Sensex, Nifty charts (Aug 18, 2017): Infosys CEO exit give bears another chance to sell

FIIs were net sellers of equity on all four days of a holiday-curtailed trading week. Their net selling was worth Rs 58.9 Billion. DIIs were net buyers of equity on all four days - their net buying was worth Rs 43.7 Billion.

However, both Sensex and Nifty gained (1% and 1.3% respectively) on a weekly closing basis despite being in down trends since touching lifetime highs in the first week of this month.

Both indices were in the midst of pullback rallies after the previous week's sharp corrections. The unexpected news of Infosys CEO Vishal Sikka's resignation on Fri. Aug 18 sent bulls running for cover.

BSE Sensex index chart pattern

Note the following comments from last week's post on the daily bar chart pattern of Sensex:

"The selling appears a bit overdone. A technical bounce can occur at any time. However, some more correction or consolidation can't be ruled out...It is possible that a technical bounce from current level will face resistance from the falling 20 day or 50 day EMA, and the index will then correct towards the support zone." 

The technical bounce occurred as expected. Sensex received strong resistance from its 20 day EMA and the (blue) down trend line (drawn through Aug 2 & Aug 8 tops) on Thu. Aug 17. Friday's heavy selling by FIIs triggered a close below the 50 day EMA for the 2nd week in a row.

Daily technical indicators are suggesting that some more correction or consolidation is likely. MACD is falling below its signal line in bearish zone. ROC, RSI and Slow stochastic emerged from their respective oversold zones, but are showing downward momentum.

The index is trading well above its rising 200 day EMA in a bull market. Any fall towards the 'support zone' between 29220-30040 (refer last week's post) will provide an adding opportunity.

With FIIs booking profits, a reversal of the down trend may take some time. Be very selective about what you buy. Companies with good fundamentals that faced top line and margin pressure due to de-stocking before GST implementation should be on the top of 'buy lists'.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty bounced up after receiving support from the 9700 level, but failed to cross above 9950 and closed below 9850 for the week.

Weekly technical indicators have corrected overbought conditions, but remain in bullish zones. MACD is about to close below its signal line. It did so in Sep '16 and triggered a 1000 points correction. 

RSI and Slow stochastic had corrected down from their respective overbought zones in Sep '16 as well. So, odds of a correction below the 20 week EMA towards the 'support zone' between 9015-9285 are getting better.

Nifty's TTM P/E has moved up to 25.1 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is falling sharply in neutral zone, and can limit index upside.

Nifty is trading above its rising 20 week and 50 week EMAs in a bull market. A deeper correction towards the 'support zone' will be a good adding opportunity.

Bottomline? Sensex and Nifty charts are in down trends for the past two weeks. FIIs first got spooked by nuclear war rhetoric of North Korea and then by the sudden departure of Infosys CEO. DIIs are still buying, and providing downside protection to both indices. This is a bull market correction, hence an opportunity to add. Be very selective.

Stock Chart Pattern - Infosys Ltd. (An update)

Bobby Hebb wrote the song 'Sunny' within 48 hours of a double tragedy on Nov 22, 1963. That was the day popular and charismatic US President John Kennedy was assassinated - and Bobby's elder brother was stabbed to death outside a Nashville nightclub.

What does that have to do with the chart pattern of Infosys? Well, Infosys also suffered a double tragedy - due to their disastrous policy of rotating the company's leadership among the original promoters.

As mentioned in the previous update, the two promoter-CEOs that followed Narayanamurthy and Nilekani neither had the dynamism nor the leadership skills required for a company with global aspirations.

With the induction of a professional manager with leadership experience in a global company (SAP), Infosys is ready to sing the following line from the song: "Now the dark days are gone, and the bright days are here". 

Should they? Let us see what the chart foretells.

The closing chart pattern of Infosys Ltd. touched a low of 553 in Apr '13 (adjusted for two subsequent 1:1 bonus offerings - marked by blue bells - in Dec '14 and Jun '15). 

The stock formed a 'double top' reversal pattern at around 950 (in Jan '14 and Mar '14). Negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction within a 'falling wedge' pattern with bullish implications.

An upward breakout from the wedge started a fresh leg of the bull rally that culminated with another 'double top' reversal pattern at around 1180 (in Aug '15 and Oct '15). 

Once again, negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction below the three daily EMAs, but the stock formed a small 'double bottom' reversal pattern and bounced up.

Daily technical indicators are in bullish zones, but giving mixed signals. The stock price has been consolidating sideways within a large 'rectangle' pattern between 960 and 1180 (i.e. 220 points) for the past 14 months.

Rectangles are usually 'continuation' patterns, with price target implications. An expected upward breakout can take the stock to a target of 1400 (= 1180 + 220).

But a 'rectangle' can also be a 'reversal' pattern - in which case, the downward target will be 740 (= 960 - 220). 

Since the stock is trading in a bull market (above its three EMAs), one can use the 'consolidation' to accumulate with a stop-loss at 1020.

[Wishing all blog visitors, blog followers, blog subscribers, twitter followers and newsletter subscribers a very happy and prosperous 2016.] 

How to Select a Company for Investment - a guest post

The long correction since Mar '15 in the Indian stock market may have finally come to an end. The time for a pre-budget rally has arrived. If you were waiting to enter the market, don't wait any more.

But which stocks should you buy from the hundreds that trade every day? Buying a stock is not buying a piece of paper (or an entry in a demat account). You are buying a 'share' of a business.

In this month's guest post, Nishit explains how you should go about selecting different companies for investment. Promoter integrity is at the top of his selection criteria.

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The Indian economy is showing signs of green shoots and we are in the take off state right now.  People who I meet often ask me how to select a company for investment. There are many things which go into the selection of a company but the most important parameters for me are Corporate Governance, Ethics and Transparency.

I usually look at where the broad economy is going and from that I identify which sectors will do well. Once the sectors are identified, next is identifying companies within the sectors. Investing in a company with a crooked promoter in a good sector will still lose you money. An honest promoter is the most important yardstick while selecting a company.

