Nifty chart: a midweek technical update (Nov 06, 2019)

FIIs were net sellers of equity on Mon. Nov 4, but were net buyers during the next two trading days this week. Their total net buying was worth Rs 13.5 Billion. DIIs were net sellers of equity on on all three trading days. Their total net selling was worth Rs 32.1 Billion, as per provisional figures.

Nikkei India's Services PMI rose to 49.2 in Oct '19 from 48.7 in Sep '19, but remained below 50 (indicating contraction) for the second straight month. The Composite (Manufacturing + Services) PMI dropped to a 2 year low of 49.6 - pointing to further weakness in India's economy.

Four major Indian drug makers - Cadila (Moraiya plant), Glenmark (Baddi plant), Lupin (Mandideep plus two other plants), Aurobindo (two Hyderabad plants) - have received warning letters from US FDA, showing a hardening stance towards lapses in quality control.

The daily bar chart pattern of Nifty is trying to continue its rally towards a new high on the back of FII buying. However, selling by DIIs has kept the upward march of the index in check.

The index is struggling a bit to overcome resistance from the 12000 level while it trades well above its three rising EMAs in a bull market. The previous (Jun 3) top of 12103 is within touching distance.

Daily technical indicators are looking overbought. MACD is rising above its signal line inside overbought zone. RSI is moving sideways along the edge of its overbought zone. Slow stochastic is also moving sideways, inside its overbought zone. Some consolidation or a correction towards 11700 is possible. 

Nifty's TTM P/E has moved up to 27.71, which is well inside its overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is moving up in neutral zone, and may limit near-term index upside.

India's economy is heading southwards - as is evident from most macroeconomic indicators. But Nifty is moving north on expectations of more reforms. 

Unless banks become more realistic about narrowing their spreads on loans, economic growth revival will remain a distant dream. Periodic reform announcements are boosting short-term bullish sentiments in the market, but neither helping rural distress nor encouraging consumption.

This is not the time to be brave. Stay invested, carry on with investment plans but avoid large bets on 'cheap' stocks. 

3 Things All Self-Directed Investors Should Know

There are two ways you can invest your monthly/quarterly/annual savings - the easy way and the hard way.

The easy way is to get hold of an experienced financial adviser and follow his investment advice. The hard way is to take charge of your own financial future and do the investing on your own.

Many small investors skip the easy way because they think that investing for the long term is a trivial activity, and not worth the fees a good financial adviser will charge. No wonder they end up with poor returns or losses.

Common sense suggests that you follow the easy way first. Learn the ropes and gain experience about which investment instruments carry what types of risks and give what kind of returns over different time frames.

Once you have followed the advice of a financial adviser you can trust and built up a decent investment portfolio, then you may start thinking about managing your portfolio on your own.

Before you decide to march to the steps of Tagore's well-known song "Ekla Chalo Rey" ("tread your own path"), there are three things you need to remember:

1. You can't be an expert at everything - invest in what you know, and gradually broaden your 'Circle of Competence'

2. Be patient and disciplined - Rome wasn't built in a day. A good investment portfolio requires canny selection, disciplined approach to regular investing and monitoring, and patience to hold for the long term

3. Control your emotions -  be dispassionate about the periodic ups and downs in the economy. Not investing when there is doom and gloom all around is just as bad as investing when there is euphoria and everyone is jumping into the stock market to buy.

Read more

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What is your Circle of Competence?
How small investors can widen their Circle of Competence

5 Reasons why FIIs may continue to sell Indian equities

The Indian stock market topped out in early Sept '16, and was going through what looked like a routine bull market correction when the bottom seemed to fall out on Nov 9 '16.

A 'double whammy' of Modi's announcement of demonetisation of Rs 500 and Rs 1000 bank notes and Trump's unexpected victory in the US Presidential elections created major panic in the market.

Those were triggers for increased selling by FIIs. Here are 5 reasons why they may continue to sell Indian equities for some more time:

1. FIIs were net sellers of Indian equity worth Rs 57.7 Billion during Oct '16 as Nifty's TTM P/E was in a range between 22.98 and 23.80 - well above its average valuation.

During Nov '16, Nifty's TTM P/E range has been slightly lower so far - between 21.19 and 23.31 - but still well above its average valuation.

2. US bond yields have moved up above 2.3%, and are expected to move up further to 2.6% or so. Why? Because of rising inflation expectations on prospects of Trump's pro-growth policies.

FIIs prefer the safety of US bonds to riskier emerging market equities.

3. US Fed is likely to increase interest rates at its policy meeting in Dec '16. At least two more interest rate increases are expected during 2017. 

Since rising interest rates usually lead to lower bond prices, yields will get a further boost which can cause more FII outflows. 

4. China's economy is slowing down, which has triggered a slump in commodity prices because China is one of the biggest buyers of commodities. Since commodity prices and the US Dollar trend in opposite directions, the Dollar has been strengthening.

A strong Dollar usually leads to selling in all emerging markets. Currencies of Indonesia, Phillipines, Mexico, South Africa, Turkey have depreciated much more than the Indian Rupee.

