Are the Sensex and Nifty back in bull markets?

Relentless buying by the FIIs have changed stock market sentiments from extremely negative to almost celebratorily positive. Have the Sensex and Nifty returned to bull markets? Is it time to strange strategy from ‘selling the rallies’ to ‘buying the dips’?

Technically, there are four criteria that define a bull market. They are:

1. A 20% rise from the bottom.

For the Sensex, the recent bottom was 15136 (touched on Dec 20 ‘11). A 20% rise means a level of 18163. Still a little more than 500 points to get there. For the Nifty, the recent bottom was 4531 (also touched on Dec 20 ‘11). A 20% rise means a level of 5437. A bit more than 100 points away.

2. Index (or stock) trading above its 200 day EMA.

Both Sensex and Nifty are trading above their 200 day EMAs – so this definition has been met.

3. The ‘golden cross’ of the 50 day EMA above the 200 day EMA.

The 50 day EMA of the Sensex is rising, but is still 500 points below its 200 day EMA. The 50 day EMA of the Nifty is also rising but is more than 150 points below the 200 day EMA.

4. Index (or stock) retracing more than 50% of its fall.

The Sensex peaked at 21109 on Nov 5 ‘11, and dropped 5973 points to its low of 15136. A 50% retracement of the entire fall would mean a level of 18122 – almost 500 points away from today’s intra-day high. The Nifty hit a high of 6338 on Nov 5 ‘11, and dropped 1807 points to its low of 4531. A 50% retracement of the entire fall would take the index to 5434 – still about 100 points further than today’s intra-day high. (Now you know why technical experts are talking about the 5400 level.)

Only one (2 above) out of the four criteria that define a bull market has been met so far. Does that mean that both indices haven’t entered a bull market yet? Technically, the answer is in the affirmative. Ideally, meeting three out of the four criteria should leave no doubt that the bulls are on top. For that to happen, another 500 points on the Sensex and 100 points on the Nifty are left to cover. The way the FIIs are buying, that could happen in the very near future.

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10 Questions about Supreme Court's cancellation of 122 2G telecom licences

In a historic judgement today, the Supreme Court has cancelled 122 2G telecom licences issued irregularly during the tenure of the former Telecom minister, A Raja (currently cooling his heels in a government hospitality center). The judgement was hailed by all concerned. After an initial dip, even the stock market celebrated by closing higher.

The judgement raises several questions. Here are 10 of them. Knowledgeable or enlightened readers are welcome to provide some answers.

1. By cancelling the licences, is the Supreme Court pointing the finger of blame towards the UPA government?

2. Isn't the business community equally to blame for trying to get something for nothing (well, not exactly nothing)? What happens to the not-exactly-nothing passed on to the badminton-playing government guest at Tihar jail?

3. Many of the 2G licences were acquired with no intention of providing any services, but merely to sell them off to others at huge profits - defrauding the government exchequer. Who will recover the immoral profits, and how?

4. A new licencing process will be formulated over the next 4 months and the licences will be reissued. Who will ensure that the new process will not turn out to be 'A Raja - Part 2'?

5. What happens to the licence fees already paid by the cancelled licence holders? Will those fees be forfeited?

6. What if some of the cancelled licence holders do not bid in the new process? Will the existing licence holders (whose licences have not been cancelled) be allocated extra spectrum?

7. Most of the licence holders borrowed money from the banks to launch their services. Will those loans become NPAs? Is that the reason why the Bank Nifty took a dive?

8. The Supreme Court judgement must have sent shivers through the spines of foreign investors in the telecom sector. Will FDI flows into India - badly needed to get our economic engine revving again - get affected by this judgement?

9. The charges against P Chidambaram brought by Subramaniam Swamy will be judged by a lower court later this week. If the judgement is adverse, can it bring down the UPA government? If yes, will the stock market crash?

10. Will the Supreme Court judgement open up a proverbial Pandora's box? Will all scams - whether in mining, CWG, Adarsh Housing, fodder - come under the Court's scanner? Will that be good or bad for the country?

Some of these questions may get answered over the next few days, as the government assesses the detailed judgement and formulates its plan of action. Till then, it will be good to hear what readers think.

