Sensex (9328.9)
Stock prices suffered as a result of investor apathy last week as market participants took a much-needed break to indulge in some year-end revelry. Volumes plunged and Sensex ended 7 per cent lower. Talks of yet another stimulus package elicited no response from the investor fraternity.
December contracts in the derivative segment expired smoothly. Turnover in the derivative segment was however very low especially on Friday when it was at the lowest level recorded in the last six months. This is yet another indication that traders have switched off their trading terminals, albeit temporarily. FII activity also witnessed a marked slowdown last week.
Sensex failed to build on the rally recorded in the previous week and declined from a peak of 10,173 on Monday. An evening-star formation, that is a bearish reversal pattern, is evident in the weekly chart. The index has closed below its 50-day moving average. The 10-day rate of change oscillator has withdrawn in to the negative zone and the 14-day relative strength index is at 45. These indicators imply a negative bias for the near term.
The short-term view will however turn overtly negative only on a close below 9000. A reversal above this level can take the index higher to 10,300 or even 11,000 over the next couple of weeks. Conversely, a close below 9000 will imply an impending move to 8,560 or 7,560.
Interestingly many of the global indices including the MSCI world have formed a lower trough on November 20 and a short-term rally is unfolding from here. All of these indices have to overcome multiple resistance levels before a medium term up-trend can be ascertained. India and a few emerging markets formed a higher bottom in November and appear to be in a range since October.
There is a strong resistance in the band between 10,700 and 11,000 for the Sensex that needs to be surpassed before volatility subsides and the risk of a decline below 8,000 abates.
Sensex can decline to 9,200 or 9,000 in the week ahead. The down-move will accelerate if 9,000 is breached and the next target would be 8,563. Resistances for the week are at 9,840 and 10,188.
Nifty (2857.2)
Nifty reversed lower from 3,110 on Monday and declined to 2,845 by Friday. Near-term outlook for the index is negative but there is key support at 2,740. A reversal above this level can take the index higher to 3,100 or 3,250 again. On the other hand, decline below 2,740 will mean that the index is heading towards 2,653 or 2,502 again.
Key medium term resistance level for the index is between 3,150 and 3,250. As long as Nifty trades below this zone, volatility will persist and a decline below 2,500 will remain on the cards.
Global CuesChristmas cheer failed to enthuse equities and most global markets eased downward in a truncated trading week. DJIA is halting around the support at 8,400. The short-term outlook for this index remains positive as long as it stays above 8,000. We adhere to the view that a move to 9,500 is possible over the next month or so. Asian markets too moved sideways just below short-term resistance levels.
CRB index that tracks the movement of commodities moved in a narrow range between 320 and 360. As explained earlier, key long-term support for this index is at 350. Gold dazzled on Friday, moving above the long-term average at $860. Key medium-term resistance for this metal is at $900. Once this level is crossed, next target would be $987. However, a short-term pull back is likely from the $900 level. The outlook is quite weak for copper and aluminium that are dropping in to a bottom-less pit.Reliance Ind
RIL eased lower and closed with 10 per cent loss last week. An evening star pattern is evident in the weekly chart that implies that the short-term trend has reversed from the recent peak at Rs 1,408. Presence of both the 50 as well as the 21-day moving average around Rs 1,200 will provide support in the near-term. Breach of this level will pull the stock lower to Rs 1,130 or Rs 1,105. Resistances for the week are Rs 1,408 and then Rs 1,500.
The medium-term outlook for RIL remains neutral. The stock can move in the band between Rs 950 and Rs 1,500 over this time period. The long-term trend line at Rs 1,000 will support any sharp decline over the medium-term.
Maruti Suzuki 
Maruti Suzuki moved contrary to our expectation last week; reversing from an intra week peak at Rs 559 and closing with a 7 per cent loss. Immediate support for the stock is at Rs 492.
Short-term traders can initiate fresh shorts on a decline below this level.
Close below this level will pull it down to Rs 446 or even Rs 382. Momentum oscillators in the daily chart imply that the current down trend can continue.
Conversely an upward reversal from Rs 492 will take the stock higher to Rs 570 or Rs 610.
Key medium-term resistance continues at Rs 570.
A strong close above this level can take the stock to Rs 755.
Infosys 
The sharp decline recorded on Friday resulted in Infosys closing the week with a 6 per cent loss.
The short-term trend has turned negative and the decline can continue to take the stock to Rs 1,065 or Rs 980. Resistances will be at Rs 1,164 and then Rs 1,204.