5. As per nominal interest rate parity theory, lower interest rates lead to a stronger currency and higher interest rates lead to a weaker currency. This is a major reason why the Indian Rupee has been depreciating against the US Dollar for quite some time.

The recent FII selling in the Indian stock market has further depreciated the Rupee against the Dollar.

In a recent interview on a business TV channel, the global equity strategist of Citi Group said unequivocally: FIIs look at three things - US Dollar, US Treasury yield and China.

Rising US Dollar and rising US Treasury yields means selling in emerging market equities (and vice versa - i.e. falling Dollar and falling yields trigger buying in emerging market equities). 

A likely Trump policy against outsourcing of US manufacturing will further affect economic growth in export-oriented nations like China, Taiwan, South Korea, Malaysia.

A self-contained economy like India will be less affected by such a policy. So far, Trump has mentioned about restricting H1B and L1 visas but nothing against services outsourcing.

Demonetisation of bank notes has led to shorter-term ETF money outflows. Longer-term long-only funds may wait for Q3 and Q4 results of India Inc. before taking a call.

If the short-term damage to India's GDP growth is not 2% (as Dr Manmohan Singh mentioned in the Rajya Sabha) but 0.5% (as Mark Mobius of Templeton said in a TV interview), Indian economy should recover over the next 6 months.

BSE Sensex and NSE Nifty charts (Aug 19, 2016): bulls and bears locked in a stalemate

Neither bulls nor bears were able to gain much advantage during a holiday-shortened trading week. FIIs were net buyers of equity worth Rs 1250 Crores, as per provisional figures. DIIs were net sellers of equity worth a little more than Rs 100 Crores.

On a weekly closing basis, Sensex lost 75 points - a point more than what it had gained in the previous week. Nifty lost 5 points, closing lower for the second week in a row.

Chances of a US interest rate hike pushed the Dollar higher and the Rupee lower. Oil prices rose on speculation of a production freeze by OPEC. Without any immediate bullish triggers, market players chose to book profits.

BSE Sensex index chart pattern

The following comments were made in last week's post on the daily bar chart pattern of Sensex: "Some more consolidation or correction is likely. With FIIs buying on every dip, the Sensex may not face a deep correction."

The index consolidated in a narrow range within the 'support-resistance zone' between 27600 and 28600. The 20 day EMA provided good downside support. The up trend from the Feb 29 '16 low is intact.

Three of the daily technical indicators - MACD, ROC, Slow stochastic - are in bullish zones, but not showing any upward momentum. RSI is straddling its 50% level.

The longer the index consolidates, the sharper will be the eventual breakout. In a bull market, such consolidations usually precede an upward breakout.

However, the macroeconomic picture has not improved. Inflation is rising again. Manufacturing output is weak. Q1 (Jun '16) earnings were nothing to write home about.

The 7th Pay Commission awards will get implemented from next month. That may provide some fillip to consumer-related stocks.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty closed just above the resistance level of 8650 after trading within a 100 point range. The index formed a 'doji' candlestick that indicates indecision among bulls and bears.

The index may be forming a small 'rounding top' reversal pattern that can trigger a correction. A move above the previous week's top of 8728 will negate the pattern.

Three of the weekly technical indicators - MACD, RSI, Slow stochastic - are moving sideways well inside their overbought zones. ROC is also moving sideways below its 10 week MA just inside its overbought zone.

Nifty's TTM P/E remains high at 23.7. The breadth indicator NSE TRIN (not shown) has dropped inside its overbought zone.

An index can remain overbought for long periods. No need to worry about a big crash as FIIs are buying all dips. Stay invested, but with a stop-loss as the downside risk appears higher.

Bottomline? Sensex and Nifty charts show that bulls and bears are locked in a stalemate. Index valuations on a TTM basis are expensive, increasing downside risk. If you wish to enter now, your bottom-up stock picking skills will be tested.

Nifty chart: a midweek technical update (Aug 10 '16)

RBI Governor kept interest rates unchanged, as was widely expected by economists and analysts. Dr Rajan's policies have kept inflation under control, helped to clean up balance sheets of PSU banks and put the economy back on the growth track.

Government's robust tax collections during the Apr-Jul '16 period is a clear sign of improved economic activity. Direct tax collections grew 24%. Indirect tax collections grew an even more impressive 29%.

During the first three trading days this week, FIIs were net buyers of equity worth Rs 1700 Crores, as per provisional figures. DIIs were net sellers of equity worth Rs 2200 Crores.

Nifty touched a new 52 week high of 8728 on Aug 9, but has once again corrected down to seek support from its rising 20 day EMA. Will the index bounce up again, or will it correct some more?

Note the following comments from last week's technical update on Nifty: 

"If the index falls below its 20 day EMA, it can drop quickly to the support zone between 8300-8400. Can Nifty fall even lower? Sure it can, but a couple of technical reasons may prevent a fall below 8300. The first is of course continued buying by FIIs on every dip. The second is a 54 points upward 'gap' between 8353-8407 formed on Jul 11. The 'gap' area can act as a support zone." 

