"There's Never Just One Cockroach in the Kitchen" - Warren Buffett

Buffett had made that comment in an interview following an accounting scandal in Wells Fargo. He may as well have made that comment about corruption in ICICI Bank and misreporting of NPAs by Axis Bank.

Yes Bank was the third 'cockroach'. (PSU banks are not being discussed here because collectively they are a massive 'anaconda' that is threatening to swallow India's financial system as a whole!)

The latest 'vermin' is IL&FS, whose MD has quit on his own. (The MD of ICICI Bank remains in suspended animation - for reasons best known to her. RBI has shown the door to the MDs of Axis Bank and Yes Bank, but is powerless to do likewise with the MDs of PSU banks.)

Moody's recently said that rising liquidity worries at IL&FS are credit negative for banks and debt market. The stock market reacted by indiscriminately pummeling the stocks of banks, NBFCs and housing finance companies.

It is interesting to note that despite a hurriedly-called concall with denials about any near-term liquidity problems, DHFL's stock failed to recover much from its lows on Friday (Sep 21). Which is the next 'cockroach'? 

There will be more than one. The business model of banks, NBFCs and HFCs requires borrowing short-term to lend long-term. If short-term liquidity dries up (or, gets costlier due to rising interest rates) the proverbial you-know-what will hit the fan - as it seems to be doing now. 

One market expert tried to reassure investors by stating that Friday's huge selloff was due to 'technical reasons'. One presumes he meant that fundamentally everything is hunky-dory in the financial system. Really?!

Talking about 'technical reasons', the market made a 'panic bottom' - with a sharp surge in transaction volumes - before bouncing up on short covering and some value buying. 

Typically, such a 'panic bottom' occurs during the second leg of a bear phase. 
However, the fact that it has occurred at an early stage of a corrective move is a clear warning to perma-bulls. 

Remember the stock market adage: Panic bottoms seldom hold. That means the market is headed lower than Friday's low. By how much? Likely support levels will be discussed in tomorrow's post on Sensex and Nifty.

Related Post
How to tackle a ‘panic bottom’

Focus back on Banking Sector stocks?

Ask any analyst covering the banking sector and you will hear a common refrain: “Buy private sector banks – avoid public sector banks.” I endorse this view.

PSU banks are often forced by the government to extend services to sectors that private banks scrupulously avoid. They run up huge NPAs in the process.

A recent decision by the government to inject Rs 70,000 Crores over the next 4 years into PSU banks have switched the focus back on the banking sector.

Does that make PSU banks better buys? Have a look at the charts of 10 banking sector stocks below and make up your mind.

Punjab National Bank

PNB’s stock started a bull phase in Mar ‘14 that culminated with a closing high of 225.95 in Dec ‘14 (adjusted for 5:1 stock split marked by light blue bell).

As often happens after a stock split, sellers dominated and the stock has dropped into a bear market. The funds infusion news has seen buyers coming to the fore.

Technical indicators are looking bullish, so the stock can rally some more. A convincing move above the sliding 200 day EMA may shake off bears.

Bank of Maharashtra

The stock touched a 2 years closing high of 54.20 in Jun ‘14, but formed a ‘double-top’ reversal pattern and started a 9 months long down trend.

The stock has been consolidating sideways for the past 4 months, but is trading below its 200 day EMA in a bear market.

Daily technical indicators are looking bearish. A convincing move above 42 may change the trend to bullish.

Central Bank

This is the chart of a PSU bank that resembles that of private banks. It is clearly in a bull market.

After closing at a 2 years high of 114.60 in Feb ‘15, the stock price has been consolidating sideways with a slight downward bias.

Technical indicators are showing signs of turning bullish. This can be a good entry point.

Corporation Bank

The stock price closed at a 2 years high of 82.40 in Jun ‘14, but formed a ‘double top’ reversal pattern and started to correct. News of a 5:1 stock split took the stock to a lower top of 77.60 in Jan ‘15.

Bears reasserted themselves, and the stock has been sliding deeper into bear territory. Technical indicators are showing some upward momentum. Any rally should be used to sell.

