Dow dilly Dallying

Dow   9180.69     +189.73 (+2.11%)

Till next week when US Presidential elections begin, Dow would probably trade with a flat to slightly positive bias. It will be interesting to watch the Indian markets towards the end of this week - S&P CNX Nifty has posted two consecutive gains this week. On the monthly charts, the Nifty has posted 4 consecutive losses after every two consecutive gains. So, today will be decisive as far as the behavioral patterns go.

Theory: Gains Vs Losses

Is investing at lower prices the best strategy? Let’s say, a stock is priced at “x” today and is expected to perform better in long term. The analyst in you says, that it would be 5x by the end of the fifth year due to several long term performance measures taken by the company. Given that the performance of the stock would improve over the long term, you have two strategies in hand: purchase the stock at lower levels as of today and then wait till it appreciates or buy at a future date when performance improves. You are also aware that till performance kicks in, the stock is bound to be volatile and may give negative returns. What would you do?

Well. I would do this. If I’m sure of the fundamentals of the company and believe that the company is reasonably (or lowly) priced as compared to its peers, then I would go outright and buy the stock. Why would I do this considering the fact that the stock will be volatile in the short term?

The reason can be better explained with an example. Let’s say, I buy stock “x” at Rs 100 and expect a 20% compounded return on the stock in the long term. Now, due to market sentiments the stock dips to Rs 50. The stock posts a notional loss of 50%. Now, let’s say I buy the stock at Rs 50 and sell it at Rs 100. My gain is 100%. The theory is the gains would always outperform the losses.  

Diwali fireworks at the Market!!

Sensex   8701.07    -1070.63 (-10.96%) 

Well, the markets seem to be reading my blog every morning! Its suprising to see so many predictions come true. I'm happy not being the typical analyst media channels follow and bring some sense of accountability for what I quote!

The fall to 8800 was expected, however the pace of the fall was a little unexpected. Given the pace of the fall, the free fall could enter an oversold state(meaning, some more fall is possible). As I quoted earlier, there would be a sporaidic rise soon once the fall completes. I would pick some trading positions after watching the markets on Monday and Tuesday.

Ah! I just read a CNBC TV18 interview here http://www.moneycontrol.com/india/news/market-outlook/long-term-investors-should-start-investing-now-experts/363238

I cant dispute judgemental calls. However, I wouldnt advice buying when the markets are in a fall frenzy. You need to wait for some stability to come before you park your investments. When the markets fell 30% at 14000 levels, everyone adviced to invest for long term. And at 8700, it still remains the same. People can say what they want to, but ultimately, its your money doing the rounds. Invest when you think the time is ripe and when you think you are paying the right price.

Targets for Sensex

Sensex 10169.90 -513.49 (-4.81%)

Sensex formed a double-top at 17600 first. This confirmed the downtrend. 50% downside from 17600 should take it around 8800 levels. The third top it made at 15504 was close to a double-top. So, one cannot rule out a further slide to 7750 levels. Once the downside completes, there should be a sporaidic rise in Sensex which would eventually take it closer to current levels(10000 or above).

Fall starts again!

Dow 8618.37 -415.29 (-4.60%)

I mentioned on Oct 16, 2008 that Dow will trade in positive territory till it dips below 8451. Having seen a few days of upswing, Dow now looks to head down and break the monthly support of 8451. For the immediate term, the next down-swing has started. At the moment, the 10-year low of 7591 is an important level to watch.

Analysis - ELSS Funds

As everyone starts to plan for tax-saving towards the end of the year, one may have several questions in his/her mind on where to park his/her money for tax-saving as well as better returns. The current economic environment offers adequate room for growth for ELSS funds and hence I would stick to suggestions under this domain.

I wouldn’t discuss absolute performance or ratings in this section as that is generally covered in most of the popular financial portals like http://www.valueresearchonline.com and http://www.easymf.com/

However, I would analyze some funds and suggest why I would buy/not buy in the current environment.

1. Fidelity Tax Advantage

Fund Manager: Sandeep Kothari
Since: Jul – 2006

I like the fact that the fund manager is experienced and has stuck to the fund for a reasonable period of time. This brings some amount of trust on the performance of the fund.

Asset Allocation
As on 31/08/2008
Equity 88.61%
Debt
Others 11.39%

The fund as on 31st September 2008 increased holdings in Infosys Tech (3.48%), Bharti Airtel (3.05%), ICICI Bank (2.8%), Hindustan Unilever (2.55%) and HDFC Bank (2.22%) amongst the top ten holdings. It reduced exposure in Reliance Industries (6.44%), HDFC (4.09%), SBI (3.24%) and BHEL (3.09%).

