Real estate – land prices are likely to drop through the next 12 months and that fear has already had an exaggerated effect on real estate stocks.
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RBI cuts CRR, repo rate
The Reserve Bank of India cut the repo rate, CRR and SLR on Saturday. The repo rate was cut by 50 bps from 8 per cent to 7.5 per cent. The CRR was cut by 100 bps to 5.5 per cent in two stages.
The SLR was cut to 24 per cent, with effect from November 8.
The repo rate cut will be effective from November 3. RBI said that upside inflation risks 'ebbing' and that early signs of global recession are 'evident'.
Index Outlook
Forced smiles gave way to genuine cheer as stock prices zipped upwards to light up the Diwali sky last Tuesday. A consensus seems to be building up across the globe that the selling had been over-done and some respite is in order. Sensex ricocheted upward from Monday's trough at 7697 to close with a triumphant 1087 points weekly gain, that too in just three full sessions!
There is however no doubt that equity markets will take some time to recover from the battering received in October 2008. The losses this October rank among the top ten monthly losses in S&P 500 and the highest ever in points in the Dow Jones Industrial Average. Sensex too has lost 3072 points in October and it was down 5163 points when it reached the nadir on October 27.
It is after a hiatus of five dismal weeks that some semblance of reversal is visible on the technical charts. The hammer pattern on the daily candlestick chart and the bullish piercing pattern on the weekly chart imply that a short-term trough has been formed at 7697. The Sensex has closed above our key long-term support at 9700. Mild signs of strength are also visible in the daily oscillator charts. But the magnitude of the fall over the past month has rendered such spurts immaterial in the weekly as well as the daily time-frame.
In e-wave term, it is too early to judge if the C wave that commenced from 15579 has ended. As explained earlier the first and second targets for this wave are 10209 and 6887. The wave could terminate between these two levels also. The action over the next two weeks needs to be observed before drawing any conclusion.
We stay circumspect from a medium-term perspective. The one-week-up-one-week-down kind of move observed in global indices over October means that any up-move needs to sustain for more than one week before it can be taken seriously. Oscillators in the weekly chart are still muted. Investors should watch out for the 10700 level. If this level is surpassed, there can be a surge towards the long-term resistance at 12500.
The resistances for the week ahead would be at 10177 and then 10275. The minor wave counts of the down-move from 15579 indicate the current short-term up-trend will face strong hurdle in the zone between 10100 and 10300. A downward reversal from this zone will mean that the index will head lower to 8000 and below. This up-trend will turn overtly positive on a close above 10750. Short-term supports would be at 9040 and 8543.
Nifty (2885.6)
Nifty recorded an intra-week trough at 2252 before re-bounding. But the piercing pattern in the weekly candlestick chart of Nifty is weaker than that in Sensex. As explained earlier, the target of the third wave from 6357 peak is 3070 and 2093. A significant trough is possible anywhere between these two targets. November 2005 trough at 2314 is the support around which last Monday's decline halted. The medium-term resistance to watch is at 3200. This level needs to be surpassed if the Nifty has to make a dash towards 3830.
For the week ahead, there would be strong resistance in the zone around 3000. If this level is crossed, the next resistance is at 3235. Reversal below 3000 will imply that the down-move would resume to pull the index towards 2200 again. Supports would be at 2670 and 2510.
Global CuesIt was a splendid recovery in equities across the globe and the investor trepidation level too came down; as was indicated by the CBOE VIX's decline to 59.8 from the peak of 89 recorded in the previous week. However, if we consider the movement over the last three weeks, most indices are moving sideways in a range resulting in wide week-to-week swings. The DJIA too is moving sideways and has closed near the upper boundary of this range. A close beyond 10400 is needed to signal that a sustainable recovery is underway in this index.
CRB index, that maps the commodity price movement, is recovering from the key support at 356. Though the recovery is not strong enough, the fact that the index is attempting to stabilize is a positive. Comex gold declined below the support at $730 to an intra week trough at $680. The next long-term support for the precious metal is at $650 and the third leg of the decline from March peak has the target at $630. A trough in the area between $630 and $650 is possible on a close below $700. —
Reliance Ind
Reliance Industries tested the long-term trendline at Rs 970 last Monday and rebounded sharply to close the week with 35 per cent gain. The giant engulfing candle in the weekly chart is a positive signal.
But the rally needs to sustain over next week. As explained last week, the next support exists at Rs 806. Key medium-term resistance for the stock is at Rs 1,836.
