It was an irresolute trading week on the Indian bourses. There were no positive triggers to enthuse the market participants. On the other hand, the plethora of negatives that have been analysed thread-bare, do not appear to have the power to surprise or scare the markets anymore. Sensex closed the week with a 300 points loss.
Extremely low volumes in both cash as well as the derivatives segment reflect the lackadaisical attitude among the investors and traders. FIIs turned net sellers last week. Nifty put call ratio too implies that the market is equally divided between the bull and bear camps.
The short-term trend has turned negative with the decline in the Sensex last week. The 14-day Relative Strength index is poised at 47 while the Rate of Change index has moved in to the negative zone implying the Sensex could be under pressure in the near-term again. The weekly oscillators are rising in the bearish zone indicating that the medium- term outlook continues to be cloudy.
Though the index can decline in the near-term, the presence of key supports at 14300 and 13700 can cause sudden reversals that can catch bears unawares. The index is currently hovering around the 50-day simple moving average at 14284.
Reversal from current levels can result in a sideways move between 14300 and 15500 for a couple of weeks more. Such a move could be the halt before the index moves beyond 16000 over the medium-term. This view will stay until the Sensex closes decisively below 13700.
In e-wave terms, the down-move from 15579 could be the minor 'b' of the correction since 12514. The minor 'c' can take the index higher to the area between 16000 and 17000. But as we have been reiterating, it is very difficult to guess the pattern of a correction while it is unfolding. The mind-whirring number of counts makes such phases a nightmare for traders.
Sensex could move higher to 14831 or 15116 in the early part of next week. But turbulence caused by the expiry of the August contracts can arrest the rally at these levels. Supports will be at 14050 and then 13690.
Nifty continued its losing streak by declining 103 points last week. The index is currently pausing just above its 50-day moving average at 4280. A move higher to 4443 or 4522 is possible next week. Reversal from either of these levels would provide shorting opportunity to short-term traders. Move beyond the second target is needed to make the near-term outlook positive.
However, the medium-term view for the index remains positive as long as it holds above 4115. Reversal from 4220 or 4120 would imply that that the index can rally to the zone around 5000 over the medium-term.
The crude, dollar and gold troika dominated the financial markets last week as analysts went nuts trying to explain how these affected each other and the equity markets.
With the dollar pausing its meteoric rise, crude moved between $111 and $120. Friday's sell-off that came after a 30 per cent retracement of the decline from the recent peak at $147, implies that the support at $110 would be under severe pressure in the near term.
Dow Jones Industrial Average reversed higher from an intra-week trough at 11290, above the key short-term support at 11230 that we have been watching over the last couple of weeks. The S & P 500 is also putting up a resilient show. The key support for this index is at 1240. Though European and Latin-American markets stabilised last week, Asia remained turbulent. Many of the Asian indices such as Hang Seng, Shanghai Composite, Seoul Composite and Straits Times Index recorded new 2008-lows last week.
Infosys
Infosys slid gently to the intra-week trough at Rs 1,646 forming a double top in the daily chart. The stock is clearly having trouble moving beyond the resistance at Rs 1,750.
The current short-term decline can drag the stock lower to Rs 1,620 or Rs 1,590. Fresh long positions are recommended only on a rally above Rs 1,750. Subsequent target for the near-term would be Rs 1,815.
We stay with our positive medium-term outlook for Infosys. It appears to be building a base between Rs 1,500 and Rs 1,600 from where the third leg of the up move from the March trough can kick off. A close below Rs 1,500 is required to negate this view.
SBI
State Bank of India declined to our second near-term support at Rs 1,320 last week. The 50-day moving average line is also poised here. Next support is at Rs 1,245. Short-term investors can hold their long positions as long as this level holds.
Resistances for the week ahead would be at Rs 1,440 and then Rs 1,520.
As we had been reiterating, SBI faces medium-term resistance in the zone between Rs 1,500 and Rs 1,600. Since the stock failed to surpass this level, a decline to Rs 1,250 or even Rs 1,007 is possible in the medium-term. However, a reversal above Rs 1,250 would mean that the bulls still stand a chance to take the stock to Rs 1,700.
Unitech
Unitech declined to the key short-term support at Rs 156 on Friday.
