Following a bright start with a 4.5 per cent gain on Monday, the stock began to waver, encountering resistance at Rs 1,090 mid- week. On Friday, it declined 2.6 per cent, which penetrated its 50-day moving average firmly. However, the stock ended the week with 1 per cent gain. Just before our first target of Rs 1,100, the stock reversed downwards and the short-term trend is sideways with a negative bias. The stock can remain consolidating sideways in the range between Rs 990 and Rs 1,100 in the short-term.
A strong close below the immediate support at Rs 1,020 can pull the stock down to the lower boundary of the short-term range at Rs 990. Short-term traders can make use of rallies to short the stock with a tight stop at Rs 1,070. On the contrary, a move above this level can re-test the immediate resistance at Rs 1,100 and move higher to Rs 1,130. Our medium-term outlook is a sideways consolidation in the range between Rs 966 and Rs 1,150.
State Bank of India (Rs 2,222.6)The stock gained during the start of the week, but it encountered key resistance around Rs 2,350 on Thursday as it began to experience selling pressure. The stock retraced its initial gains by tumbling 4 per cent with heavy volumes, on Friday, forming a long dark candlestick. The daily moving average convergence and divergence indicator has signalled a sell.
Short-term traders can consider initiating a short position at a close below Rs 2,200 levels with an initial target of Rs 2,150 and the next target at Rs 2,100. The short-tem stop-loss for the stock is Rs 2,255. Key resistances for the upcoming week are at Rs 2,280 and Rs 2,330.We reiterate that the stock can decline to Rs 2,050 or Rs 1,900 in the medium-term.
Tata Steel (Rs 548.5) The stock shot up taking support from its 200-day moving average, in line with our expectations last week, and met with immediate resistance at Rs 600. Subsequently, the stock resumed its short-term downtrend that has been in place since its April 15 peak of Rs 701. This downtrend appears to be accelerated as the stock price plummeted 4.6 per cent on Friday. It is currently testing its 200-day moving average.
A strong decline below the immediate support of Rs 536 can drag the stock further down to Rs 500, and so heading for a medium-term downtrend. The key support below Rs 500 is Rs 472. Swing traders can initiate fresh short positions if the stock fails to move above Rs 567 with a stop-loss at Rs 576. The resistances for the week are Rs 576 and Rs 606.
Infosys Technologies (Rs 2,656.8)The stock was very volatile last week; it recorded a fresh all-time high of Rs 2,875 on May 13. Though the stock experienced selling pressure at higher levels, it managed to end the week on a positive note with a Rs 37 or 1.4 per cent gain. The stock is trading below its 21- and 50-day moving averages which are poised at Rs 2,700.
A decisive close below Rs 2,600 would pull the counter down to its support zone between Rs 2,520 and Rs 2,500. The short-term view will turn negative only on an emphatic decline from this support level. On the other hand, an emphatic move above the immediate resistance level of Rs 2,720 can take the stock higher to Rs 2,763 or Rs 2,800.
Consider shorting Cairn India, Ashok Leyland
Stock strategy
Cairn India (Rs 292.45): After touching its 52-week high at Rs 321 in April end, the stock has been on a downtrend since then. The outlook appears negative as long as Cairn India stays below Rs 320.
The stock finds immediate support at Rs 272. A drop below that level (on a closing day basis) could trigger a fresh downswing. On the other hand, a close above Rs 320, would take the stock to its all-time high level around Rs 342.
F&O Outlook
Activity picked up on Cairn India futures (market lot 1,250) on Friday, as the stock tumbled more than three per cent. Both 300 and 320 calls witnessed higher accumulation indicating limited upside. Puts saw modest accumulation, suggesting that traders are not fully betting on the downside.
Strategy: Traders can consider going short on Cairn futures keeping the stop-loss at Rs 302, with a target of Rs 272. Adjust the stop-loss suitably so as to protect the capital.
