GDP - Slow but Steady!!!

While the GDP numbers will be analysed and looked in to by various people from various angles and for various purposes, as investors we are more interested in understanding the impact of these numbers on the investment climate and market sentiments.

I have tried to evaluate the numbers from this perspective and the following emerges:

1. The rise of the ‘vast’ agricultural sector is something to cheer about. This is proof enough for the Indian and foreign investors that the Indian economy will no doubt recover from the global recession much fast than other countries. The growth of the ‘core’ agricultural sector suggests that the rural economic activity and rural incomes are rising.

This should further accelerate the domestic demand, which had slowed down in the recent past. The ‘new’ government at the centre too has a long standing commitment to improve the agricultural sector and further boosting measures can be expected in the coming budget and also in economic policies of the government. We should not be surprised if the next boom in GDP growth is led by the agricultural sector.



2. The industrial sector has been reeling under pressure and has shown weak performance. However, with a rise in activity in other sectors like agriculture and construction, we are likely to see the revival of the industrial sector in the coming two quarters.

3. From the macro point of view, the yearly GDP growth rate of 6.7% is perhaps the MOST important figure for the investor! Just as we calculate valuation of a company based on its earning and its corresponding Price to earning (P/E) multiple; similarly the GDP growth rate is the figure important to compute the ‘Market’s P/E multiple’

As a thumb rule, stocks markets put a valuation of about two times the GDP as the fair value for the market. Anything beyond that may be termed as overvaluation.

There is a widely accepted consensus that the GDP rate for the current year 2009-10 will also be about 6.5%, given the state of the world economy. Moreover Indian markets are likely to attract a higher flow of FII money because of its relative attractiveness in terms of a steady economy. Thus we may put a ‘premium’ to this extra fund flow.

Instead of the usual two times GDP; we put a 2.5 times multiple to the GDP to arrive at the valuation of the market.

This gives us 6.5 X 2.50 = 16.25 as the P/E multiple for the market

Thus , the fair value of the Indian markets should be in the vicinity of 16 to 17 P/E multiple for its index stocks.

At the current Index level the following emerges



The above table suggests that at current Index levels, the market has already discounted more than 2.50 the expected GDP growth rate of 6.5%. Thus it may well be time for investors to become cautious and start booking profits in order to re-enter at lower index levels. Suggested entry level for the indices are Sensex 12000 (3500-3700 for Nifty)

Happy Profit booking!!!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.
Baroda.

EKC ... ready to 'climb'!!

With the Nifty going side ways , invesor and operator activity has clearly shifted to the mid caps. Most of the Mid Caps are showing classic signals of a technical reversal...

One such Mid-Cap which seems promising is EKC - Everest Kanto Containers...

The recent break out of the 'neckline' has been with high volumes suggestive of investment and speculative build up... An inverse H & S is visible which is a reversal pattern...



Investors may buy at current price with stoploss of close below Rs 165-68 for a target initially at Rs 220 and then Rs 235+ ...

Happy trading

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.

The Week After....

A Phenomenal Week!

These words should well sum up the activities of the Indian Stock market in the last week ended 22-May-09.

The astounding victory of the UPA government in the general elections raised the hopes of an entire nation, let alone the stock markets. The markets went berserk, as it hit the upper circuit for the first time in its history. In fact this week’s index performance was the best ever weekly performance in the past 17 years!

Most market players, including the experts, were taken by surprise. We too had anticipated a maximum of 3900-4000 of Nifty level where we suggested booking profits. The Markets however gave us another 10% as ‘bonus’!!

All in all, it has been a good week and except short sellers, all have made money. In fact, just the day before the Election results, to take advantage of the anticipated uncertainty and volatility , we , at JHAVERI, had aggressively advised all clients to create the ‘Straddle Option Strategy’ – Buy Rs 3700 Call option and Rs 3700 Put option. We are happy to report that the straddle gave more than 100% returns in the next two days of creating it.

The straddle was created at a cost of Rs 300 and most clients were able to sell the straddle for more than Rs.600/-.

Investors too were one of the biggest beneficiaries. Most of our delivery based calls in the last few weeks achieved their target returns of more than 15 – 20%. Investors holding stocks for the past few months saw their portfolios improving more than 20% in the week.

Sector wise performance has been in line with our expectation. One of the major reasons of optimism out of the stable government at the centre is that it will be able to stir the economy out of the slowdown which has set in after the western world fell in a recession. A Stable government would surely be able to take positive steps and reforms which would help the economy regain the pace of growth in the coming six to ten months.

Those sectors, which are likely to benefit more from the anticipated reforms and revival of the economy, have performed quite well in this one-week rally. The following chart provides a bird’s eye view of the sectoral indices performance (pre and post the election results)



As one would have been expected, the top performing sectors were Power (benefit of nuclear deal), Banks (expectation of reforms) , Metals, PSU (on expectation of reforms), Capital Goods and Realty.