Short-term traders can play short in the stock with a stop at Rs 1,170.
Medium-term trend in Infosys continues to be sideways between Rs 950 and Rs 1,500. The stock is currently nearing the lower boundary of this trading range. Presence of a cluster of long-term supports between Rs 950 and Rs 1,100 makes it an ideal zone where long-term investors can accumulate the stock.
Tata Steel 
Tata Steel meandered sideways for the second successive week. Immediate short-term supports are at Rs 202 and then Rs 180. If the first support holds, it will imply that the stock can unfold the third leg of its move from December 2 trough. The targets as per this count are Rs 265 and Rs 300. Traders can continue to buy in declines as long as the support at Rs 202 holds.
The medium-term trend in the stock continues to be down. But a sustainable trough could have been formed at Rs 146 in November. As mentioned last week, the zone around Rs 250 is a key medium-term resistance. This level needs to be crossed to turn the view overtly positive.
SBI 
SBI moved in a narrow range between Rs 1,200 and Rs 1,325 last week. The short-term trend continues to be up and the shallow correction witnessed last week implies that there can be one more leg higher to Rs 1,380 or Rs 1,425 in the near-term. Short-term traders can hold their long positions with a stop at Rs 1,190. Next support is at Rs 1,120.
The key medium-term resistance band is between Rs 1,380 and Rs 1,420. Downward reversal from this band can drag the stock towards Rs 1,000 again. Close above the 200-day moving average at Rs 1,420 is needed to herald a medium term up trend. Long-term investors can accumulate the stock close to Rs 1,000.
ONGC 
This stock was unable to surpass the resistance offered by the 50-day moving average and moved to the lower end of its short-term trading band at Rs 640.
Immediate support for ONGC is at Rs 615. If this level is breached, next target would be at Rs 540.
The medium-term trend in the stock is down since the November peak at Rs 810. Continuation of this move can pull the stock below Rs 600 once more.
However, the long-term support in the band between Rs 550 and Rs 600 should cushion any sharp declines in the near future. Long-term investors should accumulate the stock in the band between Rs 550 and Rs 600.
Strong & Weak futures
This is list of 10 strong futures:
Matrix Labs, Bajaj Hind, Jet Airways, Patel Eng, Aptech Training, Hind Petro, Auro Pharma, Renuka, Amtek Auto & Purva.
And this is list of 10 Weak Futures:
Satyam, Jindal Stainless, Roltas, Bhushan Steel, Birla Crop, Hotal Leela, Jindal Saw, Redington, HCL Tech & GT Offshore.
Nifty is in Up Trend.
NIFTY & SENSEX SPOT LEVELS FOR 29.12.08
 | 2857.25 | ( -2.04 %) | -59.60 |  |
| 1 | 2 | 3 | ||
| Resistance | 2930.53 | 3003.82 | 3046.68 | |
| Support | 2814.38 | 2771.52 | 2698.23 | |
 | 9328.92 | ( -2.51 %) | -239.80 | | |
| 1 | 2 | 3 | |||
| Resistance | 9591.87 | 9854.83 | 10003.27 | ||
| Support | 9180.47 | 9032.03 | 8769.07 | ||
Institutional Investors data for 26-Dec-2008
FII -344.91
DII -6.95
Sensex outlook for 2009
The word 'unprecedented' crops up often when we review the movement of the Indian markets in 2008.
In our Sensex outlook published at the end of 2007, we had expected the 4-year old bull-market to end in the first quarter of 2008. But the intensity and depth of the decline in 2008 has been astounding.
The Sensex declined 63 per cent from its all-time high when it fell to 7,697 in October. That makes this the worst correction in the last three decades. Most correction in recent times halted around the 60-per cent retracement mark. But if we view the US markets during the Great Depression, the Dow Jones Industrial Average lost 88 per cent from its peak between 1929 and 1932.
Charting 2009
It is fairly certain that the move from the 21,206 peak is in its final stages. This wave is sub-dividing into a classic five-wave pattern. The devastation in September and October 2008 was the third minor of the third. The index can re-test the October low or even decline a little below in the final stages of this 5-wave move. The possible targets where the slide from January-peak can end are 8,000 or 6,200.
Investors can, however, look forward to a counter-trend rally that could begin in the first quarter of 2009 and extend for a few months. The targets for this rally would range between 11,000 and 13,000 depending on where the bottom is formed in the first three months.