The index had bounced up after receiving support from its 20 day EMA last week, but is once again on the verge of falling lower. Will it be different this time? 

Increase in DII selling, plus lack of any immediate bullish triggers can lead to some more profit booking. All the positives - like good monsoon, decent Q1 (Jun '16) results, passing of the GST bill in parliament - have already been 'discounted' by the index.

Note the 'gap' zone between 8353-8407 marked on the chart. The 50 day EMA has risen almost to the upper edge of the 'gap'. That suggests bulls may start buying aggressively on any dip towards 8400.

Daily technical indicators are still in bullish zones after correcting overbought conditions. But their downward momentum and combined negative divergences (marked by blue arrows) may lead to some more correction. 

Nifty's TTM P/E ratio is still high at 23.44. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone - hinting at more correction.

The current chart set-up does not suggest a deep correction towards 8000 - as suggested by a couple of fundamental analysts. However, the stock market has a knack of doing the exact opposite of expectations.

Nifty is trading above its three EMAs in a bull market. Any further correction will provide an adding opportunity.

So, stay invested, but keep a stop-loss at 8350.

How Election Results can affect Stock Market movements - a guest post

Recent results of elections in four states and one union territory threw up some interesting outcomes. Congress and its various alliances got a drubbing in all four states, though they managed to retain Puducherry.

BJP and its allies won Assam - opening their account in a North-Eastern state for the first time ever. They managed to marginally increase their seat share in West Bengal, and played spoilsport for the Left-Congress alliance in several more seats.

The strength of Congress in the Rajya Sabha will get reduced. In this month's guest post, Nishit explains why the results may be beneficial for the stock market and how results of state elections in 2017 can affect the market.

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Election results for four State Assemblies and one Union territory have been declared. Election results often influence the stock market because Government policies play a big role in the progress of the economy and as a consequence of which the market reacts.

In 2004, it was the fear of change, when the well entrenched NDA Government of Vajpayee was uprooted, and the market tanked. In 2009, it was relief that Manmohan Singh was back and would no longer require support from Communists. Similarly, in 2014, the Modi wave drove the market up.

Assembly polls do influence the market because they throw markers to the future. BJP consolidated its position during the recent state elections, and hence the market did not tank. If Assam was not won, then the market may have cracked.

There are no elections scheduled for the Assembly till about March 2017. At that point of time, the key states of UP, Punjab and Uttarakhand would be going to the polls. If BJP does badly, the market will tank and vice versa.

Election results are one of the influencing factors for the way the market moves and one must keep an eye on them. Market movements are merely effects and the underlying causes are many. An effective study of causes why the market moves as it does will help one make money.

The market rallied after state election results on May 19 '16 because Mamata Banerjee made the statement of supporting the GST Bill after results were out. The results also mean that in due course, Congress will be further weakened in the Rajya Sabha - enabling the NDA to pass important bills more easily.

Next year there will be two occasions when the market may get influenced by election results. In March 2017 with UP and Punjab and in late 2017 when Gujarat and Goa go to the polls. Imagine the scene should BJP lose in Gujarat!

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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)

Why small investors should relentlessly pursue Saraswati and wait patiently for the blessings of Lakshmi - instead of the other way around

In Hindu mythology, the Holy Trinity of Lord Brahma, Lord Vishnu and Lord Maheshwara represent the cycle of life - Creation, Preservation and Destruction.

They are also symbols of the three ‘gunas’ (or attributes) of the soul – sattva, rajas, tamas – that have to be understood and then transcended for the soul’s liberation and eventual union (yoga) with the Universal Consciousness.

The Divine Consorts of the three Lords are Saraswati, Lakshmi and Parvati. Saraswati is the Goddess of learning, speech and music. Lakshmi is the Goddess of wealth, prosperity and generosity. Parvati is the Goddess of fertility, love and devotion.

Here, we will concern ourselves with Saraswati and Lakshmi – who appear to be mutually exclusive. Where one is present, the other is absent.

There is a Bengali proverb that says: “Those who concentrate on their education eventually get to ride in nice cars.” In other words, pursue Saraswati, and Lakshmi will eventually give you her blessings.

Times have changed. Saraswati has taken a back seat. Lakshmi has become the Goddess to be pursued – by hook or by crook. The concept of ‘capitation fees’ paid by wealthy parents to private medical and engineering colleges to admit their academically inferior sons and daughters is a glaring example.

Those with knowledge and learning have very little money. Those who have lots of money are often crude and semi-literate. Many of our rowdy Parliamentarians have amassed vast amounts of money through dubious means.

Many small investors perhaps get influenced by what is going on around us. The video of a farmer who has not paid the last three instalments of a Rs 1 Lakh loan getting beaten up by uniformed cops no longer shock us.

The King of Good Times, a willful defaulter of over Rs 9000 Crores of loans from several banks, thumbs his nose at authorities and flies off to a foreign land and there is a murmur of protest in social media, which will soon die down.