Another notable, but anticipated, feature was the gross underperformance of the ‘defensive sectors’ like FMCG and Healthcare. The IT index underperformed mainly due to the impact of the INR which appreciated by a hefty 4.5% ; its highest weekly gain in last 13 years!

The week ahead:

Many market players call this euphoria while many other have suddenly turned bullish.

The opinions are equally convincing and equally un-convincing! The last couple of days of market movement suggest that investors are booking profits at higher levels beyond 4300 Nifty (14000 Sensex). However we also observe increased level of activity in the mid cap counters with prices rising along with volumes. Investor money seems to be shifting to the relatively undervalued mid caps as the frontline stocks become overvalued.

Till when the markets are able to sustain this ‘sudden bullishness’, is a question of time. But one thing is clear - the expectation / optimism of the market is built upon the ability of the government to implement reforms and take necessary steps to revive the slowdown – and speed will be of immense importance too.

Technically, the markets have had a gap opening during the week. This gap is a huge one and one should at least expect filling up of 50% of the gap (if not 100%) in the coming days. We advise clients to re-enter the frontline stocks at Nifty 4000-4050 levels. For the mid cap counters we suggest frequent profit booking. We shall continue to provide you delivery based calls and suggest profit booking when targets are achieved.

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.

Tech Mahindra - Increased activity expected

I surely see a smile on your faces .... obviously . . .afterall you'll have enjoyed the super-normal profits on the back of highly positive market sentiments - the so called 'Feel Good' factor..... !!!

It became over hectic for me too and so could not blog for the past few days...

Well, the euphoria which got created seemed as if the Indian economy was the only one in the world which returned to the high GDP growth... well at least that is what the market seems to be expecting... Time will tell whether we were right about this optimism. . . .

Any way, in this highly overbought market, one stock which has attracted my attention is TECH MAHINDRA.



One observes a rounding bottom formation on the charts and the break out above recent resistance level of 410 occured today.

I would expect increased buying interest in the stock and the first target shoul dbe near to Rs 500 and then Rs 520 ... Keep stoploss at Rs 360...

Moreover the Satyam Open Offer date too is nearing - which may increase trading and investor interest in the stock.

Happy trading!!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.
Baroda

UPA wins Elections -- Book Profit !!!!!!

Well , this may seem to be a contradictory statement to many.

If the UPA has won the elections with such a huge majority, it is clearly a sign of bullishness, not bearishness.

Correct - But I presume the markets have a mind of their own... I will not be surprised if the markets, after opening gap up on Monday, actually witnesses a correction either on Monday or the next day!.

Two reasons :

1. We have had - what we may call- a Pre-Election rally on expectation of a stable government. Now do you remember that old market saying "Buy on the rumor and sell on the FACT"?

2. The second technical reason for an expected correction is which many of you may have seen but not observed - The recent price rise in Nifty and its major constituent stocks has been with declining volumes ! (i suggest you see the price and volume charts of various frontline stocks)



A Price rise will be strongly bullish ONLY if supported by rising volumes - which unfortunately does not seem to be the case....

The best strategy therefore will be to book your profits in the euphoria and re-enter the markets in corrections.

Happy trading !!!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd

Nickel (MCX) - nearing breakout!

Metals have been on a roll.. Copper , Zinc, Aluminium et al have been in positive for some time.

This led me to check out the one time favorite of commodity traders - NICKEL.

The price of the commodity on MCX has fallen from Rs 1400 in Mar 2008 to sub Rs 450 levels in Jan 09 - a huge fall in less than a year.

However recently the metal has been consolidating in a Rs 200 range of Rs 450 on lower side and Rs 650 on higher side. An upward break out is the most probable event. We can see a 'bottoming out' formation on the charts with multiple bottoms at Rs 450.



On break out of Rs 670 especially on close - expect a short term target of Rs 810 + and a medium term target of Rs 925+.... Keep stoploss at Rs 575 on closing level.

Happy trading!!
CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.

NIFTY - Will the OBV Hold ? ? ?

The Nifty movement has been quite 'technical' if we can say so !!

The Gap created on 4th May was NOT a 'Run Away' GAP and hence its 'filling' up was anticipated.

The current move down is for filling up this gap and it is likely to resume its upward journey towards the resistance area of 3800-3900...



The OBV too is support the current upmove since Nifty 2800... I expect the OBV to give us 'advance' indication of whether the Nifty will reverse from the resistance of 3800-3900 ....

Till then trade upside ...

The Election results are just a few days ahead ... Watch Out !!!

Happy Trading

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.

“Make hay, while the Sun shines”

INVESTORS - ENCASH THIS RALLY !!!

The question in most stock market onlookers is – Is this stock market rally sustainable? Or is it what many analyst term as ‘a dead cat bounce’?
Our view is that investors should take the opportunity and encash this rally!!