In the week ahead, the area between Rs 1,450 and Rs 1,480 where the 50-day moving average is also positioned is a key resistance zone. Fresh longs are recommended only above this level. Subsequent targets are at Rs 1,650 and then Rs 1,820. Supports for the week are at Rs 1,200 and then Rs 1,094.
Maruti Suzuki
MUL could not escape the broad sell-off in the markets last week. It however recovered from our second short-term support at Rs 475 and moved sideways thereafter.
As indicated earlier, strong long-term support exists at Rs 500 and the stock needs to close below this level to make the medium-term view negative. Else, it can move in a broad sideways band between Rs 500 and Rs 800 over the medium-term.
Resistances for the week ahead are at Rs 580 and then Rs 646.
A reversal from either of these levels will have negative implication for the short-term and signal a possible move below the recent trough at Rs 475. Subsequent support is at Rs 400.
Infosys
Infosys moved sideways last week in line with our expectation.
Despite the slight wobble on Monday, it recovered from the low at Rs 1,161 and went on to 11 per cent weekly gain. The stock has now moved close to the upper boundary of our short-term range between Rs 1,150 and Rs 1,350.
A strong close above Rs 1,420 will take the stock towards Rs 1,500 or Rs 1,600 in the near-term.
There is a strong resistance band between Rs 1,500 and Rs 1,600 and the medium-term view will turn positive only on a close above Rs 1,600.
As we have been reiterating, Infosys has key long-term support at Rs 1,100 where it can form a sustainable trough.
Tata Steel
Tata Steel declined to our first support at Rs 156 before rebounding last Monday.
There is a piercing pattern in the weekly candlestick chart but it is not convincing enough to signal a reversal. Short-term traders can hold their long positions with a stop at Rs 145.
The current uptrend can take the stock higher to Rs 231 or Rs 280 in the short-term.
Failure to surpass the first resistance can drag the stock lower to Rs 150 or Rs 136 once again.
Medium-term view will turn positive only on a close above Rs 360.
The stock is likely to spend a few months moving in a sideways band between Rs 150 and Rs 350
SBI
SBI tested the support at Rs 1,000 briefly, as indicated in our last column, to record an intra-week trough at Rs 991. We reiterate that the Rs 1,000-level is an important long-term support and a significant trough is possible here.
If this level is breached, the next halt would be at the March 2007 trough at Rs 796.
The medium-term view has now been revised to neutral and the stock could oscillate between Rs 1,000 and Rs 1,500 for a few weeks.
However, failure to rally past Rs 1,380 over the next few weeks would maintain the risk of a decline below Rs 1,000.
Supports for the week would be at Rs 1,007 and then Rs 991.
ONGC
The sharp decline last Monday pulled ONGC towards the long-term support at Rs 570 indicated in this column last week. As explained earlier, this is a key long-term support for the stock. The bullish hammer pattern formed in the weekly candlestick chart indicates the possibility of a significant trough having formed at the intra-week trough at Rs 538. But the up-move needs to sustain for a couple of weeks more in order to confirm this assumption.
For the week ahead, ONGC can face resistance at Rs 720 and then Rs 830. Fresh longs are recommended only on a move beyond the first resistance. Key medium-term resistance is at Rs 860.
Nifty future likely to witness volatile trading
For the first time in many weeks, Indian bourses chose to end on a positive note on Friday. Though the markets began with a negative bias on Monday, short covering and bottom-fishing by market participants helped score gains for the week. However, despite the sharp intra-week recovery, Nifty future closed at a discount to the spot; Nifty future closed at about 2882 points as against the spot close of 2885. This suggests that there still could be a good number of short positions in the system.
As far as the rollover of Nifty November future is concerned, it stood about 62.5 per cent, at levels comparable with that of last month. Even the market-wide rollover figures, pegged at 75 per cent were at similar levels as that of the previous month. Nonetheless, this is still much lower than the six-month average rollover percentage. Another trend that points at the underlying negative bias in the market is the rollover of stock futures. This time around about 60 per cent of the stock futures saw low rollover compared with that in the previous months. Besides, quite a few of these stock futures are trading at a discount to their spot prices.
Follow-up
1) We had advised traders to consider straddle strategy by buying Nifty 2750 strikes of November call and put. The option spread is currently in the money if we consider the opening and closing prices of the put and call. We suggest this position be held open for the next week also; traders can cut the position if Nifty reaches 3150-3200 range.
