And We All Fall Down !!!

The Event:
The Chinese composite index – Shanghai Composite Index – fell more than 7.5% during the day and closing down 5%.
The Reason:
The Chinese government unexpectedly cut fuel prices which led to sell off in large cap counters. Steel and Real estate stocks also crashed on overvaluation concerns.
The Effect:
The Shanghai crash led spread to cause a rapid fall in other Asian markets too, which (in any case) were overbought and overvalued.



What now?
Will this start a further sell off in the Asian markets and hence the world markets? The coming days will answer this but let us dig deeper in to the reason for this fall.

The Chinese stock markets have been the best performing markets in the last six months. The huge rally was a result of huge government stimulus, increased bank lending and signs of economic recovery. While signs of economic revival may be one reason, the major reason for the rise seems to be the excessive liquidity in the system on account of the huge stimulus package. Thus one may also argue that the current rally was not fundamental-driven to some extent and it was the excess money flow which caused the rise – a phenomenon which has previously led to creating of ‘market bubbles’!

And unfortunately, this phenomenon is not restricted to the Chinese markets- but it is true for almost all the markets the world over, including India. There have been many concerns that the stimulus money has been finding its way in to the financial markets, rather than going in productive use to revive economy.

It seems that the world is tracking the stock markets to get signals of whether economic revival has taken place or not! While, in reality, shouldn’t it be the other way round??

The Chinese crash today may well be a warning signal for other markets as to what may happen if the ‘excess liquidity’ is withdrawn from the financial markets or if investors suddenly (?) realize that what they are buying is, in any case highly overvalued! Overvaluation has been a concern especially in the Asian markets, including India. While the Chinese markets traded currently at a P/E multiple of 35 times, the Indian markets too are at 21 times P/E multiple – near the upper range.

Investors should not ignore this and not take it as a ‘one-off event’ and must become more cautious in stock picking. “A lost opportunity may many a times be better than an actual loss”.

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

Nifty Gap - Pray it gets filled SOON....!

The Nifty movement is something which seems to have taken many by surprise (as usual) ...

But what may be more worrying is the Nifty GAP or rather the time it is taking to fill..... The longer it takes for the markets to fill the Gap ... the deeper the correction is likely to be !

There has also been a debate as to whether the gap will be filled at all..My own presumption is that since the gap did not appear at the bottom of the down move (say near to 8000 or 9000 Sensex, we may not term it as a 'runaway' gap. So my own evaluation suggests that the gap will be filled - When? That is the 'million dollar (oops rupee)' question...

In the chart below i have tried to provide a little different perspective on the gap. This analysis suggests that if the markets take longer time to fill the gap, in fact , we may see near of 11000 to 11500 Sensex levels - i.e. somewhere between 50% and 61.80% retracement of the entire move from 8000 levels.



This analysis would get negated only if 16000 sensex is broken with huge volumes - which at present seems too far fetched!

Woops - tighten your seat belts !

Happy trading!

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

CRUDE OIL... will upmove continue?

Will CRUDE OIL break the recent high of $72... equivalent of Rs 3500/- on MCX??

There are opposite but convincing views - one view suggesting a fall while another suggesting a rise. ..

And in such confused scenario, we obviously turn to our price charts . Mr Market, as they say, is always right.



Incidentally, Crude has retraced exactly 38.2% of the entire fall from its peak to the recent crash (see chart). It is now in correction mode. I expect support to crude oil near to 2800-3000 range and a temporary resistance at 3400-3500...

Once the resistance of Rs 3500 is broken , a fresh rise should start...

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

'GOLD'en days ahead !!!

The Nifty has given a good corrective rise towards the neckline. We now await the signal of the resumption towards the H&S target... I presume a close below 4140 should be able to confirm this...

On the other exchanges, it seems that Gold ( and Silver) have come out of their long slumber ... Or so the charts say..



Expect a rapid upmove in Gold in the coming days . A close above $936 should be positive for a move towards the previous peak of $1034. ( On Indian charts corresponding figure should be near to Rs 14700/-) ...

And if gold is rising , Stock market must take a breather! .. All financial markets rarely move together in the same direction....

Happy trading !

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

Have world financial markets become so fragile??

So, you are surprised by today’s 450 point Sensex gain?? Don’t be.

It took just one stock analyst – Meredith Whitney, to steer a global rise in stock markets. Yesterday, the analyst’s buy rating for ‘Goldman Sachs’ triggered a rally in other financial stocks too, which later spread to other stocks and as a result the Dow Jones rallied up more than 2.5%. And, as other markets also closely follow the Western markets, Asian markets opened strong followed by a strong opening in the Indian markets!

