| Market Outlook | ||
| Last week, on the auspicious occasion of Diwali the Nifty tested new 52 weeks high of 6,338.50 and almost neared its all time high of 6,357.10. From here, immediate resistance for Nifty comes in the band of 6,357-6,370 and sustaining above will lead to Nifty 6,440 while immediate support could be seen at 6,225-6,250 mark. Further, MACD oscillator has given a positive crossing over its respective average indicating the positive underlying trend. Indian markets is likely to open in a positive note tracking positive cues from global markets which rose on stronger-than-expected US jobs data. Thereafter, Nifty is likely to consolidate between 6310 to 6360 level before giving breakout either side. Investor's will eye on Q2 results of companies like SBI, Jindal Saw, and Aban offshore which are due today. | ||
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TATASTEEL (BUY)
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| US markets | ||
| US markets closed flat as disappointing results from Kraft Foods and poor home sales data overshadowed a better than expected Jobs report. Early in the morning, Labor Department reported that October payrolls rose by 1,51,000, well above market expectation of 60,000 increase. The unemployment rate remained at 9.6% for the third month in a row. However, data on the housing sector showed that US economy is still in trouble. National Association of Realtors said its pending home sales index fell by 1.8% in September whereas market was expecting pending home sales to increase by 2.5%. In important corporate news, Kraft Foods posted an 8.5% decline in third-quarter profit as higher taxes, jumps in advertising spending and costs for integrating Cadbury weighed on its shares. Starbucks said its fiscal fourth-quarter net operating income doubled to USD 399.3 million and sales rose 17% to USD 2.8 billion. | ||
| European markets | ||
| European stocks managed to close in green after better than expected US jobs report. Initial positive bias came from data that showed Germany's construction activity rose to highest since February 2008. Germany's adjusted construction purchasing managers' index rose to 50.7 in October from 49.9 in the previous month. The latest reading was highest since February 2008 and above the long-run series average of 44.9. However, markets witnessed good amount of buying on the back of better than expected US monthly jobs numbers to register its highest close since June 2008. However, gains were capped as Eurozone retail sales fell 0.2% month-on-month in September, following a revised 0.2% drop in August. | ||
| Indian markets (Prev Day) | ||
| The 45 minutes Muhurat trading ended on a cheerful note as the benchmark indices were seen very near to their respective life-highs at the closing. The markets carried forward the bullish momentum from yesterday's session and opened significantly on the higher side tracking the substantial rally across the Asian markets and strong closing of the US markets the other night. The Japanese market surged nearly 3%, led by short-covering as well as gains in resource shares following the move by the US Federal Reserve to buy more Treasuries prompted investors to seek risk elsewhere, prompting rallies in global stocks and commodities. Soon after the positive start, the rally seemed to get paused for the session as the participants decide to book partial profits at higher levels and the benchmarks were pared some of the early trade gains gradually, though the benchmark Sensex witnessed its Life-Time highest closing above the 21,000 mark. In the sectorial front, the Healthcare, Auto and Banking space remained the star performers of the session and gained by 1.13%, 0.87% and 0.70% respectively. Both the Nifty and Sensex showed significant strength throughout the session and managed on the positive terrain. The NSE Nifty closed above the 6,300 mark, while the BSE Sensex closed above the 21,000 level. | ||
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It was the heady combination of the festive cheer pervading the country, Coal India's rocketing debut and $600 billion stimulus announcement by the US that set Dalal Street ablaze last week and helped Sensex scale the 21,000 peak.
Policy rate hike by the RBI faded away and the Sensex merrily went on to close almost 1,000 points higher for the week. Large-cap stocks once more took on the mantle of leadership as ACC, SBI, Hindalco, L&T and others helped the Sensex power ahead. The US President's visit will dominate the airspace next week though it is not expected to have a material impact on stock prices
FIIs were net buyers through the week but their net purchases spiked to over Rs 5,000 crore on Thursday, according to data disseminated by BSE. Probably some of the Coal India oversubscription was ploughed back in to the company on its listing day through secondary market. Interestingly, retail investors net sold Rs 2,000 crore worth of stocks on the same day.
Last week's pyrotechnics have made the oscillators in the daily chart positive again. Ten-day rate of change oscillator has moved deep into the bullish zone while daily moving average convergence divergence oscillator is now signalling a buy. Weekly and monthly momentum indicators continue to remain strong though weekly relative strength index reaching overbought region sounds a note of caution.
As Sensex is currently nearing a new life-time high, it is important to step back and see where we are in the larger picture.
Please refer to the long-term outlook for Sensex discussed in our September 19 edition under the title 'Bulls on a shopping spree'.
We had given the long-term targets for the move from March 2009 low at 21,798 and 25,406. It is however hard to visualize the Sensex running away to the second target just yet. We stay with the view that the index could pause around the first target since it also occurs around its previous life-time high.