Promoters can make mistakes which are acceptable; skimming off money from the shareholders is not. Satyam is a prime example of a blue chip company in a very exciting sector of IT going bad. Satyam not only jeopardized the jobs of its employees, eroded shareholder value, it also shook the confidence within the IT industry.

If I was a foreigner waiting to invest in India, I would constantly think which other Satyam was lurking in the wings in the Indian IT industry. Now if we were to compare this with a TCS or Infosys or even a Wipro, the promoter ethics are above board. Wipro might be slow to change but at least we know that the promoter is not skimming off money.

This is the very reason the Tata group of companies is my favorite while investing. With their long history and illustrious background, there is very little chance of fraud happening with the Tata companies. They may be slow to change, there could be some mishaps in decision making but that is acceptable.

If I am assured of promoter honesty then 50% of my worries are taken care of. Stock picking is an art. I normally make up my mind in 30 minutes whether or not to buy or not to buy a stock. If I cannot decide in 30 minutes it means there is something wrong somewhere.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Related Posts

Market Cycles and Sectors

Which Sectors should you Invest in?

Evolving IT Services Market Warrants Attention

The global IT services market may be worth $1 Trillion, but it is highly fragmented. The top three players – IBM, HP, Accenture – account for 12.5% global market share. Other top players – like CAP Gemini, Computer Sciences Corp., Cognizant – account for around 1% share each.

The bulk of the market is shared by hundreds of smaller companies that do low margin but regular work like Business Process Outsourcing, software maintenance, data centre operations, application hosting. Most Indian companies get their bread and butter from such ‘outsourced’ work.

Some of the larger outfits – like TCS, Infosys, HCL Tech – have moved up the value chain through higher margin but more discretionary systems integration projects. But they are well behind the big boys in the top end, high margin consulting business.

In a recent article, Andrew Lange of Morningstar has provided an overview of the current global IT services market and its prospects. Those already invested in the sector, and particularly those planning an investment in some of the smaller Indian players, may find the article useful.

Is it a good time to buy IT stocks? – a guest post

Restrictions on gold imports, lower capital goods imports due to a slowing economy and strong FII inflows have contributed to a strengthening Rupee and a lower Current Account Deficit. While that may be good for the Indian economy, it may not be so great for exporters.

Most Indian IT companies generate a significant amount of revenues from exports. A depreciating Rupee had helped companies to increase profits. But a strengthening Rupee has led to profit booking in IT stocks, which are trading below their recent highs.

In this month’s guest post, Nishit makes a strong case for using the corrections to enter IT stocks now. What do you think? Do you feel IT stocks are too expensive? Good things in life usually are.

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IT stocks have corrected from their recent highs. The corrections range from at least 10% from the tops in case of TCS and HCL Tech and 15% in case of Infosys. So, is it a good time to buy IT stocks? Let us try and examine the pros and cons.

Why have the IT stocks corrected? The rupee has strengthened 5-6% since January 2014 due to lower gold imports and FII inflows in the hope of a Narendra Modi led Government being sworn in. A strengthening rupee hits the profit margins of all exporters, including IT companies.

The upside to the profits is capped for the time being because of rupee appreciation. Also, IT stocks have run up in the past 1 year. TCS itself has gone up 70-80% from its lows and Infosys has doubled from its lows.

TCS recently had a con-call where it expects 2015 to be a stronger year than the current year. Overall, the IT stocks are dependent on the US and European economies which are slowly recovering back to normalcy. So, the core business of the IT companies which is the main driver for growth is doing just fine.

Now, a strengthening rupee is just an excuse for booking profits. If no strong Government comes at the centre then expect the markets to tank and the rupee to trade in the 66-68 band.

Let us look at the valuations right now. Infosys trades at a P/E of 19 and TCS at 23. None of these stocks are frightfully expensive if one looks at their growth prospects.

If one were to look at Indian IT, I would not look beyond TCS, Infosys and HCL Tech at the moment. These 3 stocks capture the essence of Indian IT.

What happens if Narendra Modi wins? The rupee may appreciate further but the Government would not let it appreciate beyond a point as exports would get hit.

TCS and other IT stocks would act as a hedge for the portfolio as also an investment option. With a 3 year horizon, they look a pretty solid bet.

IT stocks are not dependent on Government policies, have operating margins of 25-30%, have strong brand names. They cancel out most of the negatives which hang over the Indian markets right now.

There are many players listed on the stock market in IT but Infosys, TCS and HCL Tech represent the best bets. TCS from sheer size and scale, HCL Tech for its strength in the Infrastructure management space, and Infosys with the wild card of Narayanmurthy cleaning up the house.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

IT Sector stocks – an update

Despite the global economic slowdown, or perhaps because of it, IT sector companies have been relative outperformers in the Indian stock market. Devaluation of the Rupee against the US Dollar has been an added boon.

Large-cap IT stocks have done particularly well. Mid-cap IT stocks haven’t been far behind. But small-cap stocks in general have faced a rough time. In the IT sector, retaining talent is a challenge. That is where smaller companies are at a disadvantage.

IT services remain the major revenue earner. Consulting business is yet to catch on in a big way. With increasing visa impediments – particularly in the USA - the larger companies have focussed on offshore and India businesses. Software product development activity is mostly limited to MNCs.

HCL Tech

The stock has gained more than 200% since the bull run began back in Aug ‘12. Daily technical indicators have corrected from overbought conditions but showing negative divergences by failing to touch new highs with the stock price. There are rumours of a stake sale. May be a good idea to take some profits home.

Infosys

Lack of leadership and so-so performance kept the stock in a sideways range till Narayanamurthy took back the reins. Lot of top-level executive departures have put a question mark on succession issues. The market is obviously encouraged by an improvement in performance.

KPIT Cummins

After an 8 months bear phase (from Sep ‘12 to Apr ‘13), the stock is back in a bull market. Q3 result disappointed the market, causing a sharp fall. Can be added on dips.

Mindtree

The stock is in a terrific bull run, gaining 300% in the past 2 years. Founder and CEO Ashok Soota’s departure has been long forgotten. The stock is looking overbought and ripe for a correction. Dips can be used to add.

MPhasis

This stock has gone nowhere in the past 2 years. Likely drop in business from parent HP and possibility of sale of HP’s entire stake has kept the stock price in a sideways range. Avoid.