Outlook
The smart reversal in the market may have breathed some life into the bulls. But for the bull party to continue, Nifty will have to cross 3250 level, which is a key resistance. As for the support, it may now find support at 2600-2550 levels. Any dip below this support can weaken the Nifty future to a low of 1880-1950 levels, while a move above its resistance can lift it to 3550 levels. That said, we feel Nifty future may struggle to break and move past its resistance. But even if it does manage to stride up, it still will have to steer past at 4350, which we feel is its pivot point. Traders can turn bullish only if Nifty future moves past this crucial level.
Recommendation
Retail traders have to be cautious for the following reasons: 1) Despite sharp pull back, India VIX or Volatility Index, which indicates the expected immediate volatility of the market, still remains high at 69.32. This points that Nifty may be set to witness heightened volatility.
As mentioned before, many counters are trailing their respective spot closing prices, indicating low cost-of carry; and
Any negative news from global markets, particularly the US, could spoil the party here.
However, traders who are willing to take risk, can consider the following strategies
If the market opens on a flat note, traders can consider going long on Nifty future, with a stop-loss at 2550. Alternately, if the Nifty future opens with a gap up, traders can consider going short on Nifty future by keeping the stop-loss at 3250.
We suggest traders stay away from stock futures, as most of the stocks are trading near their support levels.
FIIs trend
The cumulative FII positions as percentage of total gross market position on the derivative segment as on October18 increased to 42.06 per cent from October23 level of 38.72 per cent. Foreign institutional investors have been net buyers almost on all days of the week. They now hold index futures worth Rs 7,840.38 crore (Rs 11,847.25 crore) and stock futures worth Rs 8,984.74 crore (Rs 11,909.55 crore). This indicates that they have booked profits on their short positions. Their holding on index options also declined to Rs 10,004.98 crore (Rs 17,018.53 crore), according to latest NSE data.
Bullish? Set a bull call spread
Option traders can consider setting a bull-call spread on Nifty for the coming week.
This can be done by buying a call option on Nifty while simultaneously selling another Nifty call at a higher strike price.
We suggest traders to set this spread using option strikes of 2900 and 3200; that is to say, buy Nifty 2900 call, which closed the week at Rs 218 and sell Nifty 3200 call, which closed at Rs 89. Note that this will entail an initial cash outflow of Rs 129 per share (or a total of Rs 6,468 for per lot).
While ideally both the legs of this strategy should be executed simultaneously so as to benefit from the lower cost of setting the spread (as the premium inflow from selling the options, to an extent, will compensate for the premium to be paid for buying the other option), you can time the purchase and sale of options depending on how the markets open on Monday.
For instance, if the market opens with a gap up, you can consider selling the call first as that would then fetch a higher price.
Buying the lower strike call can be reserved for the time when market begins to show signs of cooling off. A reverse of this can be considered if markets open lower. That said, it is imperative that execute both the legs of this option spread on the same day.
Why a bull call spread?
Bull Call spreads should be considered when you are moderately bullish on the underlying. Nifty currently appears set to trend upwards if we take into consideration the sharp reversal seen in the bellwether last week.
That the RBI has also cut interest rates may also play favourably on Nifty. While traders can consider buying plain call options on Nifty, we feel it a safer bet to stick to limited risk-return strategies such as bull call spreads for the week.
Risk-return tradeoffs
Depending on how Nifty moves, this strategy will deliver returns within a range.
The breakeven for this spread would be at 3029 (2900 +129), i.e. strike price of the purchased call plus the net debit paid for setting the spread.
That is if Nifty moves past 3029, your spread will turn in the money.
However, note that the maximum loss that can occur in any scenario will be limited to the cost of setting this spread (in this case Rs 6,468).
If Nifty closes above 3200 (say at 3300), while your 2900 call will deliver a profit of Rs 400 (3300-2900), the sold call at 3200 strike will result in a loss of Rs 100 (3300-3200). So the net profit will be Rs [(400-100) minus the cost of setting the spread].
That is the maximum profit will be limited to Rs 171 per share. So, for an initial outlay of Rs 129 per share, you will stand to gain Rs 171 per share, if Nifty moves up.
If Nifty were to close at 3100, then you will make a profit of Rs 200 on the 2900 call (purchased) and no profit on the 3200 call that was sold.
So, the net profit would be Rs 200 minus the initial cost of setting the spread.
On the contrary, if Nifty were to close at any price below the 2900, the strike price of the purchased option, then you will lose the money that was used to set this spread.