The critical question is – have world financial markets so delicate, that even one person can single handedly trigger a rise? Well if this is so, the financial markets are becoming a riskier place to be in. And to top this, the said analyst in fact maintained that she remains bearish on the US economy and other US financial companies!

The markets thus ‘read’ only what it felt convenient to read. Or may be the markets just wanted a reason to break the downward spiral in which it was gripped for the past few sessions.

What ever it be, the recent ‘rally’ has all the characteristics of a ‘corrective’ rise and it must be treated so. Some important factors which will influence the Indian stock markets in the near term are:

1. The regular onset of monsoon. The meteorological department envisages 90% of the normal rainfall in the month of July. This may not be good news and there are some sates like Madhya Pradesh which are on the verge of being declared drought hit.
2. The Interest rates are likely to rise. The heads of major banks indicated on Monday (July 13) that there is no scope for rates to fall and that in fact the interest rates may rise by about 1% in the near future. This may not be positive for an already sluggish industrial growth. Input costs for the industry have been rising on the back of a rise in fuel prices among other costs. A rise in interest cost will only add to the already tight profitability.
3. Slower reforms on the part of the government may be a factor which will have impact on the markets. However announcements on big ticket disinvestments may provide the needed relief.

Considering these immediate ‘concerns’ we maintain our view of investment buying at around 3800 Nifty levels and we may strongly suggest that corrective price rises like the one we saw today (July 14) may be used as profit booking opportunity , till the time a clearer trend emerges – both technically as well as fundamentally.

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

Have world financial markets become so fragile??

So, you are surprised by today’s 450 point Sensex gain?? Don’t be.

It took just one stock analyst – Meredith Whitney, to steer a global rise in stock markets. Yesterday, the analyst’s buy rating for ‘Goldman Sachs’ triggered a rally in other financial stocks too, which later spread to other stocks and as a result the Dow Jones rallied up more than 2.5%. And, as other markets also closely follow the Western markets, Asian markets opened strong followed by a strong opening in the Indian markets!

The critical question is – have world financial markets so delicate, that even one person can single handedly trigger a rise? Well if this is so, the financial markets are becoming a riskier place to be in. And to top this, the said analyst in fact maintained that she remains bearish on the US economy and other US financial companies!

The markets thus ‘read’ only what it felt convenient to read. Or may be the markets just wanted a reason to break the downward spiral in which it was gripped for the past few sessions.

What ever it be, the recent ‘rally’ has all the characteristics of a ‘corrective’ rise and it must be treated so. Some important factors which will influence the Indian stock markets in the near term are:

1.The regular onset of monsoon. The meteorological department envisages 90% of the normal rainfall in the month of July. This may not be good news and there are some sates like Madhya Pradesh which are on the verge of being declared drought hit.

2.The Interest rates are likely to rise. The heads of major banks indicated on Monday (July 13) that there is no scope for rates to fall and that in fact the interest rates may rise by about 1% in the near future. This may not be positive for an already sluggish industrial growth. Input costs for the industry have been rising on the back of a rise in fuel prices among other costs. A rise in interest cost will only add to the already tight profitability.

3.Slower reforms on the part of the government may be a factor which will have impact on the markets. However announcements on big ticket disinvestments may provide the needed relief.

Considering these immediate ‘concerns’ we maintain our view of investment buying at around 3800 Nifty levels and we may strongly suggest that corrective price rises like the one we saw today (July 14) may be used as profit booking opportunity , till the time a clearer trend emerges – both technically as well as fundamentally.

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

USDINR fills Gap - Will Nifty follow???

YES !!

The USDINR which opened Gap down (18th May) after the Election results. has filled the GAP today - 13th July.



Knowning the high inverse correlation between the NIFTY and USDINR , it will only be a question of time when the Nifty too will try to fill the UP Gap .. which is placed at 3700 levels !(incidentally the H&S pattern too gives target near to this level) ...

My belief that "Price is King" is getting stronger day by day .....!

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

The Union Budget- Below expectations

Mr Pranab Mukherjee the Finance Minister of the UPA government, which shot in to power with a bang a few weeks back, gave a surprisingly lack luster budget.

Most observers were taken by surprise on the lack of any specific direction to the economy – and that too in the times when it faces challenges of economic slowdown. While the finance minister gave a ‘side’ remark about reforms, disinvestment and infrastructure development, no concrete measures were indicated. In fact the government even did not spell out how much it targeted out of disinvestment of PSUs.