Oracle Financials

The stock price is undergoing a correction after touching 3400 in Jan ‘14 – its previous top was also 3400 touched in Jan ‘13. If the stock price falls below the support/resistance level of 2990, the possibility of a bearish double-top pattern may open up.

Tata Elxsi

After a prolonged sideways consolidation that tested the patience of most investors, the stock has broken out sharply and tripled in 5 months. Daily technical indicators are looking overbought. Part profits can be booked.

TCS

The ‘big daddy’ of IT companies has been in a steady bull market with frequent corrections that have kept the chart ‘healthy’. This is a stock that every investor should have in their portfolio. All dips are adding opportunities.

Tech Mahindra

It is a great credit of the M&M management that Satyam Computers has been so well integrated with the company, turning Tech Mahindra’s stock into an outperformer with gains of more than 200% in 2 years. Add on dips.

Wipro

Even after sorting out management issues, Wipro’s performance has been tepid. The stock has returned to a bull market, but gains have been moderate. Switch.

Related Post

IT Sector stocks – time to change the game plan?

The ‘second coming’ of Narayana Murthy – a guest post

Once a darling of IT professionals and FIIs, and a beacon of transparency and corporate governance, the fortunes of Infosys have been on a downward drift for more than 2 years. What has been going wrong?

The global economic downturn affected all IT services companies. A strategy of moving up the services value chain by focussing on business consulting activities didn’t quite pan out as expected. Failure to make big ticket acquisitions despite a cash surplus reduced growth options.

Most crucially, the able stewardship of Narayana Murthy and Nandan Nilekani could not be emulated by lesser mortals like Gopalakrishnan and Shibulal. In this month’s guest post, Nishit takes a look at Narayana Murthy’s return to the helm of Infosys, and its likely outcome.  

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Last week, the markets were abuzz with the announcement that Narayanamurthy was returning to head Infosys. Let us try and examine if this is a good thing and if there will be any change in the fortunes of Infosys.

As we all know, Infy has been doing pretty badly when compared with top IT firms like Cognizant, TCS and HCL Tech. It was in danger of being left behind in the race. It was becoming a laggard like Wipro.

Much of Infy’s prime position was due to the aura built around Murthy and Nandan Nilekani. After the departure of these two, it became just another software company. It also had a weird succession plan. Each of the founders got to be the CEO in rotation. This wasn’t a good plan. Being one of the founders and being able to lead are two different things.

Also, this policy led to many talented second rung executives leaving the company, like Mohandas Pai. Infy had become just like some of our political parties, where leadership is all in the family. Here it was all with the founding fathers.

One more area of concern being raised is Murthy will be assisted by his son. Now, this may or may not be a good thing, although his son is well qualified.

Throughout history, one has seen companies where leaders have returned to revive stagnating fortunes like Steve Jobs for Apple, Starbucks CEO, Google founders, and so on.

The return of Murthy also means that his succession plan was flawed. The challenges in front of him are two-fold. First is winning back the confidence of customers, employees and shareholders. Second is getting the succession policy right the second time around.

In life, very few get a second chance and a third chance never happens. This is the last chance for Murthy to lay down his legacy. The second attempt is fraught with danger - if there is a mess up, his legacy may get tarnished.

We live in an era of fast food. People want quick results. Unfortunately, the results in this case, will take time to show up. It could take even two or more years. He will not have a magic wand which will conjure up results immediately.

Once upon a time, Infy was a place where people aspired to work. Salary was not the issue; it was the brand which people wanted on their CV. The brand has lost its allure now. Will the lost glory days return or will it be another failed experiment?

Another issue with the comeback is that all the talk of morality and Corporate Governance goes out of the window. For the immediate term, the move has been greeted with universal acclaim but will that be the story two years down the line?

All said and done, one must acknowledge and appreciate Murthy’s guts to come back and try and set things right. It is very easy to sit back and relax. At the age of 67, to take this risk speaks volumes of the courage and spirit of Murthy.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

About weak IIP and strong Infy

The IIP number for November 2012 came in at a disappointing –0.1% compared to the 6% growth in November 2011. That means factory output shrank marginally from the year-ago month. The economy is still down, and only strong reform measures and a decent budget may shake it up from its somnolence.

For the Apr to Nov ‘12 period, IIP grew by a puny 1%, compared to a 3.8% growth during the same period in 2011. Mr Montek Singh Ahluwalia of the Planning Commission tried to put an interesting spin on the negative number – by saying that it was a statistical aberration because Diwali was celebrated in November in 2012.

That wasn’t the only bad news. Exports fell for the 8th straight month. However, the trade deficit reduced to $17.7 Billion in December from $19.3 Billion in November. Thanks to shrinking exports and the poor IIP figure, Rupee lost value despite strong FII inflows.

The poor IIP figure raised hopes of an interest rate cut by RBI later in the month. However, the inflation figure expected on Monday (Jan 14) will determine whether the RBI will cut rates. Even if it does, it is unlikely to be more than 25 bps – which may have very little effect on the market.

Surprisingly positive noises from Infosys management helped to prop up the stock market. Q3 revenues rose by 12% from the year-ago quarter, but net profit was down 0.1%. However, the full year and Q4 guidance were raised, which cheered the market no end.

After several quarters of disappointing results, which led to excessive selling of the Infosys stock, today’s euphoria was also a bit overdone. The stock opened up with a huge gap above its 200 day EMA, backed by a sharp increase in volumes, and rose nearly 17%.

Interestingly, the large gap in the Infosys chart formed on Apr 13 ‘12 – which was partly filled during Sep ‘12 – has not yet been fully filled. But that may be a moot point. The 2 years long down trend in the stock may be getting over.

Does that mean it is a good time to buy the Infy stock? If you missed buying on the break out today, you may get another chance if there is a pullback towards the 200 day EMA. Such pullbacks often follow sharp break outs. 

Stock Chart Pattern - Infosys Ltd. (An update)

The previous technical update of the chart pattern of Infosys Ltd. was posted way back in Dec ‘09. The stock was touching new highs on a regular basis and the sky was the limit. The stock was a favourite of foreign and domestic investors and no power on earth seemed capable of stopping its growth trajectory.