As someone put it succinctly: “If you owe 1 Crore to a bank, it is your problem. But if you owe Rs 1000 Crores, it becomes the bank’s problem."

So, why am I suggesting that small investors should pursue Saraswati and wait patiently for Lakshmi? First, I belong to the old school of the Bengali proverb mentioned above.

Second, most small investors may not have the resources of our wily politicians to launder their wealth into real estate projects or foreign bank accounts through ‘hawala’.

Making money from the stock market is the easier part. Retaining that money and growing it into long-term wealth requires skill and learning.

If you are suddenly blessed by Lakshmi and make a 10-bagger return on a penny stock, will you know how to turn that 10-bagger return into 100-bagger wealth? Or, in your urgency to chase Lakshmi, will you reinvest in another penny stock and lose it all?

Not only do you need to learn about the economy, money market, bond yields, put/call ratios, fundamental and technical analysis to survive in the stock market, you need to follow proper financial and asset allocation plans.

Without the blessings of Saraswati – which requires life-long commitment to learning – the blessings of Lakshmi may be short-lived. Unless – according to a Marathi proverb – she breaks her leg and has to stay put at your home for some time. 

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 29, 2016

Stock markets worldwide reacted bullishly to economic stimulus announcements by ECB and China and a cut in interest rate (to -0.1%) by Japan. 

All is not well on the economic front, as India's GDP growth rates for FY14 was revised down to 6.6% from 6.9% and for FY15 to 7.2% from 7.3%.

As per provisional figures, FIIs were net sellers of equity worth Rs 14350 Crores in Jan '16. The figure exceeded their combined sales in Nov '15 and Dec '15. DIIs were net buyers of equity worth Rs 12900 Crores.

A combination of short covering and value buying at lower levels ensured that both Sensex and Nifty made weekly gains for the first time in Jan '16.

BSE Sensex chart pattern

The daily bar chart pattern of Sensex, which had twice received support from the 24830 level (in Sep '15 and Dec '15 - marked by green arrows), breached the support level and dropped to a low of 23840 last week - correcting more than 20% from the Mar '15 top of 30025.

The index formed a small 'double bottom' pattern and pulled back to the 24830 level (marked by red arrow). The likelihood of a counter-trend move and resistance from the 24830 level were explained in last week's post.

Daily technical indicators are turning bullish. MACD has crossed above its signal line in negative zone. ROC has entered positive zone. RSI has moved up to its 50% level. Slow stochastic has climbed above its 50% level.

Bears (read FIIs) are still dominating in the near term, and will continue to do so as long as the index trades below it falling 200 day EMA and the blue down trend line.

However, the long-term bull market is intact because Sensex is trading more than 1300 points above its 200 week EMA. 

If the pullback to the 24830 level is used as a selling opportunity by bears, the index will fall into 'attractive valuation' zone.

NSE Nifty 50 chart pattern

The weekly bar chart pattern of Nifty had received good support from the 7540 level in Sep '15 and Dec '15 (marked by green arrows). The support level got broken and the index dropped to an intra-week low of 7241 in the week ending on Jan 22 '16 - correcting more than 20% from its Mar '15 peak of 9119.

A 20% correction from an index top is often considered a confirmation of a bear market by technical analysts. So, last week's pullback to the 7540 level may be used as a selling opportunity by bears.

Bulls may point to the weekly bar of the previous week, which formed a 'dragonfly doji' candlestick pattern. The pattern has bullish implications when formed at the bottom of an intermediate down move.

Weekly technical indicators are looking bearish, but showing faint signs of reversal. MACD below its signal line in negative zone but stopped falling. ROC is facing resistance from its 10 week MA at the edge of its oversold zone. RSI has bounced up weakly from the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

Bulls need to muster a lot of buying support if they wish to turn the pullback into a full-fledged rally.

Bottomline? Chart patterns of Sensex and Nifty have pulled back to previous support levels. Bears may use the opportunity to sell. Long-term bull markets are still intact, as both indices are trading above their rising 200 week EMAs (not shown), and near long-term P/E averages, which make them fairly valued.
 

Will Modi kickstart reforms to reverse the bearish market sentiment? - a guest post

Global stock markets have seen one of the most bearish January trading in history. Some experts are calling it a 2008-like bear market.

Bull markets are supposed to climb a wall of worries. The big worries in 2015 were a possible exit of Greece from the Eurozone, tensions in Ukraine and an interest rate hike by the US Fed.

Those worries have been absorbed by the market. This year's worries are a shrinking Chinese economy, continued turmoil in the Middle East and plummeting oil prices.

In this month's guest post, Nishit opines that falling oil prices will be a boon for the Indian economy, and passing of the GST Bill will boost bullish sentiments in the stock market.

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The New Year has begun with a massive fall across global stock markets. It is the China fear factor which is causing investors to take out money and flee. The information about China is nothing new. All this has been known for quite some time. Most selloffs need some trigger and then it becomes self sustaining.