As explained last week, reversal from this zone will imply that the move from the Rs 135 trough would resume to take the stock towards Rs 191 or Rs 212 again.
Conversely, a close below Rs 156 would pave the way for re-testing the Rs 135-trough. Traders can hold their longs with a stop at Rs 150.
The medium-term outlook is still positive but a decline below Rs 156 will imply an impending sideways move between Rs 130 and Rs 190 for a few more months.
Investors can make staggered purchases below Rs 150.
Tata Steel
This stock was floundering near its long-term support in the zone between Rs 580 and Rs 620. The pattern formed last week appears to be a running correction, which has bearish connotations.
The stock can decline to Rs 557 or Rs 525 in the near term. Resistances for the week would be at Rs 650 or Rs 700.
The medium-term trend in the stock is sideways. Retracement of the entire bull phase from 2001 trough gives the key support for the stock at Rs 600.
If this level is breached, the next long-term support is at Rs 505. The long-term view will be resolved only if the stock moves breaks-out of the current range between Rs 580 and Rs 700.
Reliance Infra
Reliance Infrastructure is halting just above the key support at Rs 940. The presence of the 50-day moving average at this level makes it highly likely that the stock can reverse from here and rally towards Rs 1,052 or Rs 1,108 again. Subsequent near-term supports are at Rs 896 and then Rs 840.
The medium-term trend in the stock is positive. It is correcting the up move recorded from Rs 660 to Rs 1,122 since the beginning of July. This correction can consume a few weeks as the stock moves between Rs 900 and Rs 1,100 before moving higher. Decline below Rs 840 will negate our positive medium-term view.
Reliance Ind
RIL moved in an extremely narrow band between Rs 2,190 and Rs 2,250 last week. Our medium and short-term view for this stock thus remains unaltered. The stock is moving in the island between the long-term averages. RIL has strong medium-term resistance in the band between Rs 2,450 and Rs 2,550. A reversal from here would result in a broad trading range between Rs 2,000 and Rs 2,400 for a few more months.
The near-term trend in the stock is down. But short-term supports exist at Rs 2,150 and then Rs 2,100. Short-term traders can watch for buying opportunity on reversal from these levels. Resistances for the week would be at Rs 2,300 and then Rs 2,375.
Derivative strategies: Using puts for discount buys
Traders typically place limit orders to buy stocks at a discount. But this is not always possible. This article discusses two alternative strategies that will enable traders to buy stocks at a discount. Both strategies involve setting up trades in derivatives.
B. Venkatesh
Traders extensively use limit-orders to buy a stock at a discount to the market price. The present market structure does not allow traders to use Good Till Cancelled (GTC) order to buy or sell a stock at a certain price. Everyday, a trader has to place a limit order till the request is filled. At times, this becomes an arduous task. Fortunately, limit-orders are not the only alternative available to traders seeking to buy stocks at a discount.
This article discusses two derivatives strategies that help traders reduce their cost of buying a stock. The first involves using puts and the second, ratio put-spread. Traders can choose a strategy depending on their near-term view on the underlying.
Trade set-up
Suppose the trader wants to buy Reliance Industries whose current market price is Rs 2,235. Assume the trader is of a view that the stock will not decline below Rs 2,125 before the expiry of the August contracts. She wants to buy 75 shares of Reliance for her core portfolio, which is equivalent to one option contract.
Puts as alternatives
The trader can decide to short the August 2160 puts at 20 points premium. If the puts expire worthless, the trader can use this premium to acquire the stock at a discount to the market price.
Selling puts does not come without risks. What if the underlying declines to Rs 2,150 just two days thereafter? The August 2160 puts could jump to 35 points, causing a 15-point loss.
What if the trader had sold the August 2200 puts instead? The Indian options market follows a cash-settled design. This means that the put seller does not have to buy the underlying if the buyer exercises her right under the contract. The transaction is cash-settled.
The trader can, hence, change her mind about acquiring the stock because of its near-term weakness. She will then incur a loss of 15 points against 85 points if she had bought the underlying at Rs 2,235.