Risk-taking traders can also consider writing Cairn India 300 call, which closed on Friday at Rs 4.85.This strategy involves higher margin requirements.
Ashok Leyland (Rs 67.05): The stock has been moving up steadily in the last two months to hit a new peak at Rs 70.6. After gaining sharply in recent times, the stock now appears headed for a correction. We expect the stock to weaken from current levels. The stock has strong support at Rs 58-60.
F&O pointers: The Ashok Leyland futures (market lot 9,550) added over two lakh shares on Friday even as the stock slipped, indicating accumulation of short positions. Option trading was also skewed towards bears as the calls such as 70, 72.5 and 75 witnessed higher accumulation. The 65-strike put witnessed a modest accumulation of 19,100 shares suggesting that put writers were not willing to commit themselves.
Strategy: Consider going short on Ashok Leyland futures with a stop-loss at Rs 70 for a target of Rs 60. Alternatively, traders could also consider buying Ashok Leyland 65 put, which closed at Rs 1.20.
Follow-up: Last week we had recommended shorting Bank Nifty futures and Suzlon. Stop-loss would have been triggered for both the recommendations.
Sizzling Stocks: Aban Offshore (Rs 831.2)
Aban Offshore tumbled 20 per cent intra-day on May 14 following its announcement that Aban Pearl, a semi-submersible ship of its subsidiary reportedly sank. The volume traded was extraordinary on Friday. The stock started the week on a positive note with 6 per cent jump, in line with broader benchmarks on Monday. However, this upward bounce failed to sustain further as downward pressure has prevailed since its October 2009 peak of Rs 1,679. Since then, the stock has been on an intermediate-term downtrend.
In the first week of May, the stock dived 7 per cent, breaking through a significant support level around Rs 1,110. Moreover, the stock's long-term trend is also down from an all-time high of Rs 5,555 recorded in late 2007.
Long-term investors can hold the stock as long as it trades above Rs 650 as stop-loss, which is a strong long-term support level. Currently, the stock is finding temporary support around Rs 800. A minor pull-back rally is possible to a maximum of Rs 915 before the stock resumes its primary downtrend. In the medium-term, the stock can decline to Rs 750 or to Rs 650 levels. Key resistance after Rs 915 are at Rs 1,010 and Rs 1,110.
Godrej Consumer Products (Rs 346.2)On May 12, Godrej Consumer Products announced that would acquire the remaining 51 per cent stake in Godrej Sara Lee. This triggered its stock price to jump almost 14 per cent on Thursday and another 2 per cent on Friday accompanied by good volume. The stock has been on a long-term uptrend since its October 2008 low of Rs 94. Besides, the medium and short-term trend is also up for the stock. It is also trading well above its 21 and 50-day moving averages.
Investors with a long-term horizon can consider holding the stock with stop-loss at Rs 200. The stock can reach higher to Rs 374. Medium-term investors can stay invested with stop at Rs 320. A failure to move beyond Rs 359 would signal that the bullish momentum is losing track; at which point investors can take partial profits of the table. Strong decline below Rs 320 can drag the stock lower to its support at Rs 290 or Rs 270 in the medium-term.
Direct equity exposure: When and how to concentrate
Most individuals believe that spreading risk across more stocks is preferable to having a concentrated exposure. This is not surprising considering that diversification is the bedrock of modern portfolio management. It does not, however, mean that concentrated exposure is sub-optimal. So, the question is: When should individual investors have concentrated equity exposure?
This article discusses the risk-return characteristics of concentrated exposure to direct equity. It then shows how to construct such exposure within the core-satellite framework.
A concentrated exposure is not always about the number of stocks in a direct equity portfolio; it is also about the exposure to each stock in the portfolio.
Consider two portfolios. The first portfolio has 10 stocks with equal exposure to each stock. The second portfolio has 20 stocks with 60 per cent exposure to two stocks and 40 per cent exposure spread across 18 stocks.