India is well placed due to low crude oil prices. The year 2016 has to be the year of major reform. Major reform means passage of the GST bill in the budget session. If the GST bill goes through then it will be a major sentiment booster for the folks who pour money into Indian markets.

Every bull market has corrections and this is no different. 2016 is also the year of elections in various states where BJP does not have major influence, viz. Tamil Nadu, West Bengal, Kerala and Assam. Whatever they gain out there is a bonus.

The real electoral test for BJP comes in Uttar Pradesh in 2017. This is the last budget where major reform is expected, post this it will be just building on what has been initiated.

The money being pulled out is not India specific but all across the globe. Global risk trade is off and the money will seek safe pastures like US bonds or US markets.

Modi has initiated several reforms in the Power sector, Telecom sector, and subsidies that will benefit India in the long term. There is a game changer which every Prime Minister needs; for Modi it is the GST bill. Modi has aligned the smaller parties isolating the Congress. Now, it is only a question of playing his cards right.

Tax reform is what India needs as major portion of the population does not pay taxes. Increasing service tax is one way of plugging the tax gaps.

Politically, with the Dalit student suicide and various untoward incidents, the Modi Government is being cornered by opposition parties. Elections are won on sentiments and 2016 is the make or break year for Modi.

The current dip is a buying opportunity. It does not take much time for sentiment to turn and the markets to rise again. Even if the markets go in for a longer term correction, good companies will continue to thrive.

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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)

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)

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Market Cycles and Sectors

Which Sectors should you Invest in?

Indian economy poised to take off – a guest post

The stock market has been in a down trend for almost 9 months. FIIs have turned sellers. Already some experts are predicting a long bear market.

The economy seems to be in doldrums. Corporate revenues and profits are sliding. Investments are yet to pick up.

Amidst the doom and gloom, Nishit has identified several signs of an economic revival. He enumerates them in this month’s guest post.

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The Indian economy is showing signs of ‘green shoots’ and we are in the take off stage right now. Let us see the leading indicators to see if we are about to see good growth:

1. Fuel consumption has increased which is always a sign of pick up in industrial activity. Goods transport has increased.
2. The Automobile industry is showing signs of revival. When people have money to spend, they buy cars.
3. The Capital Goods space is showing good traction at the moment. Capital goods space always does well when industrial activity increases.
4. The IT industry is showing good results. It has been the sector employing maximum people in last 15 years. Affluence of the new IT middle class will lead to increase in consumption.
5. Low fuel prices mean that a major inflationary pressure is off. I see at least 100 basis points (1%) cut in interest rate over the next one year.
6. Low Interest regime is conducive to growth. Borrowings increase, industrial activity increases. It is a self-feeding economic cycle. The interest cycle has yet to bottom. The bottom of the rate cut cycle often coincides with a bull run taking place. In March 2009, the rates bottomed and the markets picked up.
7. The building blocks are in place for a super bull run for the next 5-8 years. This correction is the last buying. opportunity. I see a scenario similar to the one in 2002-2003. The rest is history.
8. History often is a roadmap for the future. With good governance, favourable economic conditions globally and conducive domestic growth factors, this is a Black Swan event.
9. Tax collection has increased. This means there is uniform tax collection. I would say increase the Service Tax t o 16% so all bear the burden and reduce Income Tax slabs, do away with exemptions, simplify the tax structure.

We all know what happens when a Black Swan event happens. Nifty may go down to 6800 to 7200, but eventually we are headed to 10500 minimum on the Nifty and over the next 10 years we may even touch 18000 to 20000 - which will be the end of the super cycle as per Elliot wave analysis. Nations take birth, grow, mature and fail. This is true for everything in life, the time span differs. India’s time is now. The next 10 years will be India’s golden age and the party is just about to begin.

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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)

Will the likely interest rate cut by RBI be a non-event? – a guest post

Will he, or won’t he? That seems to be the question. Experts of different hues are expecting a 25 bps (0.25%) interest rate cut by the RBI Governor. That means, there will be no positive surprise for the stock market if the rate cut does come through.

There is also a possibility that the RBI Governor maintains status quo. That will be a negative surprise for the market and initiate a sell-off.

What if the rate cut is 50 bps or higher? The probability of that – based on Dr Rajan’s track record so far – is low. But it will be a definite positive surprise for the stock market.

In this month’s guest post, Nishit explains why the three tranches of interest rate cuts by Dr Rajan has failed to stimulate the Indian economy, and why he doesn’t expect the RBI Governor to be dovish in his announcement.

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Over the past few weeks, the impression given in the media is that an interest rate cut by RBI will stimulate the Indian economy. This is a wrong picture being portrayed. Tweaking interest rates is just one of the tools for stimulating the economy. More important are tax reforms and simplifying ease of doing business in India.