Stock Chart Pattern - Sanghvi Movers (An Update)

In the previous update of the stock chart pattern of Sanghvi Movers back in Jan '11, the stock had broken down below a bearish descending triangle pattern. Descending (and ascending) triangles have measuring implications. The downward target was calculated as 116. Stock prices don't really understand or follow arithmetic. Actual targets are never exactly met. Prices typically overshoot upward targets and fall short of downward targets.

So, what happened? The two years bar chart pattern of Sanghvi Movers is an example of how a fundamentally strong stock with a good business model can suffer when sentiments turn negative towards the sector in which the company operates:

The stock fell to a high volume 'panic bottom' of 114 in Feb '11, meeting the downward target of 116 almost exactly. It bounced up sharply - only to face resistance from the falling 50 day EMA and then dropped past its 'panic bottom' of 114 to a low of 104 in Mar '11. 'Panic bottoms' seldom hold and this is another example of it. But that doesn't prevent intrepid investors from trying to bottom-fish - and get stuck at higher levels.

Note that both the RSI and the slow stochastic were deep inside their oversold zones when the stock price dropped to 104. A correction to the earlier down move usually follows. The ROC touched a higher bottom and hinted at a possible correction or consolidation. Over the next 8 months, the stock price consolidated within a bearish 'rising wedge' pattern - oscillating around its entangled 20 day and 50 day EMAs. Throughout the consolidation period within the 'rising wedge' pattern, the 200 day EMA continued to fall - leaving no doubt that the bears were in control.

After breaking downwards below the 'rising wedge' on Nov 14 '11, the stock price attempted a pullback to the wedge. Such pullbacks after a downward break happen often, and provide a selling opportunity. The stock continued to fall on high volumes and dropped to a low of 84.50 on Jan 2 '12. It has since been trading within a small symmetrical triangle, and may seek even lower levels.

The technical indicators are bearish, but showing faint signs of improvement. The MACD is above its signal line, but in negative territory. The ROC is below its 10 day MA, and trying to climb out of the negative zone. The RSI dropped below its 50% level, but trying to rise. The slow stochastic fell inside its oversold zone, and is trying to come out.

The infrastructure sector has turned from being a darling of investors to a villain. Stocks of almost all companies with any links to the sector are getting hammered - regardless of their underlying fundamentals. The stock of Sanghvi Movers has been no exception. Debt/equity ratio is more than 1, but for a capital intensive company, that shouldn't be a major issue. Cash flows remain positive. Margins are definitely under pressure - but that is a common feature with stocks from almost all sectors. But the market knows best. No point in betting against it.

Bottomline? The stock chart pattern of Sanghvi Movers is facing technical headwinds though fundamentals appear to be reasonable. As and when the infrastructure sector starts picking up, the company will again start making a lot of money. But that seems a couple of quarters away. Watch Q3 and Q4 results before considering an entry.

Notes from the USA (Jan 2012) - a guest post

It was about 25 years back that the then head of the Department of Electronics, a dynamic government official by the name of N. Vittal, shook up the complacency in the IT industry by announcing a software export target that seemed outrageously high (by prevailing standards). The IT industry rose to the challenge, and the rest is history. Software exports mainly comprised ‘on-site body shopping’ of technically qualified software engineers.

Call center outsourcing business opened up vast employment opportunities in India for less technically savvy youth – even those located away from the major metros – and significantly expanded the size and purchasing power of the Indian middle class. In this month’s guest post, KKP points to an important trend that could potentially destroy the employment opportunities of tens of thousands of India’s educated youth.

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India Sees First Wave of Outsourcing Competition

India’s success in recent years can be attributed largely to the outsourcing trend that the Internet technologies enabled in the 1990s. Companies tripped over each other in the US to migrate their business from US and Europe to India to save on costs, while servicing customers in almost the same manner.

A recent article in the Washington Post highlights the increasingly popular trend of call center outsourcing operations moving away from India. Although India remains the preferred destination for IT support (today), the country is no longer known as the call center capital of the world since salaries and other business costs have grown significantly over the past year.