If the put seller decides to buy the stock, her cost would be Rs 2,165- stock price of Rs 2,150 and loss of 15 points on the puts. If the stock instead moves up to Rs 2,250 in two days, the put option could drop to 9 points. The trader can cover the puts at 11-point profits but will have to buy the stock at Rs 2,250. The effective cost would be Rs 2,239.
Short puts can be effective when the trader expects the stock to move up marginally or trade sideways in the near- term. But what if the trader strives to profit from the near-term decline in the underlying price?
Ratio put spreads
Suppose the trader decides to buy one contract of August 2220 puts, sell one contract of August 2190 puts and sell one contract of August 2100 puts. The ratio spread can be set-up at no cost without including brokerage commissions. This is because the long-leg will be subsidised by the two short-legs.
If the underlying declines to Rs 2,150 in two days after the trade set-up, the spread could generate five points profit not adjusting for trading costs. The trader can now buy the stock at Rs 2,150.
The ratio put spread will generate maximum profits if the underlying expires at Rs 2,190. The August 2220 will then carry 30 points while the short options will expire worthless. The trader can use the 30 points profits to subsidise the cost of the stock. The underlying can be acquired for a total cost of Rs 2,160, which is Rs 2,190 less 30 points profit.
It is preferable to set-up the long-leg with at-the-money puts or near at-the-money puts. A ratio put spread is more suitable than short puts if the stock is expected to decline marginally in the near term. Besides, the risk is lower than short puts.
But why set-up short puts or long ratio put spreads when a trader can simply execute a limit order?
Conclusion
Only a small proportion of traders buy stocks at the market price. Most place a limit order to buy a stock at a lower price. Using limit-order has its problems. Sometimes, a stock may climb up without filling the limit-order. In such cases, the trader has to revise her order and buy at a higher price. At other times, the stock may go down in value after the trader purchases it.
Short puts enable a trader to reduce the cost if the stock trades in a range or moves up marginally. Long ratio put spread subsidises the cost significantly if the stock moves down. Both these strategies are alternatives to buying a stock using limit order. A trader should decide on the optimal strategy based on how she expects the underlying to move in the near-term.
Don't fall for tips
While there is no sacrosanct way to filter stock advice, tips and so-called 'insider info' that you get, there are a few easy filters that can help you be 'better safe, than sorry'.
Srividhya Sivakumar
The world of stocks is no different from that of cricket — every second person you meet will have an "expert" opinion on it! While cricket fans would enjoy such an information extravaganza, investors may just end up confused, especially if they have just begun investing.
So, how then do you decide who to believe? While, without doubt, doing your own homework on companies and picking up stocks would be the right way to go about the whole exercise, it may not be the most practical way to begin — after all, why learn from your mistakes, when you can learn from that of others!
That brings us to the moot question — how to decide whose advice to put into action? While there is no sacrosanct way to filter the advice, tips and so-called 'insider info' that you get in your lifetime, there are a few easy filters that can help you be 'better safe, than sorry'.
Have your 'thinking cap' on
There is no dearth of stock tips in this age — be it your favourite news channel, news paper, stock broker or even friends and colleagues. There may not be any pressing need to act on such tips if you are a long-term investor, as long-term investments may not be as price-sensitive as the short-term ones.
But if you are a short-term investor, what should you look for when you receive a "buy" tip? Instead of blindly following the tip, try to study the report in detail.
Look out for details on the company's business, its estimated valuation and target price.
The urge to immediately act on such tips can be irresistible, but do stop to make a back-of-the-envelope calculation of the risk-return payoff.
Even if the tip-offs do not come with reasonable exit points, it may pay for you to keep a targeted return on both the upside and the downside. Considering that some of these tip-offs come with unreasonably high target prices, makes the case for keeping your own target returns.
That said, even seasoned investors can fall prey to wrong tips or advice. A case in point — the various IPO analyses floated freely over the internet via blogs and mail groups that can be shallow or even worse, one-sided. So, even if you cannot analyse company balance-sheets, analysing the credibility of your information source is a necessity for a successful stint in equity investments.
If it's free, think twice
More often than not, the 'hot tips' that you get on stocks that would 'run up quickly, if you do not invest soon' are for free. Beware of these 'tips' that are given to you for free. Why? Because no sane person would give you stock ideas that are immediate 'multi baggers' without charging something for it! Remember the world of investments does not run on charity, so what is given without charge may come with a hidden cost.