Implementation of GST will be the single biggest factor for growth of the Indian economy. Now, let us look at the interest rate cuts. Since, January the RBI has cut rates by 75 basis points (0.75%) in three tranches. The Banks have passed on barely 30 basis points (0.3%) to the end customer, citing high cost of deposits. The only exception has been HDFC Bank which has passed on 0.5-0.6% rate cut to the consumer.

What interest rate cuts do is lower the cost of deposits for Banks (has anyone noticed how quickly Banks are lowering fixed deposit rates?), but banks are not passing on the benefit of lower rates to people who borrow from Banks. This will only lead to Banks making more profits.

Also, if the RBI Governor cuts rates at a faster pace and tomorrow inflation rises how does he deal with it? In US the rates are near to 0 and they can stimulate the economy by ‘Quantitative Easing’, i.e. injecting huge sums of money into the economy by printing Bank notes. Is India in a similar position to do so?

Instead, by cutting rates slowly and allowing Banks to first transmit the rate cuts to its borrowers there are two advantages. The Governor gets more time to evaluate the inflation scenario and rate cuts get fully passed on to borrowers.

Hence the drama dutifully played up by television anchors is actually harmful in the long term. Simply cutting rates is  not the solution to all the problems in the economy. If it was that simple the World economy would not be where it is now and the US would not look at raising interest rates.

On Tuesday (Sep 29 ’15) I expect a maximum 25 basis points (0.25%) cut and I would not be surprised if there is no rate cut also.

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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)

About the economic slowdown in China and its effect on the Indian stock market – a guest post

The recent FII sell-off in global stock markets left investors and analysts scratching their heads and predicting another worldwide recession. Why? Apparently because China’s growth slowdown will seriously affect the global economy and hence, their stock markets.

The fear is overdone. Contrary to popular belief, there is no correlation between GDP growth and stock market returns. If anything, the correlation is negative. When Chinese economic growth was in double digits, its stock market was performing badly. Contrast with the Indian market, which rose to a new high even though economic growth was sliding.

In this month’s guest post, Nishit explains why the explosive economic growth in China – which was financed by ever-increasing debt – has boomeranged. The slow but steady growth in India appears more sustainable, and is receiving increased attention from overseas analysts and investors.

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Over the last few days, both on television and on the Web, I have increasingly noticed that the global investing community is highlighting India as a bright spot in a world mired in economic slowdown.

Why is that so?

The main reason is the global poster boy for economic progress, China, is slowing down. China had invested in huge capacity expansion leading to idle steel factories and other Infrastructure supporting industries.

What China did was mindlessly tried to urbanise. As long as they were building new cites and roads, the capacity was getting utilised. But urbanisation can only be done up to a point. Now, China is left with ghost cities, a property market for which there are no takers and a stock market which is just collapsing. China tried to accelerate economic growth of 50 years in a period of 10-15 years.

Now, the slow progress of India is being seen as a more sustainable way of growth.

An upside of this global attention on India is that there will be a lot of foreign funds flowing in. This will take the stock market much higher than the current levels.

Also, with global attention being focused on India, the infrastructure sector will get a boost. One can already see good infrastructure building companies showing strong performances.

Martin Armstrong, the renowned analyst, visited India in August. Visits by high profile analysts will lead to more overseas investors discovering India and attracting more funds to India.

On Bloomberg, out of 10 emerging markets, India was shown as the best placed emerging market. Of course, all this has a flip side to it. If the Government doesn’t show progress on reforms, then the overseas interest will wane quickly.

Lower commodity prices will also be a boon for India. The stock market in the next year should move up at least 20% from the current levels, based on a combination of renewed interest from foreign investors and low commodity prices.

Interesting times ahead for investors in the Indian equity market for sure.

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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)

Causes and consequences of lower commodity prices – a guest post

Globally, prices of various commodities have been on a downward spiral. Prices of oil, gold, steel, copper, aluminium have reduced considerably. That should be good for the Indian economy – as India imports significant quantities of oil and gold.

Reality is a little different. Lower oil prices have shrunk our current account deficit and benefitted oil marketing companies, but not oil explorers like ONGC and Cairn. Lower metal prices have hurt banks that have large exposures to the metals sector, and producers like Tata Steel and Hindalco.

In this month’s guest post, Nishit assesses causes of lower commodity prices and their consequences. Small investors should benefit from this analysis, as it lends perspective to the commodity cycle and would enable them to fine tune their investments.

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Commodity prices are collapsing all over the world. Gold is at a 5 years low, crude oil is very near its lows. Metal prices are tanking. Why is this happening and how can we benefit from this?

First of all, commodity cycles are long drawn out affairs of over 10-12 years between peaks and troughs; which means, prices are not going to rise in a hurry. There may be some corrective spikes but prices would continue to correct over a period of time.

All these years, China was consuming and stockpiling huge hoard of resources building steel and concrete cities which fuelled a real estate boom. China also set up huge capacity of Steel production. All these led the commodity prices many times higher. Now the Chinese economy is floundering; the real estate sector has no buyers and the stock market in China is collapsing.