There can even be a correction to 19,500 levels and the index can move in the band between 19,500 and 21,500 for few months before attempting to conquer new highs. The positive long-term view will be seriously threatened only on a weekly close below 19,500. Such a move will mean that a more serious correction that can pull Sensex below 18,000 is unfolding.
The medium and short-term trends in the index are positive. It is now obvious that the fifth wave from 15960 trough is currently in motion and this wave has the targets of 20922, 21638 and then 22460. Again investors ought to watch out for reversal around the second target at 21638.
Sensex closed on a very strong note in Muhurat trading and the momentum generated can take the index higher to 21,642. The recurrence of 21,600 at multiple strata is a trifle disconcerting and short-term investors should be on the watch until the index gets past this level. Subsequent target for the index is 22,483. Supports for the week ahead are at 20,800, 20,600 and 20,300.
Nifty (6,312.4)
Nifty is also halting tantalizingly below its life-time high at 6357. If we consider the long-term counts for Nifty, target for the third wave from March 2009 low gives us the targets of 6419 and then 7429.
As the Nifty is nearing the first long-term target, investors ought to exercise some caution as the index could get in to a sideways trading band for a few months in the range between 5800 and 6400 before moving higher. A close below 5800 would imply that a more serious correction is in the offing that could drag the index lower to even 5,000.
The medium-term trend in the Nifty is up. But a five-wave move from the low of 5937 is currently nearing completion. This move could terminate at 6290, 6509 or 6760. Since the first target has already been achieved, a correction is possible any time from now. This correction has the targets of 5870 and 5815.
The short-term trend in Nifty is also up and the index has the short-term targets of 6290, 6500 and 6604. Again here, it is the 6500 level that is recurring often and needs to be treated with a little respect. Supports for the short-term are at 6240, 6180 and 6090.
Global cuesMost global markets ended with strong gains last week and Dow moved to a new 2-year high as the Central Banks in US, England and European Union agreed that global growth needed to pick up further before the stimulus measures were withdrawn. The results of US mid-term elections also buoyed the spirits in Wall-Street. CBOE Volatility Index plunged once again to close at the key support at 18.
Commodities soared up with gold nearing $1400 per ounce and crude at $87 per barrel. Reuters CRB index gained 4 per cent and appears on course to its mid-2008 peak at 634.
Dow's strong move above the key long-term resistance at 11,266 is significant as it heralds that the specter of a double-dip could be dissolving finally. But as with all long-term signals, we need to await confirmation and see if the index sustains above this level for at least two more weeks. Minimum medium term target if it sustains above 11,300 is 12,573.
— Lokeshwarri S.K.
Reliance Industries (Rs 1,106.9)
Reliance Industries was very volatile last week moving between an intra-week high of Rs 1187 and low of Rs 1062 and finishing with marginal gain of Rs 11. The stock achieved our upside price targets mentioned last week and thereafter declined below Rs 1080 to find support at around Rs 1060 levels before rebounding. The stock is in a short-term uptrend and traders can consider holding their long positions with stop at Rs 1090. We reiterate our targets of Rs 1130 and 1150. Key supports for the stock are pegged at Rs 1070 and Rs 1040.
The stock has been in a medium-term uptrend since its September 6 low of Rs 885. Conclusive weekly close above Rs 1150 will give a medium-term target of Rs 1200. Investor with medium-term horizon can hold the stock with stop-loss at Rs 1030.
State Bank of India (Rs 3,489.5)
SBI jumped more than 10 per cent last week and recorded its life-time high of Rs 3497. The stock broke through its upper boundary of its sideways trading band at Rs 3300 and is in a short-term up move. As long as it trades above Rs 3300 support level, its short-term uptrend stays intact and it can gradually move higher to record fresh highs. Traders can initiate long position with stop-loss at Rs 3400 and targets of Rs 3600 and then Rs 3650. However, a slip below Rs 3400 will drag the stock down to Rs 3300. Significant support below Rs 3300 is at Rs 3150. Medium-term trend is up for the stock from its July trough of Rs 2254. It achieved our medium-term price target of Rs 3370. Investors can prolong holdings with revised stop-loss at Rs 2880 and target of Rs 3650.
Tata Steel (Rs 623.7)
Negating our view, the stock reversed higher from Rs 590 levels and gained Rs 33 or 5.7 per cent during previous week. The stock's short-term downtrend stays in place as long as it trades below Rs 645. Traders can initiate fresh short position if the stock dives below Rs 605 with target of Rs 580. Conversely, a strong move above Rs 645 will reinforce the bullish momentum and lift the stock higher to Rs 675. Key medium-term resistance and support for the stock are at Rs 700 and Rs 550 respectively.