Indian Overseas Bank

The chart structure of IOB stock is similar to that of Corp. Bank – minus the price spurt in Jan ‘15. After closing at a 2 years high of 88.80, the stock has been on a downhill ride with a break of 4 months (during Oct ‘14 to Jan ‘15) for a sideways consolidation.

Technical indicators are showing signs of upward momentum, but the stock should be avoided.

HDFC Bank

One look at the chart should convince any investor why HDFC Bank’s stock is a favourite of FIIs. After a brief bear phase during Aug-Sep ‘13, the stock price rallied strongly to close at 1094 in Jan ‘15.

A 3 months corrective phase followed. The stock dropped to seek support from its rising 200 day EMA, and then bounced up to touch a 2 years closing high of 1115.60 in Jul ‘15.

Daily technical indicators have corrected from overbought conditions. The stock looks set to resume its up move.

ICICI Bank

After closing at a 2 years low of 156.80 in Sep ‘13, the stock price rose almost one-way to a 2 years closing high of 383.85 (adjusted for the 5:1 stock split in Dec ‘14 marked by light blue bell).

The stock has been in a correction since then, but appears to have formed a ‘double bottom’ reversal pattern. Technical indicators are in the process of correcting oversold conditions.

The bear phase may have come to an end.

Axis Bank

From a 2 years closing low of 164.70 (touched in Sep ‘13), the stock rose to a 2 years closing high of 649.50 (in Mar ‘15 – adjusted for 5:1 stock split in Jul ‘14) – gaining almost 300% in 18 months.

The stock has been consolidating sideways within a ‘pennant’ pattern for the past 5 months, and is trading above its rising 200 day EMA in a bull market.

Technical indicators are in bearish zones, but trying to turn around. An upward break out from the ‘pennant’ is likely

IndusInd Bank

The stock has given very good returns to investors – rising from a 2 years closing low of 338 (in Aug ‘13) to a 2 years closing high of 977.60 (in Jul ‘15) and gaining almost 190% in 2 years.

In between, a 3 months corrective phase (during Apr-Jun ‘15) ended with a ‘double bottom’ reversal pattern that successfully tested support from the 200 day EMA.

Technical indicators are looking overbought and showing negative divergences. A correction may be around the corner.

Yes Bank

The stock of Yes Bank provided excellent returns to shareholders – gaining 290% from a 2 years closing low of 225.90 (in Aug ‘13) to a 2 years closing high of 883.35 (in Jan ‘15).

Squabbles within the promoter family has prevented the stock from going anywhere since then. The stock has consolidated within a ‘rectangle’ with a 100 points range for the past 6 months.

Technical indicators are showing some upward momentum. A likely upward break out from the ‘rectangle’ can help the stock price touch 4 figures.

Chart Patterns of 10 Banking Sector stocks (an update)

There is nothing like a nice, long bear market to separate the men from the boys. Banking sector stocks have been no exception. Back in Dec ‘10, banking sector stocks were undergoing corrections after touching new highs. Those corrections turned out to be the first phase of a 14 months long bear market.

There are two schools of thought in the stock market. One group believes that stocks that have undergone deeper corrections during a bear market, are likely to gain more during the subsequent bull rally. There may be some truth to this line of thought – if gains are measured in percentage terms from the lows.

The other group prefers stocks that fall less during a bear phase, but recover more quickly in the subsequent bull phase – even though the gains may not be high in percentage terms. If you are not sure which group you should follow, have a look at the charts of ten banking sector stocks below to help you to decide.

Punjab National Bank

Punjab National Bank’s stock was one of the star performers during the bull phase from Mar ‘09 to Nov ‘10. The bear market shaved 46% off its peak level of 1395. The recent bull rally from its Dec ‘11 low of 751 pierced the 200 day EMA from below and reached 1091 – a 45% gain from the low. But the stock price remains in a bearish pattern of lower tops and lower bottoms and has slipped down below its 200 day EMA. Technically, the stock is in a bear market. Avoid.

Bank of Baroda

Bank of Baroda’s stock dropped from a peak of 1050 in Nov ‘10 to a low of 630 in Dec ‘11 – a 40% fall. The recent rally topped out at 881 – a gain of 40% from its low. The stock is trading above its 200 day EMA, but is still in a bearish pattern of lower tops and lower bottoms. Hold.