It is clear that the second portfolio is more concentrated than the first portfolio, even though it has more number of stocks. If the second portfolio, however, contains not more than 10 per cent exposure to any one stock, the first portfolio will be considered concentrated.
For the purpose of this article, we define concentrated exposure as one that has 10 stocks or less. This definition fits with typical portfolios which do not have more than 15 per cent exposure to any one stock.
When to concentrate
The objective of concentrated exposure is to take selective bets to generate higher returns. An investor should, hence, take such exposure only if she possesses security selection skill and/or market timing skill.
Security selection skill refers to the ability to pick stocks that are likely to outperform the relevant benchmark index. Market timing refers to the ability to time the buy-sell decisions and profit from short-term trading. Security selection is often based on fundamental analysis and market timing on technical analysis; quantitative modelling could work just as well in both cases. Suppose an investor believes that Infosys will outperform the Nifty Index. She may then take 15 per cent exposure to the stock as against its 9 per cent weight in the index. This decision is a function of the investor's conviction in the security selection model and/or the market timing skill and the success that she has had in the past. Those with "hot-hand" are more likely to have concentrated portfolio than ones who have had successive losses in the past.
How to concentrate
We believe that concentrated exposure to direct equity should be confined to the satellite portfolio; the core portfolio should contain passive exposure to broad-cap index or large-cap style index.
If the equity core consists of large-cap index fund, investors should construct the concentrated direct equity exposure from the universe of mid-cap and small-cap stocks. This way, the core and satellite portfolios would have exposure to all investment styles based on size factor.
Investors, especially those applying market timing models, would do well to size their trades based on risk management rules. A trade can be sized, for instance, based on the sell-stop and the 2 per cent rule. Suppose 2 per cent of the capital allocated for direct equity trades is Rs 20,000 and the stop-loss risk of a certain stock is Rs 10. The investor should not buy more than 2,000 shares (Rs 20,000 divided by Rs 10) of that stock.
It is important to have such risk control measures for two reasons. One, market timing models typically have only 65 per cent success rate. And two, 20 per cent of the portfolio typically contribute to 80 per cent of the gains.
Conclusion
Investors should decide whether concentrated or diversified direct equity exposure would best suit their requirement. A concentrated exposure could be optimal when investors' possess market timing and/or security selection skill backed by appropriate systems to control risks.
Mutual funds outdid FIIs in stock selection
Stocks in which mutual funds hiked their stakes beat the markets and did better than those picked by FIIs.
Foreign institutional investors (FIIs) have long been blamed for stock market slides and credited with upswings. So had you mirrored FII moves, would you have then been able to pick winners while exiting the duds? As it turns out, yes. But following domestic mutual funds (MFs) would have helped you do even better.
Analysis of shareholding patterns and stock returns between March 2009 and March 2010 shows that stocks in which MFs hiked stakes delivered returns that outstripped broad markets by far more than those picked by FIIs. Stocks picked by FIIs of course delivered a healthy outperformance, gaining 105 per cent over the year.
For this analysis, we considered the shareholding patterns of the BSE 500 companies for the March 2009 and March 2010 quarters, and the returns delivered by the stocks between May 2009 and now. We jumped a couple of months for stock prices as it may have taken that time for investors to identify and ride stocks picked up by institutions.
Increased holdings
Shareholding structure is split between promoters, institutional investors and non-institutional investors. FIIs, MFs and insurance companies fall within the group of institutional investors. It is this group, and the promoter group, which usually see the most frequent changes in holdings.
Considering holdings in the 476 companies in the BSE 500 universe for which data is available, MFs and FIIs appear to have been the most aggressive in stake increases over the past year. Average holdings of FIIs went up by 44 per cent, with every six in ten companies seeing increased stakes. MFs saw a 22 per cent increase in stake, with five in ten companies having higher mutual fund holdings.