A lot of water has flown down the Ganges since then, and even the best-loved companies and leaders eventually reach their level of incompetence. In the case of Infosys, the major mis-step was the decision to rotate the company’s leadership among the original group of promoters. Narayanmurthy was a visionary. Nilekani was a dynamic leader who did a great job of trying to fill Narayanmurthy’s outsize shoes.

The leaders who followed have lacked vision and dynamism. The global economic downturn couldn’t have come at a worse possible time for the company. Devoid of any worthwhile domestic business and inability to transition into high-end IT consultancy services overseas or find any useful outlets for its large cash pile has left the company struggling for direction. The culture of transparency still exists, but the company is no longer able to walk the high road of integrity. The abuse of US visa policies – indulged in by almost all Indian IT companies – have come out in the open.

The company announced cutback in hiring and froze salary increases, leading to increased attrition. The stock market has not taken kindly to the turn of events. Infosys is not, and never will be, a disaster like a Cranes Software or a Suzlon, but it no longer deserves the premium valuation that it has received for more than a decade. The daily bar chart pattern of Infosys Ltd. is steadily and inevitably descending into a bear market:

The stock touched an intra-day peak of 3475 on Jan 7 ‘11, but it turned out to be a ‘reversal day’ (higher high, lower close). The subsequent down trend is still ongoing. After forming a double-bottom at 2157 in Aug ‘11, the stock rallied sharply above all three EMAs to touch an intra-day high of 2971 on Oct 28 ‘11.

This time it formed a ‘distribution day’ pattern (open near high, close near low) and started a sideways consolidation for the next 5 months, oscillating about its 200 day EMA. All hell broke loose when Infosys announced its Q4 results in Apr ‘12. Though the company’s performance wasn’t bad at all, the market got spooked by its muted quarterly guidance of future performance.

The stock fell down with a huge gap (marked Gap 1) on massive volumes, forming a ‘panic bottom’ at 2336. After bouncing up a bit, the stock dropped even lower to 2200 on Apr 24 ‘12, which turned out to be a high volume ‘reversal day’ (lower low, higher close). The subsequent rally was weak and formed a bearish ‘rising wedge’ pattern.

A high volume gap down break below the ‘rising wedge’ (marked Gap 2) was apparently triggered after declaration of Q1 results today. Once again, the company’s performance wasn’t that bad, but the annul guidance was bleak. Better sense seems to have dawned on the management who will no longer provide quarterly performance guidance.

Though the results may have provided the trigger for the gap-down break below the wedge, remember that a ‘rising wedge’ is a bearish pattern from which the break would probably have been downwards even if Infosys had declared better results and guidance.

Knowledge of technical analysis can help investors by providing advance warning – even though technical analysis is not a science and doesn’t always follow similar previous patterns. All four technical indicators are looking bearish. A bounce up often follows such a sharp fall on big volumes, but don’t treat it as a buying opportunity, despite the fact that today’s intra-day low at 2216 is close to the Apr ‘12 low of 2200. The stock is likely to breach the Aug ‘11 low of 2157 and fall even lower.

Bottomline? The stock chart pattern of Infosys Ltd is an example of how sentiments can affect the stock of an excellent company. The company is facing some problems which are temporary in nature. It is making profits and has a huge cash pile and no debt. Wait for the dust to settle and the stock to find a reliable bottom before entering. If you are a long-term holder, there is no need to sell in a panic. But partial profit booking never hurts anyone.

Was it a freak ‘error’ trade or a ‘short and distort’ scam?

For those who don’t have much experience in the stock market, the trading anomaly observed last Friday (Apr 20 ‘12) may have come as an unpleasant surprise - specially for those who prefer to trade in the F&O segment. Here are the facts, as already published in news media:

1. The Nifty (and the Sensex) were drifting along sideways in a very narrow range for the better part of 5 hours, when suddenly the bottom seemed to fall out.
2. Apparently Nifty’s future contract for April saw a freak trade that valued the contract 300 points lower than the Nifty spot price. Earlier, Infosys stock futures dropped more than 400 points in another freak trade.
3. The two freak futures trades taken together caused spot Nifty (and the Sensex) to plummet.

Several traders tried to explain away the anomaly by calling them trading ‘errors’. But the NSE authorities denied that there were any ‘errors’ and said that the existing systems have enough checks and balances. If there had been only one freak trade, it could have been attributed to an ‘error’. But two freak trades in the same day were too many.

So, what really happened? The answer will get revealed after the SEBI and/or the NSE authorities investigate the freak trades. But circumstantial evidence may be pointing to a well-planned ‘short and distort’ scam. This is a less known scam than the ‘pump and dump’, but the underlying logic is the same - to separate inexperienced investors from their hard-earned money.

How does the scam work? Scamsters first open short positions in an index/stock, and then spread unsubstantiated rumours or distorted facts through email, SMS messages and message board postings in investment groups. In this case, a message doing the rounds earlier in the week predicted that the market will crash on Apr 20. No reasons were given. Some hints about a negative astrological configuration were dropped. When the actual crash came, the short positions were quickly covered. The Nifty bounced up smartly, and closed higher on a weekly basis.

Some times, the scam is also used to get out of tight situations. If some operators had shorted Nifty prior to RBI’s policy announcement and had been caught unawares by the surprising 50 bps rate cut and the subsequent rally, how would they cover their losses? By pushing down the index level below their shorting level – by hook or by crook.

Those who panicked and sold off learned a painful lesson: Do not pay attention to unsubstantiated predictions about the market – even if such predictions turn out to be correct at a later date.

IT Sector stocks – time to change the game plan?

Recently, Sabeer Bhatia (of Hotmail fame) was in Calcutta/Kolkata for a little R&R-cum-business. (December and January are the two most pleasant months in the city, and attracts NRIs by the hordes.) Along with spending quality time with his in-laws and playing golf, Sri Bhatia indulged in promoting his latest venture (JaxtrSMS - free SMS through the Internet), hobnobbing with the Chief Minister and giving press interviews and speeches at IT industry gatherings.

