Stocks in the news this week (May 15, ‘14)

The great ‘event’ will finally happen tomorrow (May 16) – announcement of results after the protracted general elections. TV and print media had a field day in covering and analysing the elections and the likely results in an effort to grab ‘eyeballs’.

More important news have been ignored. The IIP number was –0.5% – another month of negative industrial production, but an improvement over the previous month. CPI inflation moved up – thanks to higher vegetable and fruit prices. WPI inflation eased a bit. The new government will have their work cut out.

Companies are in the midst of announcing quarterly and annual results. Their stocks are reacting accordingly – as the charts below will show. Make sure you understand what these companies do, and who they do it to, before deciding to buy or sell.

Ahmednagar Forgings

 

The stock of Ahmednagar Forgings had formed a ‘double-top’ reversal pattern during Mar-Apr ‘12 (not shown) and slipped into a bear market – dropping from a high of 197.50 to a low of 73.20 in Aug ‘13. It has been rallying since then and had already re-entered a bull market and doubled from its low when news of good quarterly results hit the market – causing a gap-up move on a volume spurt. Technical indicators are looking overbought. The stock may undergo a bit of correction or consolidation.

BHEL

Infrastructure company stocks in general, and BHEL in particular, have been suffering terribly in long bear markets. BHEL’s stock finally bottomed out at 100 in Aug ‘13. It has managed to return to a bull market and doubled in value from its low. The recent price spurt was on rumours of a stake sale. Technical indicators are looking overbought. Expect some correction or consolidation.

Dr Reddy’s

The stock of Dr Reddy’s has been in a long bull market and touched a high of 2940 in Feb ‘14. It went into a corrective mode for 2 months before recovering to touch a lower top of 2783 on Apr 30 ‘14. After consolidating sideways for a few days, the stock price crashed on huge volumes after announcement of disappointing Q4 results. Technical indicators are looking bearish and a bit oversold. (Question for SEBI: Was there insider selling before result announcement?)

LG Balkrishnan

After touching a high of 338.50 in Apr ‘12 (not shown), the stock of LG Balkrishnan dropped into a bear market that bottomed out at a low of 152 in Aug ‘13. The stock rallied spectacularly since then – first returning to a bull market in Nov ‘13 and then moving up to triple in value from its low. Today’s price spurt on strong volumes was due to announcement of good results and a liberal 1:1 bonus issue. Technical indicators are looking overbought and showing negative divergences by failing to touch new highs. The stock is likely to move higher after a bit of consolidation.

Which stocks are keeping the Sensex down?

The BSE Sensex index comprises 30 stocks. 16 of them are currently trading above their 200 day EMAs – indicating bull markets. 14 are trading below their 200 day EMAs, preventing the Sensex from reaching new highs.

Here are brief thumb sketches of the laggards:

BHEL: Bounced up sharply from a low of 1905, but found resistance from the 200 day EMA; currently trading just below the long-term moving average.

CIPLA: Touched a low of 286 before a sharp rally to 332 – above its 200 day EMA; now consolidating between the 50 and 200 day EMAs.

DLF: The rally from the low of 209 stopped well short of the falling 200 day EMA; the stock has dropped down to seek support from its 50 day EMA.

Hero Honda: The stock touched a low of 1378; a spirited rally was stalled at its falling 200 day EMA; the stock has started to drop towards its 50 day EMA.

HUL: The stock dropped below its 200 day EMA on Jan 27 ‘11; it has been trading sideways since then, alternately going above and below the long-term moving average.

Jaiprakash Assoc.: From a low of 70, the stock reached a high just short of the 100 mark but well below its falling 200 day EMA; it has dropped down to seek support from its 50 day EMA.

L&T: The stock is trading sideways in a narrow range, just above its 50 day EMA but well below its falling 200 day EMA.

Maruti: Trading below the 200 day EMA for the past three months, the stock had a day’s close above the long-term moving average, only to drop below its 50 day EMA.

NTPC: The stock has been trading below the 200 day EMA since end-Oct ‘10; a couple of brief forays above the long-term average saw strong selling pressure; currently trading below its 50 day EMA.

ONGC: The bonus and stock split didn’t help the stock much; a day’s close above the 200 day EMA was followed by a steep drop below its 50 day EMA.

Rel. Comm.: A rally on strong volumes could only sustain above its 50 day EMA briefly, and has fizzled out already; the stock is well below its 200 day EMA.