Central Bank

Central Bank’s stock made a double-top at 249 during Oct-Nov ‘10 and fell steadily down to touch a low of 63 in Jan ‘12 – a 75% fall from its peak. Though the recent rally gave a 76% gain from its low to its intermediate top of 111, the stock is trading below its 200 day EMA and remains deep inside a bear market. Avoid.

Corporation Bank

The stock price of Corporation Bank fell 59% from its top of 815 to its bottom of 335. The subsequent rally gained 57%. The stock is struggling to stay above its 200 day EMA, and remains in a down trend. Note the sharp volume spike as it crossed above its 200 day EMA – an indication that it may not fall much further. Hold.

Indian Overseas Bank

Indian Overseas Bank’s stock dropped 58% from its peak of 176 to a low of 73. Though the stock price rose sharply above its 200 day EMA – gaining 73% from its low – it has dropped equally fast and remains in a bear market. Avoid.

HDFC Bank

A favourite of the FIIs for obvious reasons, HDFC Bank’s stock has risen steadily to touch a new high in Feb ‘12 – forming a bullish pattern of higher tops and higher bottoms. Despite several drops below its long-term moving average, the stock is in a bull market. If you think that HDFC Bank’s stock is too expensive, and it is better to go for ‘cheap’ stocks like Central Bank of Indian Overseas Bank – think again. Cheap can get cheaper. Buy.

ICICI Bank

The stock price of ICICI Bank lost almost 50% from its peak of 1277 in Nov ‘10. The recent rally produced a 55% gain from its Dec ‘11 low of 641. The stock is in a clear down trend and struggling to get out of its bear market. Hold.

Axis Bank

Axis Bank’s stock touched a high of 1608 in Oct ‘10 and a trough of 784 in Jan ‘12 – a 51% loss. The sharp rally to 1309 means a 67% gain. But the stock price is in a long-term down trend and struggling to get out of a strong bear grip. Hold.

Kotak Mahindra Bank

The stock price of Kotak Mahindra Bank is in a bull market and touched a new high in Feb ‘12. The subsequent correction is receiving good support from its 20 day EMA. Buy.

Yes Bank

Yes Bank’s stock made a double-bottom (in Feb ‘11 and Jan ‘12) reversal pattern and re-entered a bull market. The stock is consolidating, and should test and break above its Nov ‘10 top of 388. Buy.

Chart Patterns of 10 Banking Sector stocks

The tightly regulated Indian banking sector has been one of the better performers during the bull rally. It forms one of the strong pillars that supports the India growth story. The competition and service standards of private sector banks have helped to improve the outlook of PSU banks towards customers from ‘doing a favour’ mode to ‘providing a service’ mode.

Still, there is plenty of room for improvement – both in customer service standards as well as in doing due diligence before handing out loans to corporates. The bribe-for-loans scam by some realty companies that was unearthed recently came as no big surprise to the Indian public. Many have run pillar to post to get a loan sanctioned before bowing to the malaise of greasing palms.

Many banks, particularly the ones linked with sanctioning loans to real estate and microfinance companies, have taken it on the chin during the ongoing correction in the Indian stock markets. Here are the one year bar chart patterns of 10 stocks from the banking sector – 5 of them from the PSU group and 5 from the private sector group. The ones that haven’t corrected a lot are the ones that are likely to lead the next rally in the banking sector.

Punjab National Bank

The second largest PSU bank had been in a bull market till it hit 1400 in Nov ‘10 and started to correct. A high volume fall to the 200 day EMA was followed by an upward bounce to the falling 20 day and 50 day EMAs. The stock has started falling again and is trading between the 100 day and 200 day EMAs. The technical indicators are looking weak. Another test, and a possible break, of the 200 day EMA is likely.

Bank of Baroda

This chart pattern looks the strongest of the PSU bunch. The stock is consolidating around the 100 day EMA. The technical indicators don’t hold out much bullish hope. A drop to the 200 day EMA may be on the cards.