One of the important points he raised was that Indian IT companies are over-dependent on selling services through hiring out consultants to overseas clients. Successful Indian software products are conspicuous by their absence. Apparently, JaxtrSMS has been totally designed and created by Indian software engineers sitting in India. It is time that other companies follow his lead.

Certainly the 10 chart patterns of Indian IT companies attached below indicate that Sabeer Bhatia may be right – it is time to change the game plan from services to products if the Indian IT sector wishes to retain its position in the global pecking order. Already, Philippines and East European countries are taking away IT-enabled service contracts from India.

HCL Tech

HCL Tech formed a double-top reversal pattern during Apr ‘11 to Jul ‘11 and dropped sharply into a bear market. The chart is looking weak and the price can dip to test the Aug ‘11 low. Switch to Wipro.

Infosys

The recent changes in management seem to have robbed Infosys of whatever little aggression it had. The recent attempts at getting back into a bull market have fizzled out. The stock is looking oversold, and can bounce up towards the blue up-trend line. That will be a selling opportunity.

KPIT Cummins

After touching a peak in Jul ‘11, KPIT Cummins is making a bearish pattern of lower tops and lower bottoms, and is in a bear market. The chart is looking weak, and the stock can test and break the Dec ‘11 low. Sell.

Mindtree

Ashok Soota’s departure from the helm of affairs hurt the market sentiment badly. The Mindtree stock is trying to extricate itself from a strong bear grip – with some degree of success. The stock is making a bullish rounding bottom pattern, and can be added on dips (but with strict stop-loss).

MPhasis

Not sure what MPhasis is doing currently, but the chart pattern shows that it is not doing it well. The stock is deep inside a bear market and likely to fall further. Avoid.

Oracle Financials

The stock of Oracle Financials peaked out in Jul ‘11 by making a small double-top reversal pattern, and is in a bear market. The stock is expected to resume its fall soon as both the RSI and the slow stochastic are showing overbought conditions. Sell.

Tata Elxsi

Tata Elxsi seems to have lost its way, and is sliding in a bear market. The current rally has been on falling volumes and both the RSI and the slow stochastic are looking overbought. Avoid.

TCS

Despite its gap-down fall below the blue up-trend line – probably in sympathy with the Infosys stock – TCS is technically in a bull market. Both the RSI and the slow stochastic are looking oversold, and a pullback towards the blue trend line is on the cards. Use the opportunity to book partial profits. Q3 results may not be as bad as some are expecting.

Tech Mahindra

Tech Mahindra is another stock that peaked out in Jul ‘11 and quickly slipped into a bear market. The next leg of the down move may start soon. Get out.

Wipro

Wipro has recovered very smartly after a short spell in a bear market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market. Change of CEO has brought in new direction and aggressiveness that was lacking earlier. Use dips to buy.

Related Post

In which IT Sector stocks should you invest?

Why did the stock market fall despite a good IIP number?

India’s Nov 2011 IIP (Index of Industrial Production) came in at 5.9% – higher than the consensus estimate – raising hopes of a quick return to the growth path. Considering the Oct 2011 IIP of –5.1%, there was a huge 11% swing month-on-month.

The stock market should have celebrated by spiking higher – specially since both the Sensex and Nifty are in the midst of rallies from their recent bottoms. Instead of doing the obvious by rising, both indices lost ground. Not much, but enough to cause consternation among small investors.

What is going on? Is this just the way Mr Market behaves to separate investors from their hard-earned money?

There can be a few logical explanations, which are mentioned below:

1. Both the Sensex and Nifty are in the midst of prolonged bear markets. Good news tend to get ‘discounted’ quickly and bad news causes renewed selling during bear markets.

2. Infosys – which is generally considered to be one of the bellwethers of the Indian stock market – announced better than expected Q3 results, but disappointing Q4 guidance and got hammered. Its high weightage in both indices caused the fall.

3. Oct 2011 IIP number was unusually low – but one must remember that it was a festival month (Navratri and Diwali), which meant lower production days due to the holidays. Nov 2011 IIP was comparatively much better, but some of the new orders may be due to inventory replenishment. Lower growth usually leads to inventory draw-downs (companies tend to let their existing inventory get depleted almost completely before placing new orders).

4. Technically, both indices retreated after facing twin resistances from their 50 day EMAs and DTLs (refer last Sunday’s post on Sensex and Nifty chart patterns).

5. All of the above.

Stock markets don’t necessarily move according to logic. In the short-term, sentiments can, and often do, overrule the fundamentals. So can a rush of buying or selling by the FIIs. What should small investors do?

Remember an old saying: “Buy the rumour; sell on news.” There is no better example of that maxim than today’s price action in the TTK Prestige counter. The company announced impressive Q3 results, but the stock lost more than 7% after the ‘good news’!

The stock market is in a state of flux. After 14 months of down trend, small investors are becoming impatient to buy in the hope of a trend reversal soon. Please be aware that interest rate is still high. So is inflation – though food inflation has turned negative. Stock markets don’t reverse trend till the first few interest rate cuts happen.

There is a clamour for a CRR rate cut from all corners. If the Nov 2011 IIP figure is the reality, i.e. economic growth is back on track instead of what has been mentioned in point 3 above, then there is no reason for the RBI to cut the CRR – let alone cut the interest rate. A rate cut may stoke the inflation fire.

In other words, there is no need to turn bullish yet. Await Q3 results of the big guns and RBI’s policy announcement on Jan 24. You may miss the absolute bottom by being conservative, but in a bear market it is better to be safe than sorry.

How to use Covered Calls – a guest post

Last month, Nishit wrote about the Short Strangle strategy to make money in a sideways market. Not too much has changed since then. The Nifty is still trading within a range - not giving a clear direction.

Individual stocks in your portfolio may be going nowhere also. Can you generate some profits without selling your stocks and losing out on dividends or bonus issues? Covered Call writing may be just the strategy for you, suggests Nishit.

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We continue with our series of F&O with an article on Covered Calls. Covered Calls basically mean we already own an underlying asset and sell Calls.

The Wikipedia definition is:

A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If the trader buys the underlying instrument at the same time as he sells the call, the strategy is often called a "buy-write" strategy. In equilibrium, the strategy has the same payoffs as writing a put option.