But since it is a limited return strategy, traders can consider closing the spread once Nifty moves past the strike of the sold option.
Similarly, if in the interim period Nifty starts to show signs of weakness, traders can consider a premature exit from the spread. —
Markets may see easing of selling pressure
The key to market movement would be the behaviour of foreign institutions.
The key rate cuts by the Reserve Bank of India did not come as a surprise to stockbrokers and equity analysts, as this possibility was already discounted in Friday's trade. However, now that the rate cuts are indeed a reality, stocks are likely to look up, they said.
On Friday, the Sensex gained 8.22 per cent and the Nifty seven per cent.
Though the rate cut might have been partly discounted by the market on Friday, it will open with a positive gap on Monday, said Mr P.K. Agarwal, President-Research, Bonanza Portfolio. "The selling pressure in the market will slow down."
However, this could be followed by selling later in the day: "The section of investors who were in the know of the rate cut bought yesterday. These people will be booking their profits on Monday. But on the whole, the market will be in the positive territory," said Mr V.K. Sharma, Whole-Time Director and Head of Research at Anagram Securities.
FII factorThe key to market movement would be the behaviour of foreign institutions who were net buyers of equity for Rs 1,237 crore on Friday.
Would that trend continue? Market-men say FIIs are covering their short positions, which was what led to the buying. "Till they cover those positions we will see them continuing to buy," said Mr Prashant Bhansali, Director at Mehta Equities.
Rate-sensitive sectorsThe move is most beneficial to the interest-sensitive scrips such as those in the banking, auto and realty sectors, said Ms Anita Gandhi, Head of Institutional Business, Arihant Capital Markets.
Mr Bhansali pointed out that on the day of the credit policy when the RBI didn't announce any rate cuts, the equity market had tanked. On that day, October 24, the Sensex crashed 1,070 points.
There will be some amount of base building and consolidation that will take place in the next few trading sessions, said Mr Agarwal. "We will see some smart money coming in and a good amount of value buying."
Strong & Weak futures
This is list of 10 STRONG futures:
GtlSterlinbio
Bhushansteel
Titan
IndianBk
Infosys
Hotel leela
Satyam
Bhel
&Dabur
10 WEAK Futures
Unitech Jetairways
Parsvnath
Gitanjali
Briade
Jstainless
Ivrprime
Uniphos
Purva&
Suzlon
Nifty is in Down Trend until 3070 levels.
FII DATA
FII
31/10: 1237.21 Cr. (Prov)
DII
31/10: -116.10 Cr. (Prov)
Waning retail interest: FIIs now biggest gross buyers in stocks
BL Research Bureau FII selling has been the main trigger for the recent stock market rout. But did you know that retail investor apathy too may have contributed to the fall?
Individual investors, who outdid FIIs in buying up stocks late last year, have sharply reduced their transaction volumes on the bourses over the past 10 months. This has left the market bereft of buying interest that is sizeable enough to absorb big-ticket sales.
In December 2007, when markets peaked, domestic clients (individual investors who trade through their brokers) contributed 45 per cent of the gross 'buy' turnover on the exchanges, while FIIs chipped in with a lower 29.3 per cent. But by October 2008, not only had individual investors halved their transaction volumes, their share in purchases had also dropped sharply to 33 per cent.
In fact, FIIs accounted for a higher share of the gross 'buy' transactions on the bourses in October 2008 than individual investors. These numbers are based on an analysis of institutional turnover data put out by the BSE for the "buy" and "sell" transactions on both the exchanges, on a daily basis.
Domestic institutionsThe data also reveal that domestic institutions (read mutual funds and insurance companies) have ramped up their share on the 'buy' side of the stock markets over the past 10 months. They accounted for nearly 19 per cent of the gross purchase turnover in October, up from just 12 per cent in December 2007.
But the cutback in retail buying shows their dwindling interest in the stock markets as a whole, rather than a bearish view on the market. This is reflected in the fact that domestic investors have cut back on their stock market sales as much as they have on the purchases. FIIs, obviously, are the biggest sellers of stocks today, accounting for 45 per cent of the gross 'sell' turnover in October.
On a net basis (gross purchases minus sales), it is clear that only domestic institutions have been consistently buying stocks over the past 10 months. FIIs have been net sellers in every one of the 10 months, while individual investors have alternated between bouts of net buying and selling.
--Arvind Parekh
+ 91 98432 32381