Long-term outlook
We had mentioned in our review in October 2008 that decline below 9,700 will call for recasting the long-term counts. The magnitude of this correction implies that we are not just retracing the rally from 2001 trough, but we are probably correcting an uptrend of a much higher degree, that began before 1980.
The down-move from January 2008 appears to be the first leg (A wave) of the bear market. The second leg or the B wave that moves counter to the trend, can unfold in 2009 stemming the price erosion. Needless to add that there will be another leg down or the C wave that will follow the B and complete a 3-wave move. The entire cycle can easily extend beyond 2009.
It is difficult to envisage the shape that this B wave can take. It can be a sideways move in a wide range between 8,000 and 13,000 or it can be a swift up-move to 15,000 or 16,000 that ends abruptly trapping naive investors. Either way, investors need to be extra vigilant in rallies next year. The counter-trend rally in 1930 in DJIA (B wave) retraced almost 50 per cent of the prior down-move, but the index lost 86 per cent from the B wave peak by the time the entire cycle ended. The pull-back rally in June and July 2000 is another case in point.
To sum up, the Sensex could remain volatile in the beginning of 2009 and form a significant trough either around 8,000 or 6,200 in this period. A counter-trend rally can then ensue. The preferred range for Sensex for 2009 is between 7,000 and 13,000. The upper limit for the year is 16,000 and lower limit is 6,000. We will re-visit our outlook on a breach of either of these limits.
2009 will be better than last year
The Indian markets have suffered a lot in 2008 because of concentrated selling by FIIs, which has its roots in the global economic crisis. Till such time there is clarity on how the global economy will cope with de-leveraging, it will be difficult to take a view on how long the world will be in recession. Factors such as exports and auto sales slowdown, falling excise and customs collections, NBFCs facing a liquidity crisis, and waning real estate demand are also pointers to the slowdown in the Indian economy.
October-December 2008 has been a tough quarter for corporates and there have been a rising number of earning downgrades by analysts. This seems to be already factored in the prices. If we do not see results deviating from the estimates, the results to be announced in January 2009 should not pull down markets.
Effects of stimulus
The Government has also initiated steps to revive economic growth by bringing in the fiscal stimulus package and the RBI stepping in to cool interest rates.
The combined action of the RBI and the Government will have a reasonably positive effect, though one would have liked the package to be more ambitious. The industrial downturn can be arrested, if not reversed, with these actions. Going into 2009, a key factor that will have an impact on the markets globally is the economic policy of the new US administration. Prolonged recession in the Euro zone and Japan will also have a bearing. The collapse of any other major institution and a flare-up of tension in any part of the globe are issues that the world could do without, under these fragile conditions.
Outlook for 2009
The outlook for 2009 is more optimistic than the year gone by. Crude and commodity prices have softened and have brought inflation down. Interest rates have peaked out and can only move southwards from here. Therefore, we can expect the margins of companies to improve, provided there is no significant decline in demand. The uncertainty linked to the outcome of Lok Sabha elections will act as an overhang in the first half of the year.
Infrastructure spending will be a major driver — both for its size and its multiplier effect. At the same time, while there have been talks about job cuts, we have also heard announcements from Nasscom and some of the major companies in the financial sector that they will continue to hire.
The Sixth Pay Commission award and the farm loan waiver have also improved affordability for a large number of consumers. So, it is quite likely that domestic demand will remain relatively strong and the downturn in manufacturing will be short-lived.
For mutual funds, the fact that the number of investors choosing to invest through SIPs has been growing through the year is indicative of confidence in funds with a track record. This also shows a growing maturity among them after the experiences of 1992, 2001, 2004 and 2006, when they chose to commit lump-sum investments, rather than SIPs.
In these uncertain times, the prudent strategy is to make staggered investments, rather than to keep away from the market altogether.
Snapshots 2008
Lending rates and deposit rates are back to where they were a year ago, only this time the rates are heading South, instead of ascending as in 2007. Foreign Exchange Reserves have been depleted by $66 billion from their peak on the back of weakening rupee and dollar outflows.
It is now clear that India's GDP growth will be far lower than the original optimistic forecast of 10 per cent. The Ministry of Finance, in its mid-term review, pegs the growth rate as low as 7 per cent. A more sober view has also been taken by research and multilateral agencies. A weakening rupee, rising deficit, high commodity prices, falling exports and slower capex may all slow down India's growth engine.
Which sectors you invested in this year mattered a lot in determining portfolio returns. While those overweight in FMCGs may have gotten away with a 14 per cent loss, those with realty stocks may have lost over 80 per cent in value.