Let us take an example of Infosys. Infy has been rallying from 2700 to 2950 from the June Series. That’s roughly a rise of 10% for the past past 3-4 weeks. Logic states that if a stock rallies before results, then any good news is discounted in its price. Same logic if it falls before results. This is based on the principle that markets discount all news in advance.

Assuming I have Infy shares constituting 1 lot in F&O, which is 125 shares. If I had written 1 lot Rs 3000 strike price Option of Infy on Tuesday, then I would have got Tuesday’s price of 52. This would entail a premium inflow of Rs 6500 (=125x52).

I have 125 shares of Infy in my account. Now, if my trade goes right and Infy falls, then I get to keep the shares as well as pocket the premium of Rs 6500.

Now if Infy rises, till Rs 3000, I don’t pay anything. This is because Option strike price is Rs 3000. At Rs 3050, I have to pay Rs 50. My inflow is Rs 50 from writing, so no loss no profit.

Above Rs 3050, I start having to pay up. This also means that when market price was Rs 2950, I was covered till Rs 3050 for losses and above that, I sell my shares which I hold and pocket the money. Suppose, Infy hits Rs 3100, then I sell off at a rally of Rs 350 from the bottom which translates to 13% gain in a span of 4 weeks.

A stock like Infy moves max 20% in a year in a range. Like from Aug ’10 to Jan ’11, Infy moved from Rs 2700 to Rs 3500. Not a bad deal.

This strategy is recommended for Long Term Investors who have shares in their demat accounts and want to earn some money on the side, without losing out on dividends or bonus.

Before entering any trade, one should have a clear idea of reward, risk and max loss and max profit.

Note: The figures at some times may be indicative or rounded off for example’s sake. The idea of this article is to try and explain the fundamental principle. True students of Option Strategies should try and grasp the basic principle. The strategy works best for stocks in which you are long-term bullish, but which may not be moving much in the near term.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why Japan’s calamity can hurt the global economy and stock markets

There is an English proverb: Misfortune never comes alone. In Japan’s case, misfortune seems to be coming in droves. Before the stoic and resilient people from the island country could recover from the horrendous calamity of the massive earthquake and devastating tsunami, the explosions and radiation leaks from the ageing Fukushima nuclear power plant has sent shock waves through the entire global economy.

Oil prices dipped on the assumption that demand from Japan will diminish as the economic growth may stall while the nation reconstructs the severe damage to life and property. Japan is the third largest oil consumer in the world, and there may be a drop in demand in the near term.

But global demand for oil may increase. Many countries, including the USA, depend on oil for their energy requirements – unlike India where coal-fired power generation is the norm. The US-India civilian nuclear treaty was supposed to be a win-win agreement for both. New nuclear power plants built with US technology was supposed to alleviate India’s perennial power shortage, and boost the demand for US-made equipment and consultancy services. The crisis in Japan’s nuclear power plant, built with equipment and technology from the US giant General Electric, will now put nuclear power as an alternative energy source on the back burner.

Japan also happens to be a large market for luxury goods, with more than 10% of world sales. Any further slowdown of an already slowing Japanese economy will seriously affect the businesses of luxury goods makers the world over. Many of these luxury goods – whether Gucci bags or parts for BMW cars – are actually manufactured in Asian countries.

With the Japanese Nikkei index taking a beating, investors are likely to pull out of Japanese funds that invest in global stock markets to cover their losses. As per a CNBC report, more than US $7 Billion has been invested by Japanese funds in Indian markets – and that is less than 20% of their total investments in emerging markets as a whole. The Sensex dropped 18% when FIIs recently pulled out US $2 Billion. Any Japanese withdrawal can cause a much bigger correction. Already, European indices have felt the heat.

Many Indian companies have built up their Japanese bases over a long period of time. Infosys and TCS are among them. There is talk of repatriation of Indian employees. It remains to be seen what effect that may have on the bottom lines of Indian companies.

Unlike the rise in oil prices, which every one expects to moderate in the near term as the unrest in North Africa and the Middle East gets quelled with firm hands, the crisis in Japan isn’t going to end soon. A melt-down in a nuclear reactor in a populated area can have serious long-term repercussions. Operations of many global companies will be disrupted because of damaged roads and ports, and shutdown of manufacturing facilities.

Indian investors need not sell in a panic. Corrections due to ‘black swan’ events, like the one in Japan, provide buying opportunities. Be patient and stay prepared for a deeper correction.

In which IT Sector stocks should you invest?

The IT Sector had been one of the star performers in 2010. With the US and Eurozone economies showing signs of recovery, it is expected that the sector will perform well in 2011 also. A performing sector doesn’t mean all the companies in the sector are worth investing in. Some stocks are leaders; some are laggards. Some are just not getting anywhere.

Here are the chart patterns of 10 IT sector stocks – including the four big guys and a few mid-caps. With demand for experienced manpower on the rise, the problem of attrition is causing concern. The big guys with their geographically spread out operations in different verticals is better able to manage attrition than the smaller players.

TCS

TCS is the jewel in the crown of the IT sector, and has been in a raging bull market, touching new highs on a regular basis. After a decent correction during Mar-May ‘10, when the stock almost fell to the 200 day EMA, the stock touched a lower bottom, but the RSI made a bullish higher bottom. For the past month, it has been in a consolidation mode with an upward bias. The stock is at an all-time high, so caution is advised. The RSI and slow stochastic are showing negative divergences. Hold. Add on a slightly deeper correction.

Infosys

The Infosys stock is also in a strong bull market, touching higher tops and bottoms for the past 12 months. The correction during Apr-May ‘10 touched a higher bottom. Both the RSI and slow stochastic have fallen sharply from their overbought zones. The correction may continue for a while longer. Hold, and add the dips.

Wipro

Wipro is also in a bull market, but the Oct ‘10 high has not been breached yet. The stock is showing some weakness near its previous high, and a bearish double-top pattern may be forming. Wipro has never quite been in the same league as TCS and Infosys. It is reflected in the stock’s performance. Book partial profits.

HCL Tech

HCL was an established company when Infosys first appeared on the scene. Somehow, their head-start in the small computer manufacturing and marketing field could not be leveraged into leadership in the software services field. That doesn’t mean that their stock is doing badly. It is in a bull market, and has given decent returns in the past 12 months. Can be added on dips.