Your tipper could just be passing on the information to you, to help him prop up the share price of his own holdings.
Worse, the tipper could be but a pawn in the hands of someone else and may be giving away mis-information to everyone, unknowingly paving way for somebody else to dump his stock. For those who have read Jeffrey Archer's book Not a Penny More, Not a Penny Less, understanding how and why such tips may be given would be easy.
That said, always be on guard whenever making money in the stock markets appears easy.
Even if it is not free, don't stop thinking
If you think that paying for advice will insulate you from such 'vested interest' tip-offs, there is still the possibility that 'wrong' tip-offs will find their way to you.
Remember there have been cases, both in India and the rest of the world, where investment advisors with considerable clout have played foul. Investment bankers, after managing a company's IPO, come up with 'buy' reports after the company lists; broking outfits with both an institutional and retail window can produce reports on companies that their institutional clients are stuck with or vice-versa — the list of such probabilities is endless.
While per say, none of these can be termed unethical unless proved, the very awareness of such possible discrepancies can help you peg a value to your tipper's credibility.
But the ultimate test of your tipper's credibility lies in acting on it. Just like the Chinese proverb that says, "never test the depth of water with both your feet", to begin with invest only in small amounts.
That would give you sufficient leeway to step up investments once you gain conviction or to cut your losses if they backfire.
Action shifts from futures to options
Lokeshwarri S.K
Chennai, Aug. 23 An interesting shift is taking place in the trading pattern in the derivatives segment of the National Stock Exchange (NSE).
Volume in index options has increased sharply while the trading interest in the riskier stock futures is on the wane.
This implies that participants in the futures and options (F & O) segment are graduating to more complex derivative instruments that can minimise risk and lead to better capital preservation. It also signals higher participation by informed investors in F&O.
High volumes
The share of index options in the traded value of the derivatives segment has increased from 12 per cent in February to 30 per cent in July, while the share of stock futures trading has declined from 46 per cent to 32 per cent.
Daily traded volume in index options touched an all-time high on July 23 this year.
The dominance of stock futures, both in terms of trading volumes and open interest, was one of the strange quirks of the Indian derivatives market. Index futures came second, with options a poor third.
This opposed trends in developed markets where options are preferred due to their lower risk and initial outlay.
The market crashes in May 2006 and again in January this year were prompted by large-scale unwinding in stock and index futures held by novice traders.
Limiting losses
What has brought about this change?
Mr Sandeep Nayak, Senior Vice-President and Head - Private Client Group Dealings, Kotak Securities, points out that lower appetite for risk has triggered this shift.
"The vicious and abrupt collapse of the market in January and increased volatility thereafter had resulted in investors adopting a more cautious approach, with higher emphasis on limiting losses." "In contrast to trading the stock and index futures where risk is unlimited, a purchase of a call option where the premium cost is the maximum possible loss enhances the trader's ability to withstand higher volatility without undue panic."
Lower retail presence
Many of the novice traders who were more comfortable with the futures have exited the markets, badly singed in the first quarter of this year.
"The reduced presence of retail investors is clearly reflected in the lower cost of carry of futures (futures are trading at 60-70 bps higher than their underlying spot) as compared to late 2007/early 2008 when cost of carry was 100/120 bps".
"The higher cost of carry was due to presence of retail investors who were doing leverage trading to make quick money," says Mr Sandeep Singal, co-head, institutional derivatives business with Emkay Global Financial Services.
With portfolio hedging becoming an imperative in a protracted down trend, the long-dated options introduced six months ago, have been thriving of late.
"Currently, there is more than Rs 9,000 crore of open interest in options expiring on or after December 8. There are institutional investors active in these long-dated options", added Mr Naik.
STT changes
Changes in the securities transaction tax on options in the Union Budget of 2008 is the other reason he attributes to the option trading seeing more action.
Traders are also forced to look at adopting more complex trading strategies including a mix of futures and options, arbitrage, time value stripping and so on to play the current non-trending market.
The fact that the National Stock Exchange has become the fourth largest exchange in the world in daily traded value in index options is a fall-out of this change in trading style among the Indian investors.
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Arvind Parekh
+ 91 98432 32381