Lets take a multi-dimensional view:
The Global ScenarioThe world recession seems to be worsening each day with news of major corporations declaring bankruptcy. After Chrysler, it is highly likely that General Motors too may follow the Chapter 11 route to find a cure to its ever increasing problems. European countries’ problems too do not seem likely to fade off soon. Asian countries, which are the least affected, are worried that if things worsen, they too may be pulled in the recessionary loop. It is for this reason that Asian countries pledged to start a $120 Billion foreign currency reserve pool.

A recent article in a leading newspaper indicated that World GDP is likely to fall in negative –after remaining in positive since 1930s. Moreover, it suggested that banks and lending institutions the world over will have to write off more than $4 trillion – and of this almost $2.70 trillion by US itself. These write off need to be financed – the source of which again is not immediately visible.

China is pressing for a new international currency. It holds more than $2 trillion in Forex reserves mainly in US treasury bonds and with the US economy in a recession, it is worried about the erosion in value of these holdings.

While the Americans try, almost every week, to convince investors world wide that they see the recession coming to an end, it seems more than an illusion. The more they ‘want’ the recession to end, the deeper it actually goes. The fear factor is clearly visible from the ‘panic’ the financial markets are getting even from a ‘swine flu’ outbreak.

The Indian Context
Indian stocks are also witnessing a rally on the back of ‘not-so-negative’ news from the world markets in general, and Asian markets in particular. The speed of the rise too is above normal. The recent quarterly results of most companies have only confirmed the fears of slowing down. Sales, apart from profits, of various companies have actually fallen – which is not a comfortable indication. Indian Exports were down by a staggering 33% while non-oil imports too fell 19%. Due to the global economic situation, overall trade has been affected and the situation may take some time to stabilize.

The above fundamental factors suggest that investors should not get overly bullish about the miraculous recovery of the world economy, as major governments are implementing out a ‘trial and error’ solution for the unprecedented problems faced.

The Key variables which will affect the Indian markets in coming few weeks are:

1. A global corrective rally – will benefit Indian stock markets and we can target the range of 12500 – 13000
2. The geo-political situation in Pakistan is not comfortable. In the event of Taliban gaining control over Pakistan, a major negative will be built up for Indian markets.
3. The forthcoming Election results due in Mid-May –The markets seem to be factoring either an NDA or a UPA led coalition. Any other alternative will see the markets in panic situation.
4. The ‘Banking Companies Stress’ Test in the US which will spell out how much money needs to be infused to keep major banks afloat. It is estimated that at least ten banks will require additional funding.
5. The onset of Monsoon in next few weeks

It will be better for investors to remember that:
Long term bull markets need positive indications – merely non-negative indications cannot create bull markets.

In terms of technical/ price analysis, the markets rising above 200 DMA gives a sense of relief to many market observers. The most likely target is near 3800 levels - the first retracement of the entire fall from the peak of 2008. On a broader horizon and purely technical terms, this is a ‘corrective’ rise.

Moreover, it remains to be seen as to how fast the markets reach the target of 3800 and near-about. If the rise happens fast - in a matter of 3-4 days, there is a very high possibility of the rally ‘trapping’ the bulls. The technical indicators too, in such a scenario, indicate a ‘divergence’ and hence suggest caution for long positions.

THUS:
The best advice for the investor in such situations is as the English say ‘Make hay while the Sun Shines’. The indicated level of 3800 -3900 should be a good profit booking level for investors, who can then wait for lower levels to re-enter!


CA Rajiv D Khatlawala, Head of Research & Training,
JHAVERI Securities Ltd, Baroda.

REL Capital --- correction nearing completion

The Reliance Capital Chart looks quite interesting ...

One can see a rounding bottom formation and at the micro level, it is 'correcting' after the recent rise from Rs 300 levels to near Rs 600 levels.

A break above Rs 575 now should give a target near Rs 750-800.... Keep stoploss at Rs 510-520 levels. . .

Higher targets may be achieved if the general markets too get sustained.

Happy trading!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.

STERLITE - Light ahead

The Nifty is poised at the crucial break out juncture after remaining in the range of 3300 and 3500 for the past few days... Technically, this is the 'rest' the prices required after the runup to 3500 - more popularly known as 'correction'!!!

Recent price movement on the MCX suggest that there is renewed and heavy buying in metals - Copper, Zinc, Lead etc... this prompted me to re-check the technicals of 'metal' companies like Sterlite ....

STERLITE is currently consolidating at its 200 DMA and a break out of the current consolidation should give the next up move to the immediate target of Rs 470 and then a more optimistic and likely target of Rs 540- 550.



On break above Rs 420 keep a stop near Rs 370.

Looking ahead of a vibrant week . . . .

Happy Trading !!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd.