Nifty chart: a midweek technical update (Dec 05, 2018)

FIIs were net buyers of equity on Mon. (Dec 3) but net sellers on Tue. & Wed. (Dec 4 & 5). Their total net selling was worth Rs 1.2 Billion. DIIs were net sellers on all three trading days this week. Their total net selling was worth Rs 21.2 Billion, as per provisional figures.

Nikkei India's Manufacturing PMI rose to an 11 months high of 54.0 in Nov '18 from 53.1 in Oct '18. It was the 16th straight month of expansion (>50). Nikkei India's Services PMI also rose to 53.7 in Nov '18 from 52.2 in Oct '18. The Composite (Mfg. + Services) PMI rose to 54.5 in Nov '18 from 53.0 in Oct '18.

RBI announced an expected status quo on interest rates at its policy meeting today, but kept its calibrated tightening stance intact. However, SLR will be gradually decreased from 19.5% to 18% @25 bps (0.25%) per quarter for the next 6 quarters to increase liquidity for lending in banks.

The following comments appeared in last week's technical update on the daily bar chart pattern of Nifty: "If FIIs continue to buy, expect the 'gap' to be completely filled. The down move may resume even if the 'gap' gets filled."

On Thu. Nov 29, the index opened with a small upward 'gap' and rose to completely fill the downward 'GAP' of 89 points (formed on Oct 4) on the back of net buying by FIIs and DIIs.

On Mon. Dec 3, the index touched an intra-day high of 10941, but dropped to test support from the downward 'GAP' before closing at 10884. On the next two days, FIIs and DIIs turned net sellers. The index dropped below the 'GAP' intra-day, touching an intra-day low of 10748, but bounced up to close inside the 'GAP' today.

The index closed above its three EMAs in bull territory. So, did the index just pullback towards its 200 day EMA prior to resuming its up move? Or, has it resumed its corrective down move that started on Aug 29? 

Note that all three EMAs have converged together (marked by gray circle). A sharp move is likely to follow. Will it be upwards or downwards? 

Odds favour a down move. Why? Because, the index managed only a day's (Dec 3) close barely above 10882, which is the 50% Fibonacci retracement level of the 1756 points fall from the Aug 28 top to the Oct 26 low. Many a retracement has been observed to flounder at, or near, the 50% level. 

Daily technical indicators are in bullish zones, but turning bearish. MACD is above its signal line but its upward momentum has stalled. RSI and Slow stochastic have formed 'rounding top' reversal patterns. Slow stochastic is showing negative divergence by touching a lower top.

Nifty's TTM P/E is at 26.09, which is much higher than its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating about the edge of its oversold zone - not giving any near-term directional indication.

The US-China trade war has not been resolved - only postponed for 3 months. The S&P 500 index had a huge fall on Dec 4. FIIs are unlikely to turn bulls if the US market continues to correct. 

RBI's cautious stance - despite moderating CPI inflation - was apparently not liked by the Indian market. Expect bears to drive home their advantage till state election results are announced on Dec 11.

A test - and a possible breach - of the Oct 26 low may be on the cards. Small investors waiting to enter may get better entry points if they wait a little longer.

Nifty chart: a midweek technical update (Oct 04 ‘17)

FIIs were net sellers of equity worth Rs 13.2 Billion during the two days of trading this week, as per provisional figures. DIIs were net buyers of equity worth Rs 21.4 Billion.

After a breakout below a 'rising wedge' pattern, Nifty received good support from the 9700 level and started a pullback rally that closed above 9900 today.

Passenger vehicles had robust sales in Sep '17. Maruti showed growth of 9.6% over Sep '16 sales, while M&M and Hyundai reported growths of 23% and 17.4%. Tata Motors and Toyota had muted growth of 5.7% and 2.2%.

As was widely expected, RBI maintained interest rate status quo at today's policy meeting announcement. Only SLR was cut by 50 bps to 19.5%.

The daily bar chart pattern of Nifty had breached the 9700 support level intra-day on Sep 28, but bounced up after touching a low of 9688 - testing its previous low of 9686 (touched on Aug 11).

That was a trigger for a pullback rally towards the 'rising wedge'. Resistance from the 20 day EMA halted the rally today. 

By touching an intra-day high of 9938, the index has retraced 50% of its recent fall from the Sep 19 top of 10179 to the Sep 28 low of 9688. However, the rally needs to continue beyond 10000 for bulls to regain some control.

Daily technical indicators are in bearish zones, but showing upward momentum. The breadth indicator NSE TRIN (not shown) is falling in neutral zone. Some more upside is possible.

Note that Nifty's TTM P/E has moved up to 25.75 - which is much higher than its long-term average. High index valuation is one of the main reasons why FIIs are selling.

Nifty is trading well above its rising 200 day EMA in a bull market. That means dips are supposed to be buying opportunities. However, with FIIs selling continuously - and they may use the pullback rally to sell more - it is better to err on the side of caution.

Nifty chart: a midweek technical update (Jun 07 ‘17)

FIIs were net buyers of equity on all three days of trading this week. Their total net buying was worth Rs 6.1 Billion. 

DIIs were net sellers of equity worth Rs 3.6 Billion on Tue, but were net buyers worth Rs 1.8 Billion on Mon. and Wed. as per provisional figures.

RBI's monetary policy announcement today came as no surprise. Status quo was maintained for repo and reverse repo rates. CRR was also unchanged, but SLR was reduced by 50 bps (0.5%) to 20%.

The daily bar chart pattern of Nifty rose to touch a new high of 9709 on Tue. Jun 6, but closed near the low point of the day at 9637 - forming a 'reversal day' bar (higher high, lower close) that often marks an intermediate top.

All three EMAs are rising, and the index is trading above them in a bull market. However, overbought technical indicators that are showing negative divergences by failing to touch new highs with the index may be triggering a correction.

The rally from the Dec 26 '16 low features several corrective moves towards the rising 20 day EMA that has kept the chart technically 'healthy'. Another correction towards the 20 day EMA will provide Nifty the technical strength to move convincingly above 9700.

Nifty's TTM P/E is at 24.48, which is well above its long-term average. The breadth indicator NSE TRIN (not shown) has reversed direction from the edge of its oversold zone and dropped sharply into neutral zone - hinting at some more index upside.

With FIIs turning buyers again, any correction is likely to be a shallow one. 

The Indian Meteorological Dept has reconfirmed a normal monsoon this year. That should give a boost to rural consumption. 

Implementation of GST from July 1 should benefit the economy over the long term, but there may be a temporary slowdown due to teething problems. SME companies may not be ready yet with their systems and processes.

Stay invested, and think long-term. 

Nifty chart: a mid-week update (Feb 04 ‘15)

Some analysts were hoping for another interest rate cut this week. However, the consensus estimate was that after the surprising rate cut announcement  in Jan ‘15, RBI will hold off on further cuts till the budget at the end of this month. So, the status quo announcement by RBI – except for a minor cut in the SLR – came as no surprise.

Q3 results are coming in thick and fast – but there hasn’t been much cheer for the market. Top line and bottom line pressures are clearly visible in large and small companies. There have been a handful of exceptions, but not enough to maintain bullish sentiment.

FIIs and DIIs have been in profit-taking mode during the first three trading days in Feb ‘15. However, their combined net sales in equity totalled less than Rs 1500 Crores. As a result, Nifty has corrected just about 3.2% from the lifetime high of 8997 touched on Jan 30.

The daily bar chart pattern of Nifty has dropped to seek support from its 20 day EMA and the support-resistance zone between 8180 and 8627 - which are its previous tops touched in Sep ‘14 and Dec ‘14. Previous tops tend to act as support levels.

Will the index bounce up from the current level? Or, will it continue to correct, and find support from its 50 day EMA (which is inside the support-resistance zone)? Knowing the answers to those two questions can make short-term traders rich – but should not matter much to long-term investors.

A 3% correction in a bull market should have very little consequence for the long-term – other than removing overbought conditions that prevent an index (or stock) from moving higher.

All four daily technical indicators have corrected overbought conditions. MACD has dropped down from its overbought zone to seek support from its rising signal line. ROC has crossed below its 10 day MA, and is poised to enter negative territory.  RSI has dropped to the edge of its overbought zone. Slow stochastic has slipped down from its overbought zone.

Some more correction or consolidation is possible. But there are no signs of a big correction – despite strong volumes during the past three down days.

Nifty continues to trade above its three EMAs in a long-term bull market. The next triggers for bulls may come from the Delhi election results – where AAP is surprisingly ahead in the initial polls – and the budget.

Hold on to your portfolios. Some times inaction can be a virtue. But do continue with your regular monthly investments/SIPs.

Nifty chart: a mid-week update (Jun 04 ‘14)

As was widely expected, the RBI Governor left interest rates unchanged, but lowered SLR by 50 bps (from 23% to 22.5%). Will it help the market in any way? Well, yes, and no.

SLR is the amount to be compulsorily invested by banks in government securities. A reduction in SLR should mean the release of several thousand Crores of liquidity into the market – hence, greater availability of credit for would-be borrowers.

However, most banks invest much more than the SLR stipulated amount in government securities any way – perhaps because there are fewer borrowers in a slow economy. So, the reduction in SLR may not filter down to the market for several months.

The upward ‘gap’ of about 47 points, formed on May 13, still remains unfilled. Last Friday’s intra-day drop found support from the rising 20 day EMA and did not test support from the ‘gap’.

After the gyrations on May 16 (election results day), Nifty has settled into a sideways consolidation from which the likely break out should be upwards. Even if the index drops to fill or partly fill the ‘gap’, the up move should resume thereafter.

Daily technical indicators have corrected overbought conditions, and remain in bullish zones. MACD and RSI are still in their overbought zones. ROC has bounced up from the ‘0’ line. Slow stochastic has bounced up from its 50% level. Some more consolidation is possible.

FIIs have invested a net Rs 1000 Crores during the first three trading sessions in June. They are probably waiting for positive policy announcements to increase their buying.

It is a bull market. Remain long.

A modern day parable about profligacy and prudence

Once there was a young man who lived in a small village more than two hours by train from the nearest big city. None in his family had ever studied beyond Class 8 in school. But the young man had a dream – to become a lawyer and save his fellow villagers from being exploited by the zamindar.

He pursued his dream and did become a lawyer, and went on to earn a huge fortune. He spent a lot of his earnings in building a school and a college near his native village. He also bought large tracts of land with fruit orchards and lakes. The land was cultivated to grow food grains. Fruits from the orchards were sold in the market. The lakes were used for fish farming. Villagers were employed to look after the property – and shared part of the bountiful produce.

Things were going well for the villagers – who were prospering. The lawyer was happy that he was able to make a difference to the lives of his fellow neighbours – though he spent most of his time in the big city.

But there were dark clouds on the horizon. The lawyer had a son who was a good-for-nothing spendthrift, who spent most of his time with friends and enjoyed the good life. Despite his best efforts, the lawyer could not make his son mend his ways. He was too busy with his legal practice anyway. So he thought of a plan.

He formed a trust, with his childless younger brother as the trustee. His son was to receive a regular allowance per month, but the trustee was the sole authority for sanctioning any additional expenditure. After the lawyer passed away, the trust came into force – much to the chagrin of his son.

He was soon running through his monthly allowance and kept asking for more from his uncle, the trustee. The uncle was initially indulgent, because he felt sorry that the young man had recently lost his father. But he soon realised that his nephew was taking undue advantage of his indulgence. So, he tightened the screws and refused to sanction extra amounts.

The nephew was taken aback, but instead of mending his ways, he brought over his friends and tried to threaten his uncle with dire consequences. But the uncle refused to budge. So he changed tactics and started imploring and cajoling his uncle for more money.

The uncle said he may re-think provided his nephew met certain conditions. First, he would need to get rid of his freeloader friends. Next, he would need to take an active interest in his father’s property in the village – to ensure that the villagers were doing a proper job of maintenance and upkeep as well as to plug the large amount of leakage of produce that was being siphoned off by various middlemen.

The nephew agreed to the conditions and did prevent his friends from hanging around all the time – though he didn’t really get rid of them. The uncle sanctioned some extra allowance as a quid pro quo. But the nephew showed no interest in looking after the village property of his late father, nor in plugging the pilferage.

Next month, the uncle refused to sanction any extra money, and reiterated his conditions. The nephew promised to change, but his uncle said he won’t sanction anything till he actually saw some change on the ground.

And so the stalemate continues at the time of writing. The nephew (read UPA II) may have good intentions to change, but is unwilling or unable to do so because of his friends (the Mulayams and Mamatas). The uncle (read RBI Governor) has put his foot down and said thus far and no further (by keeping repo, reverse repo and CRR unchanged). The 1% cut in the SLR – from 24% to 23% – was just a token gesture to show good intentions by increasing liquidity without affecting the high inflation rate too much.

The Interest Rate hike was expected – why did the market fall?

As expected, the RBI hiked the repo rate and reverse repo rates by 25 basis points. For the uninitiated, that means a 0.25% rise. The repo rate (the interest rate at which banks borrow short-term funds from the RBI) is now 6.5%, and the reverse repo rate (the interest rate that banks receive for parking short-term funds with the RBI) is now 5.5%. Two other rates – the CRR and SLR – have been left unchanged.

Why was the interest rate hike expected? Primarily because core inflation (non-food) has been rising and 6 rate hikes in 2010 had little effect in cooling off prices. Every one knows that food inflation has almost gone out of control, and the Indian housewife is at her wit’s end trying to put nutritious food on the table within the family budget.

If 6 previous rate hikes haven’t managed to cool off inflation, will the 7th (1st in 2011) fare any better? That is a good question, and the RBI Governor knows it. He took pains to explain to the media that his choices were limited. Inflation needs to be controlled, otherwise high prices of essential commodities will increase input costs for India, Inc. That would dent bottom lines and may slow down expansion and capital expenditure. The severe crack in Hindustan Unilever’s stock price today is a clear example of investor nervousness.

Raising interest costs too much at one go will increase borrowing costs and hurt the growth prospects of companies. The RBI has chosen the middle path of a gradual increase in interest rates. If inflation continues to rise, another round of rate hikes may be inevitable. Already, the RBI Governor has relaxed the target core inflation rate to 7% from the earlier 5.5%. There lies the first clue to the market’s fall today. So far, the RBI and finance ministry officials have been making positive noises about controlling inflation through monetary measures coupled with the ‘base effect’ of higher inflation in the year gone by. This was the first official admission that things haven’t worked as planned.

The second clue is the unambiguous message that the RBI Governor sent to the commercial banks: Curb lending and increase deposit rates. That may be music to the ears of retirees who stay far away from the stock market and depend on fixed income avenues. Fixed deposit rates at banks will hit the double-digit mark soon. What is meat for retirees is poison for stock market investors. The combination of higher interest rate with lending curbs will throw a spanner in the works of India’s growth story.

Rate-sensitive stocks took a beating today, and don’t be surprised if the stock market cracks further after the Republic Day holiday. As small investors, there are a couple of things we should do. One, don’t panic and sell off everything. But if you are in profit in second rung stocks, book some or all of it. Two, prepare for a bigger correction by making a list of fundamentally strong stocks that offer some Margin of Safety. Let the correction play out. The next positive trigger may come from the Budget. Buy then.

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What the CRR-SLR-Repo cuts mean for investors

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What the CRR-SLR-Repo cuts mean for investors

Economics and monetary matters are not my strength areas, but a lot of investors must be wondering how all these different rate cuts may affect them. So here is a 'dummies guide' to the triple rate cut dose.

But first, some of the basics.

The Repo rate is the rate of interest charged by the Reserve Bank of India (RBI) to commercial banks who may need to borrow some short term funds against securities. (The Reverse Repo rate is the rate of interest paid by the RBI to the banks who may park short term funds with it. Usually the RBI pays a lower rate.)

The Cash Reserve Ratio (CRR) is a percentage of the total deposits with commercial banks that they need to keep with the RBI.

The Statutory Liquidity Ratio (SLR) is a percentage of deposits that commercial banks need to invest in government securities.

What purpose is served by such means? It is for the safety and security of the funds available in the banking system (which in turn helps investors like you and me). It is also for controlling the supply of money (or liquidity) in the country's financial system.

The Foreign Institutional Investors (FIIs) were lured by the growth prospects of the Indian economy and brought in huge funds (by Indian standards) to purchase shares of Indian companies. Indians working overseas also channeled money back to the country for investments because of the comparatively higher interest rates.

As demand for products and services kept rising, capacities got stretched, and prices were hiked. Industries went in for capacity expansion availing cheaper overseas funds. With higher production the GDP kept rising, attracting more foreign funds.

The increased liquidity - mainly from overseas - and higher prices caused inflation to rise. Initially the government kept ignoring the rising inflation rate till it hit double digits. To curtail inflation, the RBI squeezed the supply of money by gradually increasing the CRR, SLR and Repo rates.

Unfortunately, the sub-prime crisis in the USA hit the world's financial system like a whirlwind. Many of the FIIs who had lost heavily in the sub-prime derivatives markets, started to sell aggressively in the Indian share market.

The outflow of foreign money caused two problems. First, it caused a reduction in liquidity - which had already been tightened by RBI's policies. Second, it caused a fall in the value of the Rupee - which the RBI tried to stem by buying foreign currency, further reducing liquidity.

The banks started feeling the pinch and started offering higher interest rates for deposits and, therefore, charging higher interest rates to borrowers.  Industry found the easy-money taps getting closed - both in India and overseas, and started slowing down their growth plans.

Speculators who borrow money to invest felt the cost of doing business was too high and started selling off. This compounded the selling pressure already exerted by the FIIs. The downward spiral in the stock market got exacerbated when small investors also started selling off.

The several rate cuts over the past couple of months is the RBI's and governments rather belated effort to inject liquidity in the market so that banks can resume lending. Hopefully that will lead to rejuvenating the growth plans of industries and eventually lead to reduction of interest rates.

That would be the first indication that the stock markets are ready to stop falling and starting their next upward journey.