Oracle Financials

The Oracle name hasn’t changed the fortunes of the original iFlex. Though the stock is technically in a bull market (trading above a rising 200 day EMA), it has traded in a sideways range for the past year and has given negative returns to shareholders. Switch.

MPhasis

Mphasis hit a peak in Feb ‘10, fell well below the 200 day EMA, and has since been oscillating around its long-term moving average. The stock has given negative returns to its shareholders in the past year. Switch.

Tech Mahindra

Tech Mahindra is trading below its falling 200 day EMA, making lower tops and bottoms and is technically in a bear market. The British Telecom connection has broken and the Satyam amalgamation will be a heavy cross for investors to bear. Avoid.

Mindtree

The Mindtree stock is not going anywhere. It is making an effort to move above its 200 day EMA, but is trading within a bearish pattern of lower tops and bottoms. Not quite as bearish as Tech Mahindra, but an ‘avoid’.

KPIT Cummins

The KPIT Cummins stock dropped like a stone below its 200 day EMA back in May ‘10. It recovered sharply to double in value in Aug ‘10. It has been in a down trend ever since, and is about to drop into a bear market. Sell.

Tata Elxsi

Tata Elxsi touched a high-volume peak in Mar ‘10, and has been oscillating around its 100 day EMA since then. Shareholders have got no returns. The stock is technically in a bull market, but the chart pattern does not inspire any confidence. Hold.

Related Posts

Should you invest in Telecom Sector stocks?

How to identify a truly great company from a merely good company

In a post back in Dec. ‘09, I had mentioned that the great companies can be distinguished from the good companies by how efficiently they use the money invested in the business to generate higher profits. The post was an introduction to a short series of articles on financial efficiency and profitability ratios.

At that point of time, I had not heard of, or read anything by Jim Collins – the former award-winning teacher at the Stanford Graduate School of Business. In his 2001 book, titled “Good to Great”, Collins has distilled and analysed the results of a 5 years long research project undertaken to identify how merely good companies become truly great companies.

Collins and his team of research associates sorted through all the published information available on more than 1400 US companies, and held countless interviews and discussions to come up with a short-list of 11 truly great companies.

These companies were merely good for many years before they were able to produce sustained great results over a period of 15 years, and significantly outperformed bigger and better known competitors in terms of stock market returns.

The outperformance period of 15 years occurred during the 1970s, 1980s and 1990s – just prior to the dot.com boom and bust. Some of the companies are no longer great companies, and some are almost down and out.

The book is a good read nevertheless, and reveals some universal and timeless principles that can help us to identify (and invest in) the truly great companies in the Indian stock markets. Here is a gist of the principles:

1. The transformation from good to great doesn’t happen suddenly. It is a process of a gradual build-up followed by a breakthrough.

2. Unlike the popular perception of how companies are turned around by high-profile leaders with rockstar-like personalities and egos, the good-to-great leaders are self-effacing, quiet, reserved, and have strong personal integrity. Such leaders ‘are a paradoxical blend of personal humility and professional will. They are more like Lincoln and Socrates than Patton or Caesar.’

3. Good-to-great leaders make sure that they select the right people for the right jobs, and spend most of their time on team building and succession planning. They don’t take the credit for the outperformance of their companies. They give the credit to their team.

4. Once the entire team is on board and the vision and strategy have been agreed upon, there is complete faith in the eventual success – and at the same time, the discipline to confront and overcome adversity and changes in current reality.

5. The good-to-great companies have a culture of discipline – disciplined people, disciplined thought, disciplined action. The culture of discipline combined with an ethic of entrepreneurship produces great sustained performance.

As I was reading the book, the first name that flashed across my mind was ‘Narayanmurthy’. He epitomises all the principles mentioned about good-to-great leaders, and led Infosys to become one of the truly great companies. The succession planning in the company has been an example that others should emulate.

Ratan Tata (Tata Steel, Tata Motors), Anand Mahindra (M&M), Yogi Deveshwar (ITC) are some of the names that also come to mind. Disciplined investing in these companies can generate enormous wealth over the long-term.

I am sure there are several other names that readers may know of.

Is the correction in the Sensex over already?

Many small investors may be thinking about this question after the Sensex bounced up today after 5 straight down days. A simple 'yes' or 'no' answer will have 50% chance of success - but also a 50% chance of losing money if you bet on the wrong side.

In investing, one needs to tilt the odds in one's favour. The best way to do that is to keep yourself better informed and prepared. If you have made a proper investment and asset allocation plan then such ups and downs in the index should be ignored as mere 'noise'. The business channels and pink papers make a big deal out of it because it helps them to sell advertisements.

Let us look at the information available. The weekend's big news was the SEC fraud charges against Goldman Sachs. The quick denial by Goldman has not convinced any one. More such skeletons in the US banking and financial sector may come tumbling out. Asian and European indices had a sharp reaction.

The huge disruption in air traffic due to the volcanic eruption in Iceland caused discomfort and inconvenience to travellers. Import and export shipments also got badly affected. Clogged up trans-Atlantic air channels seem to be easing back to normalcy. The European markets greeted the news with good up moves.

Today, the RBI raised the repo, reverse repo and CRR rates by 25 basis points, which was along expected lines. How much it'll cool food inflation is debatable. But the market was apprehensive of a bigger 50 basis point raise. No wonder the Sensex shrugged off the rate hike.

Among Q4 results declared so far, Hero Honda came out with surprisingly strong results. Infosys and TCS have also reported good performances, though both are cautious about the outlook for this year - for two reasons. The appreciating Rupee, and the lack of big deals so far from the US and Europe markets.

The fundamentals of the Indian stock market seem to be in reasonably good shape, so there is no reason for the Sensex to drop any further. Right? I'm afraid not, because the technicals are getting a bit dodgy.

Yesterday, the FIIs were big net sellers, and the Sensex fell by 190 points. Today again, the FIIs were net sellers - but the Sensex went up by 60 points! What happened? The DIIs bought, and so did retail investors.