Reliance: The stock has been trading in a broad sideways range, oscillating around its 200 day EMA – giving no returns to its investors; currently trading just below the long-term moving average.

Rel. Infra.: Another ADAG stock with equally disastrous results – a brief rally on good volumes above the 50 day EMA that is showing signs of weakness; the stock is trading way below its 200 day EMA.

Sterlite: A sharp rally accompanied by a volume spike took the stock from a low of 45 to a high of 68; but it stopped short of its falling 200 day EMA and started correcting.

Unless some of these 14 stocks start to rally soon, the Sensex may remain range-bound. Technically, the most likely candidates to help propel the Sensex upwards are BHEL, CIPLA, HUL, L&T, Maruti and Reliance. Dropping Rel. Comm. and Rel. Infra. from the index would not hurt either.

12 Sensex stocks displaying the ‘death cross’

The main reason why the Sensex isn’t showing a ‘death cross’ yet, is that only 12 of the 30 Sensex stocks are showing the ‘death cross’. The balance 18 are technically still in a bull market. For the uninitiated, the ‘death cross’ is the 50 day EMA crossing below the 200 day EMA on a price chart, signalling the beginning of a bear market. (The 50 day EMA crossing above the 200 day EMA, signalling the beginning of a bull market, is called a ‘golden cross’.)

Chart patterns of the 12 Sensex stocks displaying the ‘death cross’ (marked by blue ovals) are discussed below:

BHEL

BHEL is a PSU blue-chip that started correcting after hitting a peak in Oct ‘10. The correction in the Sensex from Nov ‘10 exacerbated the fall. The ‘death cross’ occurred in end-Nov ‘10, two days after the stock dropped sharply to an intra-day low of 2060. A strong pullback took the stock up to 2379, where it faced strong resistance from the combined 100 day and 200 day EMAs.

Though technically in a bear market, the stock is trying to build a base. A move above 2379 will create a bullish pattern of higher tops and higher bottoms. The RSI and slow stochastic are showing positive divergences, having reached higher tops as the stock made a lower top. Use the dip to accumulate.

DLF

DLF, the real-estate high flier, doesn’t really score very high on management ethics, accounting transparency or investor friendliness. The stock is in a long-term bear market. A brief rally took the stock to a 52 week high of 397 in early-Oct ‘10. That was an opportunity to sell. The ‘death cross’ in Dec ‘10 has restored the bear market. With the recent tightening of loans to real-estate players by banks and housing finance companies, you can forget about investing in this stock even as a contrarian play. It may be headed down to two-digits.

Hero Honda

Hero Honda was one of the stars of the bull market till its peak of 2094 in Apr ‘10. A technically overbought condition started a corrective spell. The confirmed news of Honda, Japan pulling out of the joint venture was given a thumbs down by the market. The uncertainty about the future has led to heavy selling. The ‘death cross’ in end-Jan ‘11 is signalling a bear market for this blue-chip. Avoid.

Jaiprakash Associates

Jaiprakash Associates has been in a down trend since touching a high of 180 in Oct ‘09. The ‘death cross’ occurred in May ‘10, confirming the bear market. The rally from Sep-Nov ‘10 was an exit opportunity. Launching huge projects and borrowing money by the truck-load seems to be the core competency of this company. The stock is headed towards low double-digits. Avoid.

Larsen & Toubro

It is a bit disappointing to see a blue-chip like Larsen & Toubro in this group of bearish Sensex stocks. It started correcting with the Sensex after touching a peak of 2212 on Nov 4 ‘10. The sharp fall in Jan ‘11 was partly due to the less-than-expected Q3 performance. The re-structuring into 9 separate companies has also caused some uncertainty in the minds of investors. The ‘death cross’ will occur tomorrow, but I would use this dip to accumulate the shares of this fundamentally strong and investor-friendly company.

Maruti Suzuki

Maruti Suzuki’s chart pattern has two ‘death crosses’ – one in May ‘10 and the other in Jan ‘11. What does it indicate? Technical analysis is not a science, and no rule is sacrosanct. The ‘death cross’ usually indicates the start of a bear market. But not in this case. The stock has been consolidating sideways since reaching a top of 1740 in Sep ‘09 – causing the ‘death cross’ to occur twice without entering a bear market. Yesterday’s low of 1170 formed a possible double-bottom. The RSI and slow stochastic are indicating a likely upward bounce. Accumulate.