Central Bank

The chart pattern of Central Bank remained in a sideways consolidation for 6 months, before breaking upwards on good volumes. It formed a bearish double-top after reaching the 250 mark and has corrected sharply. The stock had back-to-back closes below the 200 day EMA and has wiped out all the gains it made in the recent break out.

Corporation Bank

The stock had been in a bull market till it hit the peak of 814 in Nov ‘10. The subsequent correction seems to have ended with a sharp intra-day drop below the 200 day EMA, following which it managed to close above the long-term moving average and remains technically in a bull market. The technical indicators are hinting that the correction may not be over yet.

Indian Overseas Bank

The chart pattern traded in a range for seven months before breaking upwards on good volumes in Aug ‘10. After twice facing resistance from the 180 level, the stock is seeking support from its 200 day EMA. Any recovery may be short-lived and the stock is likely to correct some more.

HDFC Bank

This is a favourite stock of the FIIs, and the chart pattern shows why. The stock is in a bull market, and the recent correction looks more like a sideways consolidation. However, a test of support from the 200 day EMA seems imminent.

ICICI Bank

This stock is another FII favourite, but is more volatile than the HDFC Bank stock. Though the correction has been steeper, the stock hasn’t dropped to the 200 day EMA yet.

Axis Bank

The Axis Bank stock had an excellent bull run till it hit its peak in Oct ‘10. The correction has been just as strong, and the stock is struggling to move above its 200 day EMA.

Kotak Mahindra Bank

The Kotak Mahindra stock traded in a range of 85 points for 8 months. It finally broke upwards after the stock split and reached the 530 mark in Oct ‘10. The correction has not yet tested the support from the 200 day EMA, but may do so soon.

Yes Bank

FIIs hold majority stakes in Yes Bank, which had a spectacular run from a low of 41 in Mar ‘09 to a high of 388 in Nov ‘10 – gaining 850% in 20 months. The correction has been sharp, and the stock has closed three days in a row below its 200 day EMA. The correction may not be over yet.

Bottomline? All 10 banking sector stocks are undergoing correction. Bank of Baroda, ICICI Bank and Kotak Mahindra Bank have not suffered as much from the bear attack. The corrections may continue a little longer. Investors can wait a bit or buy in small lots.

Does real estate really qualify as an investment?

For most small investors with only a few lakhs to spare, investing in real estate is out of the question. If you want to buy a piece of land and build a house to live in, or buy an apartment for personal use - it really doesn't count as an 'investment'.

The online Merriam-Webster dictionary defines 'investment' as an outlay of money usually for income or profit. From that perspective, the house or apartment that you live in does not qualify as an investment because it neither produces any income (unless of course you rent out a portion) nor any profit (unless you sell it).

Buying a house and renting it out completely can qualify as an investment. Some people book or buy apartments only for the purpose of selling at a profit. This type of 'investing' requires serious amounts of money - upwards of Rs 3-5 Million - which puts it beyond the reach of small investors.

In several posts I've written about why investors should have an asset allocation plan (read Chapter 12: How to Reallocate your Assets in my FREE eBook) and then be disciplined about sticking to that plan. Several readers have asked me why I have not included real estate in an asset allocation plan.

The main reason is mentioned above - it costs too much. The other reason is the lack of liquidity. If you've ever tried to sell an apartment or a house, you will know that it is a long drawn out procedure with the involvement of property brokers, lawyers, local toughs (with each extracting their pound of flesh). Not to speak about the contrasting colours of money used in completing the transaction.

There are some real estate funds from HDFC, Kotak, ICICI. They are mostly targetted at high networth investors (HNIs) with a minimum investment of Rs 2.5 Million and are closed-ended funds of long duration that invest in real estate projects. Again, beyond the reach of most small investors.

ICICI has a hybrid real estate fund that invests in the equity and debentures issued by real estate companies like DLF, Purvankara and others but its performance is nothing to write home about. A couple of real estate venture capital funds have also been floated by DHFL (Dewan Housing) and Kshitij (Pantaloon) - meant for HNIs.

Last, but not the least, are stocks of real estate companies. Many such companies are emerging out of the woodwork of late with fancy-priced IPOs. They should be avoided like the plague. The leaders (in terms of market cap) like DLF and Unitech don't really have stellar reputations or track records either.