Currently, a larger number of call center outsourcing employees are working in the Philippines and Malaysia rather than in India. My team in Argentina is also telling me that there is a significant growth of this business in Argentina. For companies such as 24/7 Customer, the choice has been clear. It set up its first call center in India in 2000. Today, it has 4,500 employees in the Philippines compared with 3,000 in India.

What is so crucial about it?

It is critical to understand what US does to economies around the world. US is a Wall Street driven engine for the enterprises. This means that there will be ‘trends’ and ‘herd movements’ in one direction. And when the winds blow a different way, it will all change quite quickly. In a recent conversation, a businessman who has come from Hyderabad told me how salary cuts are going on within the call center environment, and there are plenty of people, but not enough jobs. This is Phase 1.

USA businesses will make a decision on what is good for their bottom line and change, throwing away the human component quickly and switching countries in a heart-beat. Many companies have moved their operations to the Philippines also and they are serving customers well.

But, the most important trend that I have seen is moving operations to low cost states within the US where they can hire, train and operate a US based call center at almost the same cost as those in a foreign land. Here’s proof. I open/close many credit cards and lines of credit every year, and during the month of Dec and Jan, do an inventory and clean house. In doing so, I have to make calls to open new ones, and close existing ones. Every single call I made (except for Citibank), was picked up by someone in a US call center, and they announced themselves as being in the US! Of course, they served me with a level of service that is expected in the US, and with a level of urgency that falls outside of pre-written scripts and documented processes.

So, again, why is this important for us investors?

USA did this to Japan, and today, there are more Japanese plants operating outside of Japan than in Japan. This trend might hit the shores of India, and hence India will really have to boost its ‘organic growth engine’ in a huge way to compensate for the loss of business that will come over the next 1-2 decades. It is a slow moving engine since these trends are like the Titanic making a turn, but when they turn, they turn for good.

It is also possible to offset the reduction in call center work by transitioning to the BPO type of efforts, where the margins are better. Those efforts are also underway, but the push to bring business back into the country (in US and Europe) is getting stronger as job losses in those economies begin to hurt. That is a wind of change that an investor needs to worry about (macro trend).

I am not saying that Manufacturing, Auto-parts, IT support, Software development, Tier 2/3 Support, BPO efforts etc. will all move away from India, but when the first wave is affected the other waves will slowly get affected in a small manner, if not completely get wiped out over the ensuing years.

Our investments have to reflect this since a lot of infrastructure is built around this growing middle class, and the growth of middle class is becoming dependent on the flow of business from US and Europe. With both those economies slowing, and further scaling back on outsourcing to India, we may see a much larger detrimental effect on this portion of the business. The only hope is that the local growth engine revs up in the meantime to replace this slow loss that will happen over the next decade or two.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 27, ‘12

S&P 500 Index Chart

The S&P 500 index chart touched an intra-day high of 1333 on Jan 26 ‘12 but closed lower than the previous day’s close – forming a bearish ‘reversal day’ pattern. Reversal day patterns, when formed at the end of an intermediate rally or decline, can signal a change of the intermediate trend. The index had moved up too fast, and a correction will restore the health of the bull market.

The technical indicators are signalling that a correction may be on its way – though the weekly close was flat. The slow stochastic is still inside the overbought zone, but has started to fall. The MACD is positive and above its signal line, but has also started to fall. The RSI formed a small head-and-shoulders pattern before dropping from its overbought zone. The ROC is positive, but heading down.

The US economy reminds me of a badly tuned automobile that is knocking and backfiring but still moving forward. Initial jobless claims rose to 377,000. New home sales dropped in Dec ‘11. But durable goods orders rose in Dec ‘11. AAII’s sentiment survey indicated bullishness at 48.4% was higher than its historical average of 39%; bearishness at 18.9% was much below the historical average of 30%. Q4 GDP came in at an annualised 2.8%, of which inventory build-up accounted for 1.9%. Q1 ‘12 GDP may suffer as a consequence.

FTSE 100 Index Chart

The FTSE 100 index chart has followed the S&P 500 index into a bull market by rising to an intra-day high above the 5800 level and making a bullish pattern of higher tops and higher bottoms, but closed flat on a weekly basis. Volumes dropped off during the week, which doesn’t auger well for a sustained rally.