Macro view
On the macro front, the first and foremost point which may ‘surprise’ an observer is that the government is targeting a 9% GDP growth rate while the previous years’ GDP growth rate was merely 6.5%. It shows a lack of perception as the possibility of even a 7.5% GDP growth rate as mentioned in the Economic Survey, is hard to achieve without a recovery in the US. How the FM came up with a 9% target figure is something to wonder!

Moreover, this targeted GDP growth rate is indicated along with a fiscal deficit of 6.8%. With such a huge fiscal deficit and its impact on the already rising inflation (CPI), targeting 9% GDP may obviously lead to a ‘bubble’ somewhere.

The rapidly falling exports and imports – (higher world trade is a prerequisite for GDP growth) is a major cause of concern and the government failed to address this problem in an aggressive manner. Only some ‘cosmetic’ benefits were extended to the export oriented sectors.

For Corporates
Some of the few positive points of the budget were the abolishing of the FBT (Fringe Benefit Tax) and the CTT (Commodities Transaction tax). The abolishing of the FBT should be a relief to the corporate sector and a lot of time and effort will be freed up and put to use in more productive areas. While CTT was abolished, there was an expectation of the reduction in STT which failed to come in.

The increase in the rate of MAT from 10% to 15% is also a major negative. Increasing tax rates, even for MAT, was a step which could have been avoided at this juncture.

Excise duties on goods attracting 4% duty have been increased, except in some few cases, from 4% to 8%. This too may be treated as negative.

For the individual, the budget raised the IT exemption limit by Rs 10000/- (Rs 15000/- for Senior Citizens) which was much less than expected. Surcharge removal on personal income tax would benefit taxpayers in the higher tax bracket.

As for the investors, the lack of any major direction in the budget, saw the sentiments dampen. The expectation of reduction in STT and other sector specific announcements – in sectors like infrastraucture, Power and IT & education – had been built up but as these did not materialize, there was a heavy sell off in the stock markets. The markets fell by more than 800 points.

In the following table we have segregated the impact of the various budget provisions.

Conclusion:
Overall we may say that both the budgets of 2009-10 (Interim and the current one), failed to give a direction to the economy in its trying times. However , we strongly expect that some ‘reforms’ oriented announcements will be made in the coming weeks which will at least provide investors – both domestic and foreign – an idea of the future course which the government is likely to take to regain the GDP growth. Disinvestment in PSUs may be the initial step along with some more fiscal announcements.

We may expect the unwinding of the poisitions to continue during the week and target levels of sub-4000. Price downmoves between 3800-4000 Nifty may be the correct time for investors to re-enter the stock markets and build up their portfolios.

In the next few days we shall come out with our list of stocks which investors can pick up in the correction.

CA Rajiv D Khatlawala
Head of Research
JHAVERI Securities Ltd

The Put Call Ratio suggesting extreme Caution!!

One of the ‘contrarian’ indicators which are tracked to gauge market sentiment during such volatile times is the Put-Call Ratio (PCR). The put call ratio is the ratio of total volume in Put options vis-à-vis total volume in Call option.

Usually when the put-call ratio is high, it may actually suggest a market rally. Conversely, when the put call ratio is low, it may actually suggest near market top and a subsequent fall. (Hence it is termed as a contrarian ratio)

The recent put call ratio movement is as follows:



As you would observe, that in May, just before the election results, the PCR had steadily risen to 1.21 – more puts were bought compared to calls.

However the current scenario suggests that the PCR is placed near its lower level at 0.83 – suggesting relatively higher numbers of calls are bought compared to puts.

Being a ‘contrarian’ indicator, the PCR may be actually suggesting extreme caution and we will be well advised to consider the signal given by PCR.

Up moves in stock prices should be used as profit booking opportunity as the PCR suggests that the markets may actually be ‘topping’ out.

Happy Volatile week !!!

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

Caution ! H&S Ahead... L & T

The Nifty movement in the week is as expected / anticipated in last week (Sat) ... It is however incidental that the Nifty touched an exact high of my indicated level of 4440.

I don't think technical analysis can be SUCH an exact science!!!

Well... While the Nifty formation is similar to an H & S formation, even some stocks are beginning to show signals of 'possible' reversals.

L&T seems to be making a classic head and shoulder formation. Moreover there is negative divergence too on the RSI which strengthens the case for H&S.



The downwad break out level is at 1500/- and investors may want to exit and book profit once they see a level below 1500/- on their screen!!

Happy profit booking !!

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