“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.