold put option. If you feel that the likelihood of the underlying moving down is low, close the position prematurely.
FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
Category | Date | Buy Value | Sell Value | Net Value |
FII | 26-Feb-2010 | 3542.94 | 2701.71 | 841.23 |
DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
Category | Date | Buy Value | Sell Value | Net Value |
DII | 26-Feb-2010 | 1611.02 | 2470.65 | -859.63 |
Finance Minister, in his speech of Union Budget 2010-11, has emphasized on bringing the economy back on growth rate of 9% and strengthening the mechanism of inclusive growth. The Union Budget will not only provide fresh impetus to investment and consumption in the economy but also promote infrastructure development on a larger scale. The focus is on supporting the growth momentum of the economy as well as addressing long-term constraints to growth. Further, the budget continues with the government's plan to improve systemic efficiency through a simplified tax structure.
The budget, while highlighting the strong fundamentals of the economy, has presented a balanced approach towards long-term economic planning and short term considerations of sustaining and broad-basing the momentum in economic recovery.
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Impact Governments' thrust on infrastructural development will benefit infrastructure companies as it would lead to higher order inflows going forward. Higher allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) will benefit companies like IRB Infra, IVRCL Infra, HCC, Gammon and Reliance Infrastructure. L&T, IVRCL Infrastructure, GMR Infrastructure and IDFC are also likely to gain from thrust on Infrastructure spending. Increase in refinancing from IIFCL will encourage banks to lend to infrastructure companies boosting overall growth in the sector. Additional tax benefit for investment of Rs. 20,000 in infrastructure bonds would enable easier financing for infrastructure firms and allocated more funds in different segments such as roads, irrigation, ports, airports, power etc. Higher allocation for irrigation projects would benefit players having expertise in irrigation and water projects like Jain Irrigation.
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Impact Union budget 2010-11 has bought positive impact on the pharmaceutical industry. Continuation of 4% excise duty on formulations may prove beneficial for companies including Cipla, Aurobindo pharma, Ipca labs, Cadila Healthcare, Ranbaxy, Piramal Healthcare and Sun Pharma. Drug makers could also indirectly benefit from the higher public healthcare spending as that would create health related infrastructure. India is an attractive destination to outsource R&D work because of its low cost and high skill advantage. Global MNC's looking to reduce their research expenses prefer countries such as India for outsourcing their manufacturing pipelines. Therefore, the proposed increase in weighted deduction for expenses incurred on recognized in-house scientific R&D from existing 150% to 200% will prove a boon for the Indian pharmaceutical industry. Although this move would have been even more welcomed if the time limit for these weighted deduction benefits had also been extended. Finance Minister has also announced that an annual health survey would be carried out to prepare the district health profile of the rural populace with an aim was to improve availability and access to quality healthcare for people living in remote areas. This will also help increase in demand of medical equipments and drugs in the domestic market.
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Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES. Disclaimer: "I do not make any warranties, express or implied, as to results to be obtained from using the information in this e-letter. Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report." |
Arvind Parekh
+ 91 98432 32381