The previous update to the stock chart pattern of State Bank of India was posted back in Nov ‘11 (marked by grey vertical line in chart below). The stock price had touched an all-time high of 3515 a year earlier (on Nov 8 ‘10), and since then had been in a bear market along with the Sensex.
The stock touched a low of 1576 on Dec 20 ‘11 – a drop of 55% from its peak of 3515, which is almost twice the fall of the Sensex in percentage terms. The subsequent sharp rally took the stock above all three EMAs to touch a high of 2475 on Feb 21 ‘12.
Bullish hopes were belied as the stock entered a period of sideways consolidation – alternately moving above and below its 200 day EMA that frustrated long-term investors, but provided good trading opportunities. The 18 months daily bar chart pattern of State Bank of India shows that the stock is far from regaining its former glory.
The stock price twice received support from the 1820 level before bouncing up. On Sep 17 ‘12, the stock moved up with a ‘gap’ between 1975 and 2005. The ‘gap’ remains unfilled till date, which is a bullish sign. However, the stock has formed a bearish head-and-shoulders pattern since then – with the peak of the ‘head’ touching 2550 on Jan 10 ‘13.
The 2050 level, which has acted as a support/resistance level, is also the ‘neckline’ of the head-and-shoulders pattern. The downside target of the head-and-shoulders pattern is 1550. (Why? 2550 – 2050 = 500; 2050 – 500 = 1550.) If the downside target is met, not only will the ‘gap’ between 1975 and 2005 get filled but the Dec ‘11 low of 1576 will also get breached.
Note the negative divergences in all four technical indicators (marked by blue arrows), which failed to touch new highs along with the stock price. Also, by touching a high of 2550 and turning down, the stock price just reached the 50% retracement level of the entire bear market fall from 3515 to 1576. Technically, the stock remains in a bear market till it can move convincingly above the level of 2550.
Most PSU banks have substantial unreported NPAs – called ‘restructured assets’ – thanks to loans given to power and airlines sectors. Fund managers and investors can hardly ignore the largest PSU bank in the country. However, the stock chart pattern reflects a distinct wariness among investors. Notice the volume spikes on down days.
All four technical indicators are in bearish zones – though they have corrected from oversold conditions.
Bottomline? The stock chart pattern of State Bank of India is poised near an important support at 2050. The support may not hold. If it fails to find support from the 1820 level and drops lower, it can drag the Sensex down into a bear market. Extreme caution is advised.
The stock chart pattern of State Bank of India was last analysed more than two years back. A lot of water has flown down the Ganges since then, and the fortunes of India’s biggest public sector bank has almost waxed and waned with the river’s tides.
A change of guard at the top brought with it sweeping changes in some of the lending policies. The very popular but financially disastrous teaser home loan rates were scrapped. Cleaning up the balance sheet meant a one-time hit on the bottom line. The bad news came at a time when the overall market had begun correcting after a 20 months long bull run.
The effect on the stock’s price was dramatic, as the bears went on a vicious rampage. The stock not only dropped into a bear market, but lost more than 50% from its Nov ‘10 peak. Let us have a look at the 2 years bar chart pattern of State Bank of India and analyse whether it is a good idea to enter this beaten down stock:
The stock touched a new high of 2500 in Oct ‘09 – a full 100 points higher than its bull market top of 2396 in Jan ‘08. A corrective move followed; the stock’s price dropped more than 25% to a low of 1863 in Feb ‘10, and looked ready to enter a bear market. But the 200 day EMA provided strong support throughout Feb ‘10, and positive divergences in the technical indicators led to a strong bull rally.
The stock’s price struggled to move above its previous top of 2500 through most of Jul ‘10. A break out on a volume spurt in Aug ‘10 propelled the stock to an all-time high of 3515 on Nov 8 ‘10. Unfortunately, it turned out to be a ‘reversal day’ (higher high, lower close) that signalled the end of the bull rally. That wasn’t the only warning signal.
Note that all four technical indicators reached lower tops (marked by blue arrows) as the SBI stock touched its all-time high. The combined negative divergences also pointed to a correction – if not a trend reversal. Interestingly, the MACD formed a head-and-shoulders reversal pattern with a downward-sloping neckline during Aug through Nov ‘10.
The confluence of bearish signals had a disastrous effect on the stock’s price, which crashed to a low of 1709 on Oct 5 ‘11 – a 51% correction from its Nov ‘10 peak. Q2 results appeared good at first glance, but not so great on a more detailed look. The stock formed a ‘reversal day’ pattern backed by very heavy volumes today, and may drop down to test and break its Oct ‘11 low.
The technical indicators are turning bearish. The stock has formed a bearish pattern of lower tops and lower bottoms over the past year, and is trading below all three EMAs and the blue down-trend line. The downgrade of the banking sector by Moody’s couldn’t have come at a worse time.
Bottomline? The stock chart pattern of State Bank of India is deep inside a bear market, with no signs of bottoming out yet. If the Sensex has to revive, SBI has to revive as well – but it doesn’t look like a possibility any time soon. If you like the banking sector, look at HDFC Bank or even a Yes Bank. The PSU banks are increasingly looking less attractive.