The technical indicators are signalling a correction. The slow stochastic has made a head-and-shoulders pattern and slipped down from its overbought zone. The MACD is positive and touching its signal line on the way down. The RSI is above the 50% level but moving down. The ROC is falling towards the ‘0’ line.

Britain moved closer to its second recession in three years after official figures showed the UK economy contracted by more than expected in the last three months of 2011. Eurozone problems are not going away, and are affecting UK’s growth prospects.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are technically back in bull markets, even as the US and UK economies continue on their painful roads to recovery. The rallies appear to be on their last legs. Corrections are around the corner - use them to add selectively.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 27 ‘12

The following concluding comment was made in last week’s analysis of the BSE Sensex and NSE Nifty 50 index chart patterns: “…a flood of FII buying can throw all analysis out of the window.” The deluge of FII buying drowned DII selling, and overbought conditions in the market became even more overbought.

Reminds me of the title of a funny Jack Nicholson movie: Something’s gotta give. Technicals are pointing to a correction at any time, but the market just keeps marching up. Benjamin Graham had said that in the short-term, the market acts like a voting machine. FIIs are definitely voting for a return to a bull market. Q3 results declared so far continue to demonstrate pressure on the bottom lines, even as there have been some growth in top lines.

BSE Sensex index chart

The BSE Sensex weekly bar has just about managed to close above its 50 week EMA and is only 100 odd points below the upper edge of the downward-sloping channel (within which it has traded during the past 15 months). If the FIIs continue their buying spree, the index may breach the channel on the upside and return to a bull market.

The technical indicators are looking bullish and supporting the up move. The MACD has crossed above its signal line, but remains in negative territory. The ROC has risen sharply above its 10 week MA. The RSI has edged above its 50% level. So has the slow stochastic.

Note that the technical indicators were in a similar bullish state during the previous rally in Oct ‘11, but the bear market rally fizzled out near the top end of the channel. Will the Sensex behave differently this time? Only FIIs can provide the answer.

NSE Nifty 50 index chart

The NSE Nifty daily chart is looking bullish to the point of being heavily overbought. The index climbed above the 200 day EMA on a volume surge and has reached the top of the downward-sloping channel. The 20 day EMA has crossed above the 50 day EMA, and though both EMAs are rising they remain well below the 200 day EMA.

The rally has been too fast and too steep, which is typical of bear market rallies. The technical indicators are looking quite overbought. The MACD is above its signal line, and both are rising in positive territory. The ROC is also positive, and rising above its 10 day MA. The RSI and the slow stochastic are well inside their respective overbought zones.

The Nifty can remain overbought for long periods, but a correction, even a short one, will restore the technical health of the index. Otherwise, the bulls may get tired of buying and allow the bears to resume their control.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns had strong bear market rallies from their Dec '11 lows, and have reached the top end of their downward-sloping channels. Will they be able to break out of the bear grips finally? Technically, yes. Fundamentally, no. Nothing has changed much from the time that the Dec ‘11 lows were touched. Interest rates remain at their high points. Same with oil price. Balance of payments continue to deteriorate. Nothing is happening in the policy or reforms front. Inflation has moderated a bit, but that has more to do with the base effect. The Rupee has strengthened, mainly due to the FII inflows. This still looks like a sucker’s rally – but betting against the market can be hazardous to your wealth. Enjoy the ride while it lasts.

Stock Chart Pattern - Sintex Industries (An Update)

In the previous update a year back, the concluding comments were:

“The stock chart pattern of Sintex Industries is an example of how a stock that appears to be fundamentally investment-worthy is to be avoided for technical reasons. Sell.”

Lately, there has been a lot of chatter in various investment groups about the stock – so it may be worthwhile to have a look at the two years bar chart pattern of Sintex Industries and find out if there has been any worthwhile changes to reconsider the earlier advice:

A grey vertical line has been drawn to indicate the date on which the previous update was posted. Note that the expected ‘death cross’ (of the 50 day EMA below the 200 day EMA) happened a few days later, but the stock price found good support at 137 over the next two months and smartly bounced up above all three EMAs.