Promoters and insurance companies have been far more sedate, with the latter having no holdings in about a third of the universe. Average holdings of both increased by just about 12 per cent each, maintaining holding levels in far more instances than both FIIs and MFs. One possible reason for this could be the lock-in period with investments in ULIPs, as well as the longer holding period these plans require of investors. Insurance companies therefore have leeway to hold investments for longer periods.
Picking winners
Having juggled investments actively over the past year, how have FIIs and MFs fared in terms of stock selection skills? The broad market, represented by the BSE 500, delivered a return of 57 per cent from May '09 to May '10. The Sensex and the Nifty posted a 40 per cent and 41 per cent return in the same period.
In the FII space, stocks that saw a significant (more than 5 percentage points) increase in holdings averaged a return of 109 per cent, well above broad market returns and the bell weather indices. Now turn to MFs. Stocks which saw significant hikes (more than five percentage points) by MFs delivered a stunning 142 per cent. About 83 per cent of mutual fund stock picks have delivered superior returns, against the 78 per cent of FII picks that have outperformed markets.
For instance, Texmaco saw an 11 percentage point increase in mutual fund holdings, against a 2 per cent increase by FIIs. The stock delivered a year's gain of 105 per cent. Similarly, the stock price of Bajaj Electricals went up about five times in a year's time; MFs augmented holdings by 8 percentage points, against the lower 3 percentage point hike by FIIs.
Or consider the stock of Indiabulls Real Estate, which gained a modest 17 per cent in a year. Here, FIIs increased stake by 23 percentage points, while MFs shaved holdings by about 1 point. Instances such as these go to show that while tracking FII movements would have helped deliver superior returns, looking at mutual fund activity would have served far better.
Even lowering cut-off to include stocks that saw marginal stake increases of 1 per cent, MFs managed a 115 per cent return against the 105 per cent enjoyed by FIIs. For instance, Consolidated Construction Consortium returned 192 per cent in a year's time. MFs hiked stake by 2.7 percentage points against a 0.5 point decrease in FII holdings.
As mentioned above, insurance companies have not resorted to active buying or selling to the same extent and have just held on to a major proportion of their stocks. This buy-and-hold approach does appear to have paid off, with average returns at 83 per cent. But that still wasn't as good as MFs or FIIs.
Underperformers
Turning the argument the other way round, have MFs been equally good at spotting the lemons and selling them quickly? Not to the same extent, but they have performed better than FIIs. Taking into account stocks where FIIs reduced holdings by a significant margin (more than five percentage points), more than half have actually outperformed the broad markets. The figure is better for MFs, where a lower four in ten stocks have outperformed markets.
For instance, Shoppers' Stop witnessed a drop of 5 percentage points in FII holdings while seeing a hike of about 3 percentage points in mutual fund holdings. In the meantime, the stock has gained a massive 230 per cent. The same holds true in the case of Mahindra Lifespace Developers, which delivered returns of 139 per cent. FIIs pared stakes by about 6 percentage points while MFs increased holdings by similar margins.
With the sizeable differences in returns posted by FIIs and MFs, the sectors both entities have bet on too seemed to differ quite a bit. The consumer durables segment, a strong growth story, has emerged one of the few sectors that found favour with both FIIs and MFs, besides sugar and realty. For the most part, some sectors were favoured far more by one entity than the other. For instance, MFs hiked holdings in sectors such as entertainment, finance and power generation. On the other hand, FIIs took up stakes in auto and related ancillaries and fertilisers. Sectors such as retail were preferred by MFs but FIIs stayed away from them. Similarly, steel, IT software and FMCG saw stake increases by FIIs while MFs largely ignored these.
The other classes
While promoters, MFs and FIIs were aggressively increasing their stake, non-institutional investors have done the exact opposite and collectively reduced their stake by 11 percentage points. This may be the result of a variety of factors including an aversion to risk following the bear market phase, resorting to safer debt investments and the continued volatility in markets, both global and domestic.