NTPC

The NTPC stock chart pattern is also showing two ‘death crosses’ – the first in May ‘10 and the second in Nov ‘10. The stock has been drifting downwards since touching a peak of 242 on Dec 31 ‘09, and is in a bear market. The hype about the phenomenal growth and profit opportunities in the power sector has proved to be just that – hype. Avoid.

ONGC

The ONGC chart also has two ‘death crosses’ – one in Apr ‘10 and the other in Jan ‘11. The first one didn’t cause too much damage to the bulls. The current one is unlikely to do much damage also – because the FPO has been scheduled for Mar ‘11, and the DIIs are likely to buy at dips till the FPO goes through. This is a great company but the government’s meddling has messed up its operations. This is a major reason why I avoid all PSU stocks. Accumulate.

Reliance Comm

Where is the ‘death cross’ in the Reliance Communications chart? It happened more than two years back, and is not showing up in the one year chart pattern! The stock is in a long-term bear market and should ideally be removed from the Sensex 30 index. Only big-brother can bail this company out. Don’t go anywhere near this.

Reliance Infra

Reliance Infra chart also has two ‘death crosses’. The first one was caused by the sideways movement in Feb ‘10. The next one in Sep ‘10 signalled the bear market. Anil Ambani has proven to be a big bag of wind with a slow leak. If you are invested in this company, bail out now before it becomes too late.

Reliance Ind.

Reliance chart has two ‘death crosses’ as well – one in Aug ‘10 and the other in Jan ‘11. The first one was due to the sideways consolidation that has generated negative returns in the past one year. But the second one looks more ominous. The fall in Jan ‘11 has been steep and on increasing volumes. If Reliance doesn’t recover soon, it will drag down the Sensex with it. The technical indicators are hinting at a further fall. Wait for the correction to play out before entering. 

Tata Power

The ‘death cross’ in the Tata Power chart hasn’t yet happened – even though it has been marked in Sep ‘10. The 50 day EMA spent only a few trading sessions below the 200 day EMA due to the sideways consolidation, followed by a 52 week high. The current corrective spell may push the stock into a bear market. Wait for the correction to play out before entering.

3 year charts of some Sensex 30 stocks trading below all-time highs

The BSE Sensex is trading near its all-time high. That doesn’t mean all the 30 stocks that comprise the Sensex index are trading near their all-time highs. Here are the charts of some of the Sensex stocks that are trading below their earlier peaks:

BHEL is a PSU star and a leader of the infrastructure pack. Despite power being a priority sector and BHEL being the major supplier of large capacity steam turbines and boilers that form the heart of thermal power stations, the stock is yet to reach its 2007 peak.

The 200 day EMA is rising and the stock is trading above it, which is a bullish sign. But volumes have trailed off as the stock is trying to move higher, which is not so encouraging. Add on dips.

The realty sector was most favoured by investors in the previous bull market, with DLF being the undisputed king. Questionable business practices and opaque financial statements had a disastrous effect on the stock’s fortunes. Though it is trading above its 200 day EMA, it has failed to regain even 50% of its bear market fall. Avoid.

NTPC is one of the better managed PSUs and the largest power generation company in India. But that hasn’t translated into superior stock performance. Despite all the hype surrounding the power sector – specially during the previous bull market – most power generation companies are not highly profitable. One of the major reasons being that growth in power generation is dependent upon frequent and huge capital expenditure.

The stock is trading below the 200 day EMA and falling. Avoid.

Jaiprakash Associates is one of the leading companies undertaking large infrastructure and real estate projects that require massive capital outlays, which have been mainly financed through debt. The huge interest burden has proved a detriment to the stock’s performance. After retracing 50% of its bear market fall, the stock has been making a bearish pattern of lower tops and bottoms. Avoid.

Tata Steel’s large debt burden caused by the Corus acquisition was compounded by the economic slowdown in Europe (where Corus sells most of its output). The stock is trading well below its Jan ‘08 peak, but has formed a bullish cup-and-handle continuation pattern. It is trading above its rising 200 day EMA and can be added on dips.

Why did the Sensex fall so much today?

One of the favourite pastimes (or is it bread-and-butter?) of market analysts is to assign reasons for gyrations in the Sensex after it has gone through a big up or down move.