China has created so much capacity - what does it do with it? Obviously, it cannot be left idle. So, it is now exporting steel priced very close to the cost of production of steel in India. The Government is doing its bit by adding some anti-dumping duties. Overall, the prices remain depressed.

China was accumulating gold reserves and that was the reason price of gold was going up. Now they have started selling some gold leading to lower prices.

Now the bad news. Commodity cycle related companies like steel industry in India will be in doldrums for some time to come. Banks have huge exposure to these companies. These companies make profit equal to just about the interest payment on their loans. Forget about repaying principal amounts.

In India, people rush to buy gold at every price drop. If they buy now they will have to hold it for at least 5-6 years or maybe even longer.

Lower crude oil prices will help the Indian economy. These will also continue for some time to come - at least for this year 2015.

Having an understanding of why commodity prices are correcting will help us capitalise on them.

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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)

Pluses and minuses of Modi government’s first year - a guest post

The ground-swell of support for the likely installation of a Modi-led government was clearly visible in the stock market last year. The situation has changed quite a lot since then – and the current state of the stock market is a clear reflection of what might have been.

The expectations of ‘achhe din’ from citizens were too high. Change – particularly of the structural kind – doesn’t happen in a hurry. Several initiatives have set the tone of this government’s priorities. Much more needs to be done to get the economy back on the growth track.

The first year was a year of consolidation. Modi needed to comprehend the nuances of parliamentary democracy. In this month’s guest post, Nishit provides an assessment of the achievements and failures during the first year of Modi’s government.

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The Modi Government has completed a year in office and amidst all the hoopla let us try and examine whether it has achieved enough during the first year.

The biggest problem this government has faced is the burden of high expectations which they themselves created. India is a complex country and no Prime Minister can expect to solve all the problems in 1 year or maybe even 5 years. To put things into perspective, this 1 year should serve as a base on which Modi can build for the next 4 years.

The first year is the foundation, years 2 and 3 main building blocks and years 4 and 5 are when results should be visible on ground if Mr Modi expects to be re-elected.

The plus points of Year 1:

1. Foreign Diplomacy. Ironically what was expected to be the weakest link has turned out to be the strongest part of Modi’s initiatives. Modi has managed to network with who’s who of the International community and this may serve in good stead over the next 4 years. We are now linked to a global economy and it helps if our leaders have a personal rapport with the top leaders of other countries.
2. Social schemes like the Jan Dhana Yojana. The inclusive concept of everyone having a bank account can lead to much bigger things. The twin insurance schemes are the best thing that could happen to the poorer sections of the Indian population. Many people leave nothing for their families to survive on if they die suddenly. The 2 lakhs insurance will at least give such families some breathing space.
3. Swachh Bharat and similar slogans are needed for a basic reason; most places in India are pretty unhygienic. Such Initiatives do not need much investment but at the same time can be effective in creating awareness among people.
4. The Coal auction put in place a mechanism where coal is available for power plants. India does not need more power plants. It needs all the existing power plants to be optimally used. Reforming the State Distribution companies is the next step.
5. The Land Acquisition and GST bills are the next steps. These are the key steps for Year 2 for Mr Modi.

The negatives:

1. Intemperate statements made by whole lot of fringe elements - amongst them a few Ministers. When the time is to build bridges and walk the extra mile to assure the minorities, such statements help nobody.
2. Grandiose claims by some Ministers over road building and other initiatives by trying to claim credit for something which has not yet been achieved.
3. Needless tax issues created to hassle FIIs. Either the Government goes ahead by taxing these guys or it doesn’t. There is no point by creating a scare and then pulling back from the brink.

All in all a good beginning has been made. More effects should be seen in Year 2. People always have the option of voting out the present government in 4 years time.

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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)

Europe Showing Signs of Life

In a recent video interview with Jeremy Glaser, Bob Johnson, Director of Economic Analysis at Morningstar shares his opinions on the state of the European, US and Chinese economies.

Here is an excerpt:

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. One of the dominant themes in the recent past has been the U.S. economy growing faster than Europe and some concerns about a slowing China. But is that growth starting to balance out? I'm here with Bob Johnson, our director of economic analysis, for his look at the data.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's start in Europe. They've been very aggressive, at least recently, in terms of quantitative-easing programs, in terms of trying to weaken the euro against the dollar. Are there any signs that these policy moves are starting to have an appreciable effect on the European economy?

The rest of the interview can be found at the link below:

http://www.morningstar.com/cover/videocenter.aspx?id=692914

Is the stock market defying conventional logic?

Interest rate has started coming down. So has inflation. WPI inflation is actually negative. IIP number is positive and inching up – indicating manufacturing growth.

Forex reserves are at an all-time high. Sales of medium and heavy commercial vehicles are rising – which is an indication of a recovering economy. Passenger car sales grew after 2 years of de-growth.

These are all signs of an economy that is returning to a path of growth. As per conventional logic, a growing economy should lead to a rising stock market.

So, why is the stock market defying logic? It is like asking: “Why do mosquitoes sting?”  The answer is: “It is their nature to do so.”

Experts and analysts try their level best to explain the reasons for a market correction. As if they really know.

Some said that expectations of poor Q4 results led to the correction. But everyone has been expecting poor Q4 results for quite some time.

Others said that PSU divestments and IPOs are sucking out cash from the secondary market. Weren’t these same experts saying a couple of weeks back that a lot of ‘cash is waiting in the sidelines’? 

(By the way, ‘cash waiting in the sidelines’ is one of those enduring myths in the market. Unless the cash gets invested in FPOs or IPOs, it always remains in the sidelines. Think about it.)

One talking head on a business channel said: “The market has been boosted by a liquidity driven rally.” Wonder what kind of a rally will occur without any liquidity!

The market has a tendency of going against consensus estimates and expectations. Which increases the probability that Q4 results will throw up some positive surprises.

IndusInd Bank has declared very good results. TCS came out with a decent set of numbers – if you look beyond the one-time bonus payment to employees.

Smart investors look for opportunities to buy during such corrections. That doesn’t mean you need to jump in feet first. Do your homework, be patient and wait for opportunities.

Have you looked at hospitality sector stocks lately? Most small investors are shunning them. The “e-Visa on arrival” scheme should be a huge boon for the sector.

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.)

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 14, ‘14

S&P 500 Index Chart

Note the following remarks from last week’s analysis of the daily bar chart pattern of S&P 500: “Bulls are clearly on top. But don’t expect the bears to give further ground without a fight. Several technical indications point to a correction.”

The index started to correct from Monday (Mar 10) and ended the week by falling sharply below its 20 day EMA on strong volumes – losing about 2% for the week. There is no immediate threat to the long-term bull market since the index is trading more than 100 points above its rising 200 day EMA.

Daily technical indicators are looking bearish. MACD is positive, but falling below its signal line. RSI has slipped below its 50% level. Slow stochastic has dropped below its 50% level. The correction may not be over yet. The dip can be used to add.

Initial jobless claims were lower than expectation, while retail sales revived somewhat in Feb ‘14. Both data points are indicative of a recovering economy.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 breached the support from its 50 day EMA and the 6700 level on Monday (Mar 10) and then fell sharply below its 200 day EMA – all the way down to the 6500 level before bouncing up a bit.

Daily technical indicators are looking oversold. MACD has dropped into negative territory below its falling signal line. RSI has reached the edge of its oversold zone. Slow stochastic has entered its oversold zone.

The index may pullback towards its 200 day EMA in an effort to return to bull territory. The dip is an adding opportunity.

Improving economic conditions in the eurozone – Britain's largest trading partner – and rising consumer demand drove output and orders higher in the first quarter of the year. However, Britain's trade position worsened in January, as diminishing demand for British goods abroad triggered a fall in exports.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 indices are in the midst of bull market corrections. Regular corrections enable indices to move higher. The dips are providing adding opportunities.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 07, ‘14

S&P 500 Index Chart

The bull rally from the Feb ‘14 low of 1740 continued unabated. The daily bar chart pattern of S&P 500 rose to touch new lifetime intra-day and closing highs on Mar 7 ‘14. The selling on Mon. Mar 3 – triggered by Russia’s ‘invasion’ of Crimea – subsided after the index received good support from its rising 20 day EMA.

All three EMAs are rising in tandem and the index is trading above them. Bulls are clearly on top. But don’t expect the bears to give further ground without a fight. Several technical indications point to a correction.

Note the volumes. They have been quite flat, with volumes on the 2 down days matching volumes on 3 up days. Volume peaks are coming down as the rally progresses. The index is trading more than 150 points above its 200 day EMA. The last time that happened (in Jan ‘14), a sharp correction followed.

Daily technical indicators are in bullish zones, but looking overbought. MACD is inside its overbought zone and its upward momentum is diminishing. RSI is just below its overbought zone. Slow stochastic has remained inside its overbought zone for almost a month.

The economy keeps growing but sluggishly. New job additions in the private sector and initial jobless claims were lower than expectations. The Services ISM number was also below expectations but showed growth. Looks like the index and the economy are taking QE3 tapering in their strides.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 dropped below the 6700 level and its 50 day EMA (on Mon. Mar 3) as news of Russia’s ‘occupation’ of Crimea shook investor confidence. Fears of a war receded the next day. The index jumped up to close above the 6800 level.

By the end of the week, the index slipped down to test support from its 50 day EMA once again. Though it managed to close above the 6700 level, the index lost almost 100 points for the week.

Daily technical indicators have corrected from overbought conditions and are looking bearish. MACD is still positive, but falling below its signal line. RSI has slipped below its 50% level. Slow stochastic is falling rapidly towards its 50% level. A drop below 6672 (intra-day low on Mar 3) will form a bearish pattern of lower tops and lower bottoms.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 indices are in long-term bull markets. S&P 500 managed to shake off fears of a war in Ukraine by touching a new lifetime high, but is looking overbought. FTSE 100 seems to be in the midst of another corrective move. Stay invested, but be ready to face a correction.