Infosys Technologies (Rs 3,079.8)
Infosys advanced 3.7 per cent last week, breaching its 21-day moving average poised around Rs 3050. Short-term trades can initiate fresh long position only if the stock surges beyond Rs 3110 with stop-loss at Rs 3090. Short-term targets for the stock are at Rs 3150 and then Rs 3185. Supports are at Rs 3000 and Rs 2950.
The medium-term trend is up for the stock and investors can stay invested with stop-loss at Rs 2750. Medium-term target for the stock is Rs 3250.
Yoganand D.
Sizzling Stocks
Rashtriya Chemicals and Fertilizers (Rs 116)
The stock accelerated last Tuesday jumping 10 per cent. This bullish momentum prolonged for the next trading session and the stock skyrocketed, hitting the upper circuit and finishing with 17 per cent gains. Although the stock witnessed some selling pressure in the later sessions, it managed to finish the week 22.6 per cent higher. The long-term trend is up for the stock since its December 2008 low of Rs 25. Medium-term trend is also up. However, the stock is testing key long-term resistance between Rs 118 and Rs 124. A strong close above Rs 124 will leave the stock higher in the Rs 145-150 band. On the other hand, a dive below its immediate support level of Rs 105 will drag the stock lower to Rs 95. An emphatic decline below this level will mitigate its medium-term uptrend. The stock has room to decline to Rs 85 or Rs 80.
Great Eastern Shipping Company (Rs 370.6)
GE shipping also zoomed on Tuesday and ended the week with a 17 per cent gain along with extra-ordinary weekly volume. The stock had conclusively penetrated its key long-term resistance at Rs 345 during this rally and is hovering well above its 21 and 50-day moving averages. Both long and medium-term trend for the stock are up.
Immediate resistance for the stock is in the zone between Rs 390 and Rs 400. Strong weekly close above Rs 400 will take the stock higher to Rs 440 in the medium-term. Nevertheless, failure to move above Rs 400-mark can lead the stock to decline to Rs 345 or Rs 320 support levels.
Yoganand D
Good volumes, high turnover mark Muhurat trading
A trader in Hyderabad opens new account and bill books on Diwali.
Our Bureau
Mumbai, Nov. 6
The pre-Diwali trading session, which saw the Sensex close at an all-time high, was certainly a harbinger of things to come. On the Muhurat trading day that followed, the benchmark index pushed past the 21,000-mark, to reach its new closing high of 21,005.
The index gained by 111points from its previous close. However, it has still not reached its all-time trading high of 21,206 reached in January 2008.
The Muhurat trading session, which took place between 6:15 and 7:00 pm on Friday, saw very high volumes being traded, said brokers. "There were very good volumes, especially in the cash market segment, which saw a very high turnover. The Coal India IPO listing has added on to the euphoria," said Mr Rakesh Goyal, Senior Vice-President, Bonanza Portfolio.
Essentially, on Muhurat trading day, brokers and investors prefer to buy (as a symbolic gesture), rather than sell, stocks.
"There is active trading happening and out of sheer sentiment, people were buying more than selling. The uptake in overall volumes was very high, with a bias towards the derivatives and cash markets," said Mr Anil Bagri, President, Association of National Exchange Members of India.
The Muhurat trading session also marks the beginning of the Samvat year 2067. The start of the Samvat year is also the new year's day of the Gujurati community, who constitute a large part of the trading community in the country.
The opening bell for the Muhurat trading session was rung by the cast of the movie No Problem, which included stars like Anil Kapoor and Sushmita Sen.
Brokers believe that the markets might see a correction soon, once the steam generated by the Coal India IPO dissipates.
The market looks only one year or 18 months ahead. But it does not factor in the cumulative power of growth over a sustained period and that is really where most people go wrong in evaluating the positive trends in the economy and stock markets. - SATISH RAMANATHAN, HEAD, EQUITIES, SUNDARAM MUTUAL FUND
SATISH RAMANATHAN, HEAD, EQUITIES, SUNDARAM MUTUAL FUND
Aarati Krishnan
Vidya Bala
Though Sensex valuations may appear high, Satish Ramanathan, Head of Equities at Sundaram Mutual Fund, believes that the risk of steep meltdown in stock prices from here is limited. Investor preference for quality companies, the strong case for investing in India and favourable demographics that are enhancing the long-term growth prospects are key factors that investors should bear in mind before they consider exiting equities, he told Business Line.
Excerpts from the interview:
Market valuations appear quite high, though people like to say they are a little way away from the 2007 highs. Do you feel there is a bubble in the making?
Markets are close to their all-time highs, but what one needs to appreciate is that earnings have grown in the interim. It is now two years since the all time high was reached and earnings have grown by 50 per cent in this period. So, in that sense, the markets are less euphoric than earlier.