Some times the reasons are genuine and accurate. Mostly it is an exercise in trying to explain the unexplainable. The Finance Minister said that inflation in food prices will slow down, so the Sensex moved up. Several Indians are on a ship hijacked by Somali pirates, so the Sensex moved down. You get the drift.

I have no intention of doing a post-mortem. I'd rather quote from this recent article:

'... stock markets generally 'discount' good or bad news months in advance. If you own stocks that make up the Sensex (or Nifty) index, and if such stocks have risen a lot already and are now showing signs of hesitation - then they may fall if the results are perceived to be less than great. Only positive earnings surprises can cause them to rise more.'

Larsen and Toubro's Q3 Profit After Tax (PAT) grew 15% on a Year-on year (YoY) basis; the stock fell more than 6.6%. BHEL's Q3 PAT rose more than 35% on a YoY basis; the stock dropped 4.25%. Wipro's Q3 PAT increased more than 21% on a YoY basis; the stock dipped by 2.2%. ONGC's Q3 PAT was higher by 23%; the stock shaved off 2%.

Is the market behaving irrationally? Not at all. The results were below the market 'expectations'. It was the expectations that were irrational.

Will the Sensex fall some more? The probability is high, because the expectations of growth of the Indian economy has been on the irrational side as well. The actual growth is likely to be lower.

For the April to December '09 period, indirect tax collections have suffered. A 13% dip in excise duty, a 6% drop in service tax and a hefty 28% cut in customs duty has led to an overall 18% lower collection over the previous year's same period. These figures will not enthuse market players.

World indices are facing headwinds, with the Dow dropping like a stone at the time of writing this post. FIIs have been selling for some time, and buying by DIIs may not stem the rot.

What should small investors do? If you have been reading my blog posts regularly, you already know my answer. Wait and watch, but stay nimble. Curb the urge to dive in. This could be a quick, sharp cut before the Sensex recovers. The India growth story is far from over.

Stock Chart Pattern - Sanghvi Movers

The stock chart pattern of Sanghvi Movers has a couple of interesting formations - one is very positive, and the other - which is still forming - is quite negative.

Before delving in to the details, a small confession. I have very little information about the management quality. But they seem to be on to a good thing. What is Sanghvi Movers' business? They hire out cranes for construction projects.

What is the big deal about that? It is just the kind of business the big boys will not get into. That has allowed this small-cap company (equity less than Rs 10 Crores) to become the largest crane hiring company in India, and the 3rd largest in Asia.

Sanghvi Movers' client list reads like a 'who's who' of the engineering and construction industry. They have close relationships with Reliance, BHEL and Suzlon. Robust cash flows from operations, growing earnings and dividends, more than 300 medium and large size cranes amongst its assets - all add up to a company whose future is tied to India's growth story.

The 1 year bar chart pattern of Sanghvi Movers shows that savvy investors have already caught on to the stock:-

After making an almost perfect bullish 'rounding bottom' formation with a low of Rs 60 made on Mar 4, '09, the stock moved up quickly and hit a high of Rs 199 yesterday.

Take a look at the pattern forming since the middle of May '09. If you draw a line connecting the tops, you will see a semi-circle being formed. Such a 'rounding top', if formed, is a bearish pattern that could lead to a sharp decline.

The RSI has been moving down as the stock has moved sideways for most of this month. The slow stochastic has moved down from the overbought zone and the %K line is below the %D line. The MACD is in positive territory but has gone below its signal line. All three indicators are showing negative divergences.

The OBV is the only indicator that looks bullish. But look a little closer. A sharp volume spike on Jun 2, '09 (a bulk deal?) moved the OBV into positive territory. Otherwise it was meandering below the '0' line, with a marginal rise during April and May '09. In fact, the pick up in volumes happened only during the past month.

Please note that Sanghvi Movers is a Rs 2 face-value stock, so the current price of Rs 177 is equivalent to Rs 885 for a Rs 10 face-value stock. Are there any other negatives? Yes, the huge debt. Obviously, the nature of the business is such that to keep up with the growth, the company needs to invest continuously in capital equipment.

Bottomline? On a correction, the stock chart pattern of Sanghvi Movers can move down to the Rs 120-130 levels and seek support from its 50 day EMA. Entry can be considered on the dip by intrepid investors for a 100% gain within a year or so.