Selling options: Profiting from negatively-skewed strategies
A negatively-skewed strategy refers to a distribution structure that has higher probability of small gains and lower probability of large losses. This is one of the reasons why selling options is not for novice traders.
Desperate times call for desperate measures. That is, perhaps, one of the reasons why many novice traders are now resorting to selling options. This article discusses such short trade set-ups. It also shows how option sellers can choose appropriate strikes using the behavioural biases of option buyers.
Negatively skewed strategy
Selling options is risky. The reason is that options carry asymmetric payoffs. A call option buyer gains more when the underlying moves up, than she loses when it goes down. Similarly, a put option buyer gains more when the underlying goes down, than she loses when it goes up.
The opposite is true for the option seller. The maximum profit on a short call is the premium received. The maximum loss, however, is unlimited. Likewise, the maximum profit on a short put is the premium received. The maximum loss is capped, as the underlying cannot go below zero.
Why then do traders indulge in selling options? The reason is because of the lure of negatively-skewed profit-loss distribution. Typically, 80 per cent of options expire worthless. This means that option sellers realize maximum profits (keeping the premium) on 80 per cent of the options during any month. The asymmetric payoff, however, means that short sellers will suffer large losses when 20 per cent of the contracts expire in-the-money (ITM).
A negatively-skewed strategy refers to a distribution structure that has higher probability of small gains and lower probability of large losses. This is one of the reasons why selling options is not for novice traders. Besides, selling options attract margin requirements at the NSE, which means more trading capital.
Trade set-upsTraders typically sell calls when they expect the underlying to decline or sell puts when they expect the underlying to move up. Such a strategy is, however, sub-optimal. Why?
Long calls are preferable to short puts when the underlying is expected to move up.
Similarly, long puts are preferable to short calls when the underlying is expected to decline.
Selling options are, hence, optimal only when the underlying is likely to move sideways or when volatility is expected to decline. It is typical for experienced traders to sell options during the expiration week, as time decay is higher during that period.
It is preferable to sell options on the Nifty index than on the underlying. The reason is that price jumps on individual stocks are more frequent than jumps on a broad market index. And price jumps can lead to large losses on the short option positions.
The next important step is to choose the appropriate strike. Option sellers can choose the strike that carries the highest implied volatility based on the Black and Scholes model.
Traders who do not use the model can choose the strike that carries the highest trading volumes. The reason is this: Option premium consists of intrinsic value and time value. Intrinsic value is the difference between the spot and the strike price for ITM options. The time value is the residual factor in the option premium including the behavioural biases of traders; higher demand for a strike leads to higher time value. And higher time value leads to higher time decay, which translates into higher gains for option sellers.
Now, strikes (near-ATM and near-OTM) that are closer to the spot price carry higher volumes for two reasons.
One, these strikes require lower outlay, as they carry no intrinsic value. And two, if long traders' view turns out right, these strikes expand generously to carry intrinsic value.
It, hence, pays to sell near-ATM and near-OTM options when the underlying is expected to move sideways.
Selling the January 3000 Nifty options (Wednesday prices), for instance, will generate optimal gains if the trader expects sideways movement in the index. It is, however, important to remember that selling options are risky, as they carry limited gains and higher losses.
Market decline is steep while fall in FII holdings is not
| Impact cost, blind following by retail investors could be the cause. |
BL Research Bureau For much of 2008, FIIs have been cast as the villains of the piece in the Indian stock market meltdown. Net sales of Rs 52,842 crore executed this year by FIIs also seem like a mammoth sum.
But did you know that FIIs have relinquished only a minuscule portion of their stakes in Indian stocks, at least as per the available shareholding data?
Despite the huge FII sell-off, the shareholding patterns for CNX-500 companies show just a 1 percentage point reduction in FII holdings over 2008. FIIs, who held 15.4 per cent of the outstanding equity of these companies in December 2007, now hold 14.2 per cent (as of September 2008, the latest available shareholding pattern), a mere 1.2 percentage point decline.
While that may seem like good news, it needs to be noted that a mere 1 percentage point reduction in FII stake has contributed to a near halving of bellwether indices.
High impact cost
Impact cost, which captures the cost of executing a transaction on the stock exchanges, has always been on the higher side in the Indian markets.
That may be one explanation for the extended impact of FII sales on prices.
While mutual funds bought stocks even as FIIs sold, their quantum of purchases was small in relation to FII sales. In 2008, while FIIs net sold equities worth Rs 52,842 crore, mutual funds' saw net inflows (showing buying interest) of just about Rs 13,753 crore.