Yesterday, the Sensex took support at the 50 day EMA but was resisted by the falling 20 day EMA. Today, the index tried several times to move above the falling 20 day EMA, but failed. The technical indicators have also turned weak.

To cut to the chase, as long as the Sensex remains below the 20 day EMA, the correction is likely to continue. The support from the 50 day EMA was a positive, so watch the medium-term average closely. A fall below it could lead to a deeper correction.

Note: Read more about asset allocation in my FREE eBook.

The Sensex fell 120 points - is it time to hit the panic button?

Regular readers of this blog will not even think about hitting the panic button just because the Sensex fell 120 points. They would have heeded my recent advice about being prepared for a possible correction as the index approached the Jan '10 top.

Probably just routine profit booking after four straight up days. May be even an effort by bulls to trap the bears. Why? Because the FIIs were net buyers even today and market breadth was positive after several days. That means, index heavyweights were sold (e.g. Infosys, HDFC) which pushed the index down and stocks outside the index were bought.

However, the fact that the Sensex tested the Jan 6 '10 top of 17790 two days in a row and briefly crossed it to hit 17793 on Mar 29 '10 before retreating by 200 points could also be a sign that an intermediate top has been made. So the index could be heading down soon.

The advance-decline line is showing a huge divergence with the Nifty index (thanks to reader Sanjeev - who sent me the link to the chart at the icharts.in site):-

Note that during Sept and Oct '09 there was a wide divergence between the falling A-D line and the rising Nifty index which culminated in a sharp correction.

From Nov '09 to Feb '10, the Nifty index and the A-D line moved together in lock-step. Post the budget, the Nifty index has soared while the A-D line has plummeted. Such a situation is unlikely to continue much longer.

Investors can play this three ways:

1. Book profits and wait for the correction to re-enter. That will be the riskiest way.
2. Book partial profits to generate some cash that can be redeployed during the correction. Less risky.
3. Stay invested with strict stop-losses - say, around 5150 for the Nifty and 17200 for the Sensex. Of course, this assumes that you are invested in index funds or index ETFs.

For individual stocks, the stop-loss levels should be placed at the previous (lower) tops. If the Sensex resumes its rally, remember to maintain trailing stop-losses.

(If you don't understand how to set stop-loss levels or what is a trailing stop-loss, you should read my FREE investment eBook.)

Related Post

Why you should forget about the Sensex and Nifty and look at the Advance-Decline (A-D) line instead

Stock Chart Pattern - Infosys Ltd. (An update)

When I last took a look at the stock chart pattern of Infosys Ltd back in Apr '09, it had made a bullish saucer-like bottoming pattern but was under bear attack due to disappointing Q4 '09 results.

But you just can't keep a good company down. This impeccably and transparently managed company that has set the benchmark for financial reporting, and a perennial FII favourite, has since embarked on a strong rally that recently reached a life-time high (adjusted for bonus issues).

Let us have a look at the 9 months bar chart pattern of Infosys Ltd:-

After hitting a high of 2400 in Sep '09, the stock entered a 6 weeks period of consolidation within a 'flag' pattern formation, which is a continuation pattern. That means the stock usually resumes the earlier (bullish) trend.

The 50 day EMA provided good support and the stock smartly broke out upwards from the 'flag' pattern and resumed the bull rally - almost doubling in value from the low of Apr '09.

The technical indicators show that there may be some more steam left in the rally. All three EMAs are moving up and the stock price is above them. The slow stochastic, MFI and RSI have just entered their overbought zones.

The stock hasn't been able to remain in the overbought zones for any length of time in the past 9 months. Also, the 50 day EMA is more than 350 points above the 200 day EMA. So a correction can be round the corner.

Bottomline? Existing holders can book profits partially. New investors can enter at the next dip. This is a stock that deserves to be in every long-term investor's portfolio.

Become a successful investor by avoiding 'herd mentality'

There are many ways and means to become a successful investor. One way is to be aware that certain behavioural flaws exist in human beings - like 'herd mentality' - and avoid them.

It is logical to expect that a group of people can become successful investors by taking better investment decisions. Why? As more information gets shared and different view points and experiences get discussed and assimilated, the process of deciding which stocks are good 'buys' and which stocks are 'duds' become easier.

The large number of investment groups on the Internet, some with several thousand members, point to the popularity of such joint investment decision making. So the members of these investment groups should be rolling in money, right?

The reality is otherwise. Some times group decision making can be flawed, specially if enough research, or an opposing view, is not taken into consideration. A few individuals, regarded as knowledgeable by group members, can mislead the group inadvertently.

A good example is the mad rush to buy infrastructure and real estate stocks in the later stages of the bull market in 2007. Many investors entered these stocks when they had risen way past the prices that discounted huge growth expectations well into the future.

'Land banks' was added to the investment vocabulary, just as 'eyeballs' were added during the dot.com boom at the turn of the century and 'replacement costs' were touted for pushing overpriced stocks during the Harshad Mehta scam in the early 1990s.

Even seasoned fund managers are not immune to such 'herd mentality' - and the price is paid by legions of small investors. The plethora of 'infrastructure funds' launched in 2006-07 are mostly languishing while the BSE Sensex has gained more than 100% in the past 9 months.

A quick look at the top holdings of popular diversified equity funds is equally revealing about the 'herd mentality' that leads to poor investment performance:-

1. HDFC Top 200 - SBI, ICICI Bank, Infosys, ONGC, L and T
2. DSPBR Top 100 - TCS, L and T, SBI, Reliance, ITC
3. Sundaram Select Focus - SBI, ICICI Bank, Reliance, Sterlite, Shree Renuka Sugars
4. HSBC Equity - SBI, Infosys, Reliance, ITC, BHEL.

Investors buying into these four funds may think that risk has been mitigated through diversification. But they have actually invested in the same stocks (with one or two exceptions).

Herd mentality is further compounded by bad timing. Money is literally poured into fund houses when the BSE Sensex is at or near a top, and pulled out by cart loads when the index is languishing near the bottom.

One of the tricks to being a successful investor is to avoid the herd mentality. Particularly when the herd is talking about esoteric investment ideas like alternative energy and water management. Stick to the knitting - invest in what you know and understand.

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