If you like and understand the real estate space (I don't) and want to invest in it, the best bet might be to go for stocks of companies that have already established a good reputation in other group activities - e.g. Godrej Properties, or Mahindra Lifespaces. The chances of incomplete projects or poor construction materials are likely to be less.

That was the long answer. The short answer is: it doesn't.

Stock Chart Pattern - State Bank of India

For the mid-week stock chart pattern discussion, I'll take a look at the technicals of the largest bank in India, SBI.

I have a bias against stocks of public sector undertakings (PSUs). At one point of time (and may be even now), PSUs were hot beds of corruption and red tape. Even the military establishments weren't free of this dual menace.

30 years back, when I was first posted at New Delhi, and had to solicit business from the likes of EPI, BHEL, NTPC, ONGC, MES, a well-wisher advised that I should get hold of a 'fixer' if I wanted to crack open government orders.

As a green horn, I had no clue what a 'fixer' was and how to locate one. So I muddled along without making much headway. I believe things have improved a lot since then, but my negative feelings about doing business with PSUs have remained.

I still haven't overcome my bias to make investments in PSUs. After my father passed away ten years ago, I had to run pillar-to-post to recover his pension amount and savings bank account balances from SBI. But there has been a sea change in attitude towards efficiency and customer service at SBI, to the point where it is now near the top of my 'buy list'.

Let us have a look at the 6 months chart pattern of SBI:-

(You can right-click on the image above and open it in a new tab or window for a better view.)

All the three EMAs - 20 day, 50 day and 200 day - are moving downwards with the shorter term averages below the longer term ones. If you don't know what EMAs are and how to 'read' them, please read the blog post: "Why you need to follow the latest trends to become a better investor".

SBI was treading water in a sideways rectangular consolidation chart pattern, just like the Sensex, but broke below the strong support at 1000 level early this month. It is now making an effort to climb back into the rectangular consolidation zone, but is facing resistance from the short-term 20 day EMA.

If it manages to break upwards, it will be resisted strongly at the 1100 level - both by the 50 day EMA, and the down sloping trend line that can be drawn by connecting the two previous tops of 1400 and 1200 (made in Jan '09 and Feb '09 respectively).

Notice how the 20 day EMA moved up and then merged with the 50 day EMA before moving back down again during the Jan '09 up move. The down move was hastened by the news of the Satyam fraud. Due to such chart patterns, technical analysts claim that fundamental analysis is of little use because the stock price reflects the fundamentals. (I don't necessarily agree with such a view.)

The slow stochastics and RSI are trying to emerge from oversold zones (below '20' line) to support the current up ward pull back. But the MACD is still very much in negative zone. The most interesting indicator is the volumes, which are higher on down days and lower on up days. This is not a good sign.

In the Jan '09 attempt to move up, the 200 day EMA provided the resistance. In Feb '09, the 50 day EMA resisted the up move. In Mar '09, even the 20 day EMA is proving a tough barrier. All this points to the conclusion that the down move in SBI isn't over.

Fundamentally, SBI is far less riskier than ICICI Bank and Axis Bank because of its correspondingly lower exposure to derivatives. It is also trading around its book value and is therefore looking like a value buy.

Bottomline? There is strong support on the longer term charts at 900, from where it bounced back recently. Thereafter there is support at the 700-750 level. Those are levels where long term investors can start to nibble at this stock. (Since I don't trade, I'm wary of advising trading calls. May be initiate fresh shorts when this up move gets exhausted around 1050-1100. But please do your home work diligently.)

Two Index Funds that track the Nifty 50

In a post on Dec 8, '08, I had written briefly about the benefits of index funds and discussed about Nifty BeES, which is a ETF (Exchange Traded Fund). ETFs are traded like shares through brokers in a stock exchange, and just like for share trading, investors need to open a demat account.

In a subsequent post on Feb 22, '09, I had discussed about two balanced funds that may be more suitable for those investors who have less risk tolerance and don't have a demat account.