With very few interested buyers, FIIs would have been forced to find buyers at lower and lower prices, explaining the steep erosion in some stocks.
Another explanation for the steep fall could be influence that FIIs wield on the investment decisions of retail investors.
The much-touted 'blind following' that FIIs have may also have accelerated declines in stocks that FIIs exited.
Moves significant
Even though overall FII ownership in stocks didn't fall much, FII moves were significant at the level of individual stocks. In 2008, the number of companies that registered a fall in FII stakes far outnumbered the ones that saw an increase.
Sixty per cent of the stocks in the CNX-500 companies saw a fall in FII shareholding, while only 30 per cent saw an increase.
That said, the overall picture may get clearer once the shareholding patterns for December-08 quarter are out early next month.
That will help capture the changes in FII stakes in October, the month which saw the highest monthly pullout by FIIs (net sold equities worth Rs 15,347 crore).
First time in 11 years, FIIs turn net sellers; pull out $13 billionFII sales of Indian stocks accelerated, especially after a series of financial failures in the USRavi Krishnan and Ashwin RamarathinamMumbai: Foreign institutional investors, or FIIs, the key drivers of the Indian stock market in the past few years, pulled out at least $13 billion (about Rs62,880 crore) in 2008, the most in 15 years, after an unprecedented global credit crunch led to a flight of capital from emerging markets.This is also the first time in 11 years that there has been a net outflow of FII money from India, according to a Mint analysis of data from capital markets regulator Securities and Exchange Board of India, or Sebi.Analysts do not see huge FII inflows in 2009 either, as they expect foreign investors to continue to be averse to risk, though some might see India as a major pick among emerging economies.FIIs have invested a net $50.59 billion in Indian equities since Sebi opened up the stock markets to them in 1993. At the height of the bull run at the beginning of 2008, FII inflows had increased to about $140 billion, according to some estimates, pushing the Sensex, India's most tracked index, to a record 21,206.77 points on 10 January.But FIIs started withdrawing heavily from India in the wake of the global credit crunch and economic slowdown, dragging down the stock markets as well. As a result, the portfolio of FIIs has shrunk to about $70-80 billion, according to estimates provided by fund managers.FII sales of Indian stocks accelerated, especially after a series of financial failures in the US—investment bank Lehman Brothers Holdings Inc. declared bankruptcy in mid-September, Merrill Lynchand Co. was sold to Bank of America Corp., and the US government had to take over insurer American International Group Inc. a week after it took over the country's largest mortgage lenders Freddie Mac and Fannie Mae.FIIs have been selling mainly because their lenders, facing a cash crunch in home markets, asked the investors to bring back the money, analysts said."The general environment is not conducive and institutional investors wanted to pare down risk due to the global meltdown," said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp., a global fund registered as an FII in India. "You can't expect them to return in a very big way. It will probably take at least a year for confidence to come back."Domestic institutional investors such as mutual funds, banks and insurance companies more than made up for most of the FII outflows, in absolute terms at least, pumping in more than $16 billion this year. But they haven't been able to boost the markets.The Sensex has fallen 52% so far in 2008. In 2007, FIIs put in $17.3 billion worth of funds into Indian equities and the Sensex gained 47%.Still, local brokerages expect that while foreign investors might not come back in a big way, there might be some inflows."I think flows next year will be marginally positive," said Vikas Khemani, co-head of institutional equities at Edelweiss Capital Ltd, which says it has 600 FII clients. "There may not be any immediate inflows. The dust has to settle and the post-election scenario has also to become clear before FIIs start allocating money to India."Regional equity analysts such as Clive McDonnell, head of equity strategy at BNP Paribas Securities (Asia) Ltd, have raised their ratings for India, citing low exposure to the global economic slowdown because of lower dependence on exports to the US and Europe."Looking ahead, we see greater risk being 'underweight' as opposed to 'overweight' Asia," McDonnell wrote in his latest report.While India faces "fiscal constraints, it is less exposed to the global economic slowdown, having a below Asian average weighting towards cyclical sectors. Lower oil prices, leading to a narrowing of the current account deficit and lower inflation pressures compared to 2008, drive our recommendation," McDonnell wrote."On a relative basis, India might be better than other emerging markets since it is less dependent on trade with the US and EU (European Union)," Bhat of Dalton Strategic said. "But I don't expect anybody to consider the basket (of emerging markets) itself."
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Arvind Parekh
+ 91 98432 32381
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