Two or three trends have unfolded, which we need to bear in mind when we talk about valuations. One is the flight to quality. Quality companies that are underleveraged have become far more expensive than they were in the previous market cycle. Companies that have debt, and issues on repayments or on credibility, have become far cheaper than they were in 2007 and 2008.
So, when we aggregate and say that the average market P/E is X, what has actually happened is that companies with good quality have become two times the median valuations and companies that have issues such as constant need for capital, have become half the median valuations. Markets have become far more discriminating.
The second trend is that global investors now have to invest outside of their home country, primarily for growth. India is going to remain one of the favoured destinations for that reason. China is moving to become a far more developed country and its requirement for heavy capital is going to come down. Therefore, incremental money has to come to India, though it may probably go to Africa or some of the LatAm countries too.
Trend number three, which is very important, is demographics. You are going to have a very robust period of domestic demand which can stretch on for 10 or 15 years. Case in point, look at the two-wheeler industry. That is demographics at work.
The industry offers a home-grown solution for infrastructure because we did not privatise transportation in rural markets adequately. So while yes, the market is expensive, based on what we have seen in the past, there are always going to be themes and sub-themes that will work and are available at a price.
So, do you believe that, overall, the markets are not expensive?
These are two key risks we need to bear in mind when we call the market expensive or cheap because, technically, the market looks only one year or 18 months ahead. But it does not factor in the cumulative power of growth over a sustained period and that is really where most people go wrong in evaluating the positive trends in the economy and stock markets.
Markets may be expensive, some of the leading companies may be expensive but if growth were to last for five years, then it is not expensive. So, from a fund manager's and investor's perspective one has to bear in mind this point before selling off equity positions.
Consumption-related sectors have led this rally and are at a premium to the market while other sectors (such as infrastructure) are at a discount. Do you see scope for the latter to catch up?
This is not really just about sectoral shifts. Within sectors, the good companies or the well-run companies with high return on equity have been continuously re-rated in this market.
Fund managers have taken the call that 'if I have to buy a company I will buy a quality well-run company rather than a depressed company on depressed valuations based on the hope that there will be a turnaround in business sentiment or management'.
However, probably a year down the road, risk appetite could come back. If there is a quantitative easing II and if there is indeed an abundance of cheap money, at some point in time there could be a section of the market actually saying why don't we take that extra risk or how can a company be trading at 20 PE or 25 PE and why don't I get a company that is at 10 PE and get that 2 or 3 PE extra? That risk appetite has not yet set in but could come in pretty fast if the money situation remains adequately liquid.
Are you saying that earnings performance in one quarter or so does not really matter?
The earnings performance could have several aspects. One is the commodity cycle itself. We have to bear in mind that 20-25 per cent of our earnings comes from the commodity oriented companies. The commodity cycle is far better in the second quarter. Financials too appear to be coming out of their troubled patch.
Having said that, the fundamental risk that Indian companies and markets face is that their margins are among the highest, given that ours is a capacity-starved economy. And the price power is tremendous with companies. So there is a risk that even though our GDP grows, that profits do not grow for some period of time as a result of higher interest cost coming in and higher depreciation as a result of capacity expansion.
Also, the logical end to higher capacity expansion is lower margins. So you could see three or four quarters of this adjustment taking place. The risk is that the markets actually do nothing for some time. Eight quarters from now, you may see markets at the same level as they are today. Apart from that, do I fear a meltdown or am I building that into my scenario of expectations — the answer is 'No'.
It is usual for mid-cap stocks to play catch-up in the second leg of any market rally. Do you believe the valuations of mid-caps offer room for this, given the fundamentals?
The term mid-caps has to be used with some caution. As a house, we see that some mid-caps are leaders in their space but are mid-caps because of the size of the business. Typically, what we find is that companies that are small in a large business segment do not have pricing power or capital access and become weaker after a recession or a slowdown. A case in point are the construction or infrastructure companies. L&T and BHEL have come out stronger but many small construction companies have become far weaker.
The qualitative aspects have a significant bearing on valuations in mid-caps now. We haven't moved towards the commodity stocks and that's something that helps us.
What is the risk of a shift in FII in to other emerging markets such as Latin America (LatAm) and African nations?
I think capital does not seek all destinations at all points in time. It seeks a favoured destination and the momentum sustains it for the next 5 to 10 years. The second aspect is that the first level of development is not as capital intensive as the second level of development.
Widening a road from 2 to 4 lanes is not as capital intensive as going from 2 to 16 lanes, which is what China has perhaps done. So we are at a lower level of capital intensity compared with China while Africa and LatAm countries are slightly behind us.
When I say LatAm a country like Brazil is probably far more advanced than India. So take China, Japan, Taiwan and Korea in turn — there was a logical way in which liquidity flowed. The demographics in India are now most favourable as was the case in China ten years ago or Korea 20 years ago.
Arvind Parekh
+ 91 98432 32381