Index funds are ideal for the category of investors who are:

a) conservative but don't mind taking the risk associated with equity investments;

b) disinclined to track the performances of individual stocks;

c) not interested in opening a demat account

What are the specific benefits of index funds? They need very little management since they track the constituents of the respective indices. That means no dependence on the skills or whims of fund managers - leading to minimal management fees. Also, there is not much scope of out-performance or under-performance since an index fund tracks an index closely.

In the longer term, equities as an asset class tend to outperform all other assets. Regular investments in index funds provide long term wealth creation in a slow and steady fashion.

For more than 4 months, since the Sensex made a 52 week intra-day low on Oct 27, '08, there has been a rectangular sideways consolidation by the Sensex with no clearly discernible up or down trend. Such periods provide good opportunities for investments in index ETFs like Nifty BeES or index funds.

A couple of highly rated index funds that investors may want to consider are ICICI Pru Index Fund Retail and UTI Sunder, both of which track the Nifty 50 index. A brief summary of the funds are given below:-

1. ICICI Pru Index Fund Retail

Entry load - 1%, exit load - nil; Minimum lump sum investment: Rs 5000, subsequent investments: Rs 1000; Systematic Investment Plan (SIP) - available, minimum investments are Rs 1000 for monthly SIP and Rs 5000 for quarterly SIP; Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) available; Dividend option available; top holding - Nifty Futures (65%).

2. UTI Sunder

Entry load - nil, exit load - nil; Minimum lump sum investment: Rs 10000, subsequent investments: Rs 2000; SIP, SWP, STP - NOT available; Dividend option available; top holding - Reliance Industries (11%).

Both index funds have marginally out-performed the Nifty 50 over all time periods. They have lost less during shorter time periods and gained more over longer time periods. This was possible because of some amount of tweaking of the weightage in the portfolio of the Nifty 50 stocks.

My personal preference is for an index ETF like Nifty BeES over an index fund because it is easier to buy and sell ETFs any time during the day at the prevailing price (whereas a mutual fund can be bought or sold up to 3 pm on the same day's NAV and after 3 pm on the following day's NAV).

How to exercise your rights

Several large rights issues from companies like Tata Motors, Hindalco, Tata Investment will be hitting the market in the near future. Recent entrants to the stock market, like my young friend Bala, may not have a clear idea about what to do with a rights issue.

Once you receive the rights issue application form and the offer booklet from the company, go through the details of the offer. Special attention should be given to the details about how much to pay, when to pay, where to pay and what to write on the cheque. Any mistakes can cause your application to be rejected.

Several options are available to the investor. These are listed below:

1.  Apply for your entire entitlement; e.g. if your entitlement is 42 shares, this figure will be clearly mentioned in the application form; just fill out the form and pay the application money for the 42 shares

2. You may apply for additional shares in the box provided in the form; e.g. apply for 8 additional shares and pay your application money for (42+8=) 50 shares; chances are you will get allotment for the 50 shares because the market is in a bear phase and many investors may not apply for additional shares. Don't get greedy and apply for 52 additional shares. You may then get an allotment of say 17 shares and be left with an odd number of 59 shares (which may be difficult to sell later in one lot)

3. You can apply for less shares than your entitlement; e.g. apply only for 25 shares and let the balance entitlement of 17 shares lapse

4. You may 'renounce' your entire entitlement in some one else's favour, like your broker or your friend. You will usually get a monetary consideration for your renouncement, say Rs 8 per share.

5. You can request the company for split forms, i.e. 25 shares in one and 17 shares in another. That way you can apply for 25 shares and 'renounce' the balance 17 for a consideration of say Rs 8 per share

6. You can decide not to do anything at all and let your entire entitlement lapse.

Why would you choose this last option? In a falling market the difference between the market price and the rights price may not be large enough. After the rights issue is over, the market price may even drop below the rights issue price. So you may be better off to buy the shares at market price after the rights issue is over if you feel the rights price is not leaving a large enough margin of safety.

Investors who participated in the recent rights issues of ICICI Bank and State Bank will know what I'm talking about.

There is a recent move by SEBI to make rights issues paperless, but as on date it remains a proposal only. If readers have any questions on rights issues, please send me an email with your specific query ( or leave a comment on the blog).