RBI increased the repo rate (at which it provides short-duration loans to banks) and the reverse repo rate (at which banks maintain short-duration deposits with the RBI) by 25 basis points each. The repo rate is now 8.5% and the reverse repo rate is now 7.5%. The CRR has been left unchanged at 6%.
With inflation remaining stubbornly high despite 12 rounds of rate increases since Mar 2010, it was widely expected that the RBI will increase the repo and reverse repo rates by 25 bps (0.25%) today. The market should have already discounted the rate hike. Why the buying celebration then? Was there some good news that the market liked?
Apparently, there were three. First, and most important, the RBI governor hinted at inflation rate moderating to 7% by Dec ‘11, in which case there will be no further rate hike at the end of the year. Moderation of inflation and a likely pause in the rate hike cycle was considered ‘good news’ by the market.
Also, for the first time ever, interest rate on savings bank accounts have been de-regulated. That means banks have the freedom to offer any interest rate on savings bank accounts that they deem fit. Last, but not the least, banks have been given the freedom to open branches in Tier-II through Tier-VI towns without prior permission.
Let us look a little more critically at each of these pieces of ‘good news’.
How will inflation suddenly moderate to 7% in less than 2 months when it has remained uncontrollably high for the past 20 months? Will food prices suddenly fall? Will government employees get less salary? Will politicians become honest and stop their looting? The answer is: none of the above.
The moderation will happen due to the ‘base effect’. Inflation was already high in Dec ‘10. So the YoY increase in Dec ‘11 will appear to be less. Actual prices that we pay will remain almost the same as now. There is also a possibility that diesel and kerosene prices will finally be increased if inflation does moderate. So, we may get back to square one.
What about the pause in the rate hike? Well, that won’t help much either. Better than bad isn’t necessarily good. As per RBI’s guidance, the GDP growth rate has been revised down from 8% to 7.6% in year ending Mar 2012. There are already signs of growth slowdown, which will be exacerbated by today’s rate hike. Unless interest rates start heading downwards, stock markets are unlikely to go up.
Is the saving bank interest rate de-regulation good news? Certainly not for banks. Their business has already been hampered by high interest rates – due to which loans have become dearer and term deposit rates have gone up. If interest rate on savings bank accounts is increased, it will be a direct hit on bank bottom lines.
As per the Economic Times, if savings bank interest rate is increased from the current 4% to 5%, then all the banks put together may need to pay out an additional interest of Rs 15,000 Crores, which may reduce the entire banking sector’s profitability by 13%.
Look at it another way. Savings bank account holders will collectively receive an extra Rs 15,000 Crores. What will they do with the sudden inflow? Why, spend most of it. Will that stoke the fires of inflation or not? You tell me!
SBI has the largest percentage of savings bank accounts among all banks (Yes Bank has the fewest) and will be affected the most by an increase in savings bank interest rate. The CMD went on record that SBI will not increase the savings bank interest rate. He also said that de-regulation means rates can also be reduced.
What about opening branches in small towns? It may help in financial inclusion of people living in remote areas where no bank branches exist. But if there was a lot of business potential in Tier-II through Tier-VI towns, banks would have sought permission to open branches there by now. By removing the red-tape of prior permission, the business potential of remote corners of the country is not going to increase overnight. But opening branches will add to the operating costs of banks.
The ‘good news’ doesn’t seem so good, does it? What was the reason for the buying today? It was a combination of short-covering and index management – today being early F&O ‘expiry day’ because of the Diwali holiday. The broader markets didn’t participate much in the rally.
Both the Nifty and the Sensex are poised at the upper end of their respective trading ranges of the past 11 weeks – with the huge gaps caused in Aug ‘11 remaining unfilled. Tread with caution.
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:-
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.
Related Posts
When I analysed the stock chart pattern of State Bank of India back in Mar '09, it had dropped from its peak of 2396 made on Jan 14 '08 to a low of 894 on Mar 9 '09 - a 63% drop, matching the fall of the Sensex.
It had bounced up to the 1000 level where it had received resistance from the 20 day EMA. All the technical indicators were looking very bearish, and I had expected the up move to get terminated at the 1100 level.
The up move only faced a short-term correction after hitting the 1100 level, before embarking on a strong rally. The pattern mirrored the Sensex, post election results from May 18 '09 onwards.
A look at the 1 year bar chart pattern of State Bank of India will show a prolonged consolidation within a symmetrical triangle followed by an upward break out on decent volumes:-
The State Bank stock made a new high of 2235 on Sep 30 '09 - outperforming the Sensex by rising 150% from its Mar '09 low, and retracing 89% of its bear market fall. But it looks like an intermediate top has been made.
Why? Several reasons. A bearish rounding top formation. Increasing distance between the 50 day and 200 day EMAs. Negative divergences in the RSI, MACD and slow stochastic. All these point to a healthy correction.
Note how the 50 day EMA has provided strong support to the up move from end-Jul '09 onwards. It should provide resistance to the down move. Below that, the 200 day EMA should provide stronger support.
Bottomline? The stock chart pattern of State Bank of India seems to be getting ready for a decent correction. Will the Sensex follow suit? Partial profit booking advised. Remember that this is the top pick among PSU bank stocks. At some point in time, its subsidiaries should get merged with it and create an even bigger entity.
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.)
