Technical updates – L&T and JK Lakshmi Cement

Stocks from the infrastructure sector were in doldrums due to the economic slowdown, and had fallen to two year lows during the second quarter of 2013-14. The ground-swell from Modi’s campaign brought them out of bear markets.

Once the Modi government came to power, many infrastructure stocks rose spectacularly, and provided multibagger gains. However, during the past one year, there has not been much progress in disentangling of stuck projects or initiation of new ones. High interest rate also played spoilsport.

Earnings of infrastructure companies haven’t kept pace with their stock prices. While stock prices haven’t crashed, large-cap and mid-cap stocks are down from their two year highs, and have entered sideways consolidations. The stocks of L&T and JK Lakshmi Cement are good examples.

L&T

After a 1:2 bonus issue in Jul ‘13 (marked by bell on chart), the stock of L&T dropped to a low of 695 on Sep 3 ‘13. From there, it rose to touch a high of 1752 on Jun 9 ‘14 – a huge 150% gain in 9 months.

The stock has since been in a sideways consolidation within a ‘rectangle’ pattern. The stock broke out above the ‘rectangle’ on good volume support and touched a two year high of 1843 on Mar 2 ‘15. But it failed to sustain above the ‘rectangle’. It subsequently formed a ‘head-and-shoulders’ reversal pattern with an upward-sloping neckline within the ‘rectangle’, and corrected below its 200 day EMA.

Daily technical indicators are looking bearish and oversold. A pullback towards the upward-sloping neckline is a possibility. A ‘rectangle’ pattern is usually a continuation pattern – which means the eventual break out should be upwards. But there has already been a failed break out and a reversal pattern formation. It may be better to wait for upcoming annual results to decide whether to buy, sell or hold.

JK Lakshmi Cement

The stock of JK Lakshmi Cement rose from a two years low of 55, touched on Aug 5 ‘13, to a two years high of 407, touched on Jan 19 ‘15 – a whopping 640% gain in less than 18 months. The stock has been consolidating sideways within a ‘rectangle’ pattern with a downward bias since touching its Jan ‘15 high.

The stock is currently receiving twin support from the lower edge of the ‘rectangle’ (at 340) and its 200 day EMA. Despite the correction, valuation looks quite stretched.

Daily technical indicators are in bearish zones, but showing some upward momentum. A technical bounce is a possibility. Sequential QoQ results have shown decline in top and bottom lines for the past three quarters. Check annual results before initiating any action.

A look at Cap Goods and Infra sectors – a guest post

After rallying from their Dec ‘11 lows to their Jan ‘13 tops, both Sensex and Nifty indices have been undergoing corrective moves. While both indices are within 10% of their Jan ‘13 tops, some sectors have done much worse than the indices.

In this month’s guest post, Nishit takes a look at two such beaten down sectors – Capital Goods and Infrastructure, and builds a case for investing in stocks from these sectors with a long-term point of view.

-----------------------------------------------------------------------------------------------------------------

The Markets are going down every day and several sectors are being beaten out of shape. Capital Goods and Infrastructure are two such sectors. Fresh orders have dried up and stocks from these sectors are at multi-year lows. Let us try and examine these sectors.

Capital Goods and Infrastructure are the heart of any country’s economy. If infrastructure is not built well, no country can expect to do well. These sectors typically work in about 8 year cycles. They see a boom phase for a long time and then an equally long downturn as well.

The last cycle of investments stopped around 2008-2010 period. Hardly any new orders are being booked by most of the companies. The expansion of industry has also halted, and hence the Capital Goods sector is doing horribly.

Now, there will be two factors at play here. First, the existing infrastructure - specially the power plants and manufacturing industry - is getting old. This will lead to replacement demand. Second, as India grows there will be demand for additional power plants and machinery. More interior areas will get developed and become urbanised. This will lead to a lot of work for the Infrastructure companies.

There have been several companies both in the Capital Goods and the Infrastructure space which have been around for decades and have seen several business cycles and have returned stronger. Siemens, L&T, Bharat Bijlee, HCC to name a few.

We do not know how long the current downturn will last. It may well go on for a couple of years more. A smart way of playing this is by doing Systematic Investment in these companies. Most of them are at around 40-50 % from their peak valuations. Investments may be divided into 4 lot sizes. Add one lot now and then add another lot at about 15% higher or lower than the current valuation.

Metals is another sector where valuations have been beaten down. Remember no country can ever expect to grow without Steel being produced. Tata Steel and SAIL have been beaten badly out of shape and these companies have been around for several decades now. They certainly merit a look.

The downturn can go on for some time to come and all investments in such sectors need to be done with a time horizon of at least 3 – 5 years. It is a tough task for most of us but only by investing on such larger time frames can real money be made in the equity markets. The Benchmark Nifty may be down only around 10–12% from its peak in January ‘13 but Steel, Capital Goods and Infra stocks are down almost 40-50%. In every fresh leg of down move, different sectors get beaten down. Banks are currently facing the music. Information Technology Sector could be the next one.

-----------------------------------------------------------------------------------------------------------------

(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.)

Stock Chart Pattern - Larsen and Toubro (An Update)

The previous update to the stock chart pattern of Larsen and Toubro was posted back in Apr ‘11, when the stock was testing the support/resistance level of 1750 after trying to find a bottom at 1475. Earlier, the stock had touched a peak of 2212 in Nov ‘10 – which was a lower peak than the 2335 level the stock had touched in Nov ‘07.

The stock price consolidated sideways between the two support/resistance levels of 1750 and 1475 for the first 6 months in 2011 before breaking out upwards to touch an intra-day high of 1868 on Jul 8 ‘11, followed by a second slightly lower top at 1864 on Jul 26 ‘11. The small double-top reversal pattern ended the intermediate up move from the May ‘11 bottom.

The stock price dropped back into the consolidation zone between 1750 and 1475 for the next 2 months, and finally dropped below 1475 on strong volumes on Sep 23 ‘11. After receiving good support at 1300 for the next month and a half, the stock fell below 1300 in Nov ‘11 only to bounce up above 1300 in early Dec ‘11 and then fell off a cliff down to 971 in Dec ‘11.

The 2 years daily bar chart pattern of Larsen and Toubro is a good example of how support and resistance levels can play an important part in deciding when to enter or exit a stock. High volumes during an upward break out through a resistance level is a requirement for a break out to be valid. Downward break outs below support levels need not be supported by high volumes. But a high volume downward break out is likely to turn the support level into a strong resistance level during a subsequent up move.

Note that the upward break out through the 1750 level in Jun ‘11 was not accompanied by significantly higher volumes. The stock price could not sustain above 1750 for very long. On the other hand, the break down below 1475 was accompanied by a sharp volume spurt, which has turned the 1475 level into a strong resistance.

In today’s (Aug 16 ‘12) trade, the stock price has broken out above the blue down trend line that has ruled the chart since Nov ‘10 – but the break out was not accompanied by any volume spurt (marked by blue arrows). It is no surprise that the stock hasn’t yet crossed above the 1475 level.

The 50 day EMA has crossed above the 200 day EMA and the stock is trading above all three EMAs. Technically, the stock is back in bull territory. However, the bulls have plenty of work before they can regain control of the chart.

MACD and ROC are looking bullish, but both are showing negative divergences by touching lower tops. RSI and slow stochastic are also bullish but looking overbought. So, expect some correction or consolidation before the 1475 level is overcome. The next hurdle on the up side will be 1750. Only a convincing cross above 1750 will put the bulls back on top.

Bottomline? The stock chart pattern of Larsen and Toubro seems to be finally getting out of a strong bear grip. One can enter with a strict stop-loss at 1300, and add more on a cross above 1750. But don’t expect any fireworks. The infrastructure sector is still out of favour, and the stock is meant for patient long-term investors.

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.

How to use Financial News - revisited

With results season upon us, financial news is flooding the airwaves and the pink sheets. Some companies are declaring better than expected results - like Tata Motors and ITC. Others are disappointing the market with poor Q2 '09 shows - like Punj Lloyd and Tata Steel. A few had so-so results - like L&T.

I had written an earlier post on this subject when the market was down in the dumps. At that time, my suggestion was to categorise each item of financial news into 'great news', 'good news', 'bad news' and 'worse news'.

The stock market is in a much healthier state now, but is in the throes of a good correction. Does that put a spin on the decision making process? Not really. The same categorisation principle applies.

Let us take the examples of the companies mentioned above.

Tata Motors and ITC pleasantly surprised the market. The Jaguar-Land Rover deal was supposed to weigh down the former, and the bad monsoon was expected to affect the FMCG sector. The Tata group's huge resource raising capability helped to manage the large debt; plus the pick-up in commercial vehicle sales was 'good news'. So was ITC's considerable profits from cigarettes and reduced losses from FMCG.

What happens with such 'good news'? Stock prices usually perk up, which is used by smart investors to sell. Within a few days, the stocks tend to trade near their earlier range.

Punj Lloyd and Tata Steel declared results that were way below consensus estimates. Tata Steel's Corus debt hangover and poor offtake of steel in Europe wasn't entirely unexpected. But it is a fundamentally strong and well-managed company. The selling pressure on 'bad news' can provide re-entry points for smart investors.

Punj Lloyd's is a case of 'worse news'. Why? The management had given the impression that the Simon Carves UK penalty issue was not a big problem and will get resolved soon. Far from it. On top of their singular inability to generate cash from their core operations which led to their huge debt burden, the effort at hoodwinking investors have not gone down well at all.

The stock is falling off a cliff but still trading at a P/E of 19 at today's closing price of 202. Investors should not make the mistake of using this fall as a buying opportunity. Instead, sell at every rise. I won't be surprised if it revisits its March '09 low. A stock to avoid.

L&T's case is a little strange. While their results were not a major disappointment, the low rate of conversion from their huge order book is a concern for the market. This is not a buy on 'bad news' yet, because of the valuations. Patient investors should wait before re-entering.

The 'bad news' about Idea's results could be a harbinger of the overall derating of telecom stocks. Bharti's stock price got battered by 7% in anticipation of similar 'bad news'.

There has been no 'great news' among the financial news in the results season so far. The economy is still recovering, and unless the export-import business picks up to its earlier glory, the stock market may fail to reach greater heights.

Related post

Should Indian investors switch out of Telecom Sector stocks?