The rally topped out at 194 on May 31 ‘11 – much lower than its Nov ‘10 peak of 233, but higher than closing level of 168 when the previous update was posted in Jan ‘11. The three EMAs came quite close to each other, though they didn’t quite get entangled. This is often a precursor to a sharp move. The move came soon enough, but not before the stock price received good support from the 137 level once more during Aug ‘11.

Another upward bounce stalled just before reaching the falling 200 day EMA, and once the stock dropped below 137 in Sep ‘11, it fell in steps all the way down to 59 on Dec 16 ‘11 – losing 75% from its Nov ‘10 peak. Mid-cap (and small-cap) stocks find it very difficult to recover from such steep falls, and Sintex is unlikely to be an exception.

Despite a volume surge during the rally over the past month, the stock price has so far failed to climb above its falling 50 day EMA and is trading way below its 200 day EMA. The technical indicators are looking bullish, so the rally may not be quite over yet. The MACD is rising above its signal line, and is about to enter the positive zone. The ROC is positive, but has dipped below its 10 day MA. The RSI has just entered its overbought zone. The slow stochastic is about to do the same.

Bottomline? The chart pattern of Sintex Industries clearly shows that the bears are on top. The present rally should be used to exit the stock.

Did the stock market over-react to the 50 bps CRR cut by RBI?

The short answer to the question is: Yes. The CRR rate cut is good news, but not great news. Great news would have been a cut in the repo and reverse repo rates. Now, the long answer.

Imagine that you are a farmer in central India, and it is the middle of April. With poor access to irrigation facilities, your crop is dependent on the monsoon rains. Your cousin from the nearby town comes to visit you and mentions that it was announced on the TV that monsoon may set in a week early in the middle of June instead of the third week. No doubt, that would be good news. But the rains will still be two months away.

RBI's announcement is somewhat similar. The CRR rate cut is an indication that repo and reverse repo rates may be reduced two months down the road. So, today's high volumes may be a sign of a buying climax.

What is the CRR and what purpose will be achieved by cutting it from 6% to 5.5%? Cash Reserve Ratio (CRR) is a percentage of the total deposits in a bank that has to be maintained as a 'reserve' with the RBI. It is one of the monetary instruments used by the central bank to regulate the money supply in the financial system.

Due to the aggressive interest rate increases by the RBI to contain inflation, growth has started to slow down. In fact, the RBI has now set the GDP growth target for 2011-12 at 7% - down from earlier revised target of 7.6%. Much lower than the glory days of 9-10%. India Inc. have been complaining that growth was being sacrificed to control inflation. Now that inflation rate has finally started to moderate, RBI has taken the first step by increasing the liquidity in the financial system.

How does it work? Let us say, a bank has Rs 10,000 Crores as deposits. A 6% CRR implies that Rs 600 Crores have to be maintained as a 'reserve' with RBI. That means, the bank has access to only Rs 9400 Crores that it can give out as loans. A 50 bps (i.e. 0.5%) cut in the CRR leaves the same bank with access to Rs 9430 Crores to deploy gainfully. On the extra Rs 30 Crores, the bank can expect to generate an additional Rs 3 Crores in profit.

The overall cash infusion into the banking system is expected to be about Rs 32,000 Crores, which can be loaned out to generate a profit of say Rs 3200 Crores. Not a small sum, but not a king's ransom either. Now you know why the bank stocks rose today. But that is the theoretical view point. What is likely to happen in real life?

Is India Inc. going to break down the doors of banks to apply for loans? Highly unlikely. Remember that the interest rates remain just as high as it was two months back, when no one was taking loans and were postponing capital expenditure. Banks are also struggling to contain their NPAs and have become quite rigid in doing due diligence before handing out loans. Add to that the likelihood of the inflation fires getting stoked by the excess liquidity in the system. There is also 'hidden' inflation due to large subsidies.

All in all, definitely not a cause for celebration. The RBI governor clearly put the ball in the government's court by pointing out that fiscal profligacy is one of the major causes of inflation. Unless core inflation falls further, do not expect a cut in the repo or reverse repo rates in a hurry.

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