Given that the fund has significant equity exposure and lower cash/debt position, the fund is bound to loose in a falling market. The fund manager has taken smart calls in reducing exposure to RIL and other stocks as stated; however, the fund still has high exposure to RIL. I am particularly bearish on RIL and other stocks held in the portfolio as they would be the most to fall in a falling market. This portfolio suites investment once the market stabilizes. For the present, I would like some cash exposure and adequate equity cushion (FMCG and Pharma).
Investment Valuation Stock Portfolio

Portfolio P/B Ratio 5.55

Portfolio P/E Ratio 23.14

The funds P/E and P/B ratio are still high which means the downside risk is higher.

2. Franklin India Taxshield

Fund Manager: Anand Radhakrishnan
Since: Apr – 2007

The fund manager has been around for a lesser period of time. However, it’s not an alarm signal as the fund hasn’t changed its style of declaring dividends on a regular basis when the markets were ripe. I like the dividend distribution policy of the fund which reduces risk in long term.

Asset Allocation
As on 31/08/2008
Equity 92.68%
Debt
Others 7.62%

The fund increased its holdings in Bharti Airtel (7.16%), RIL (6.12%), BHEL (4.49%) and L&T (4.3%) while reducing exposure to Infosys Tech (6.04%) and HDFC (5.7%). I’m extremely bearish on all the top stocks held by the fund. The fund manager has done well to increase holdings in “cushion” stocks like Nestle, Hero Honda and Marico. However, I would have like higher allocation to these stocks rather than the old performers which the fund manager still seems to betting on! The equity allocation is significantly higher at 92.68%, which presents good amount of downside risk.

I am partly happy on the fund managers actions, hence would recommend a part-buy.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 6.90

Portfolio P/E Ratio 22.88

P/E and P/B is high for the fund and hence the risk id higher.

3. Sundaram BNP Paribas Taxsaver

Fund Manager: Satish Ramanathan
Since: Sep - 2007

The fund manager has been around for a lesser period of time. However, he brings in good amount of experience having worked with Franklin Templeton MF for a long period of time. I have tracked his performance during his tenure in Franklin Templeton and have found it to be satisfying.

Asset Allocation

As on 31/08/2008
Equity 63.64%
Debt 7.61%
Others 28.75%

The fund has substantial cash/call/debt allocation which is one of the reasons for outperformance over the previous month. However, as I see during the later days of October, the fund has been underperforming the markets and some other peers in the group. I suspect some equity re-allocation or portfolio shift. During the month of September, the fund increased exposure in HUL(4.86%), ITC(4.36%), RIL(3.94%) and ICICI Bank(3.02%) while reducing exposure in Nestle(3.81%) and Tata Tea(3.18%). Given the cash exposure as on September '08 portfolio, the fund is a good defensive bet and a good addition to your ELSS portfolio.

I’ll check the funds October portfolio once it releases and then take a final call.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 6.43

Portfolio P/E Ratio 16.47

The fund has a reasonable P/E ratio and hence is suitable for investment.

When to Buy?
Given that ELSS has significant equity exposure, they are governed by equity market movements. Hence, I would recommend investors to keep a watch on support levels discussed in the blog and invest closer to support. For instance, the next Nifty support looks to be at 2663. Another way of looking at it is to look at the support levels of top ten stocks held my MFs and then invest closer to those levels. But this can get very complex and hence I would say, just look at the Nifty close and invest. You can probably phase your investments over the months of November, December and January. However, I don’t recommend an SIP way of investing as of now. SIP’s if you note, have underperformed the market over the last two years.

Up or Down?

Sensex 10223.09 +247.74

Nifty 3122    +48.45

One could analyze the technical trend of the market in many ways. One way would be to take the Nifty or Sensex chart and then chart a trend based on patterns. Second is to take the top ten Nifty stocks and analyzing their technical trends.

I looked at the second method, having discussed the first previously. I'll focus on three key stocks which have and would eventually contribute to Nify/Sensex trend. Here are my observations.

1. RIL which contributed to significant portion of the fall is now close to its 2-year low. If it breaks 1174 decisively, then it could be headed lower. I have always stressed on my law of markets – “The stocks contributing the most to the rise of index would contribute the most to the fall whenever it happens”. It is only a matter of time before the law unfolds. RIL doesn’t look good fundamentally and technically.
2. Next, let’s take the case of ICICI bank which is another big contributor to the fall. Well, there are different views on its fundamentals. One may argue that it is one of the strongest banks in terms of capital adequacy ratio, insignificant exposure to sub prime etc. Ah! For once, let’s look at it logically. With such high interest rates and inflation, retail loan portfolio is sure to witness a slowdown. One has already seen a huge dip in home loan portfolio. New home sales are hard to come by, so banks would face some pressure on demand for fresh loans. Automotive manufacturers have indicated a slowdown in sales, which means there would be a corresponding hit in auto-loans. Corporate loans would be hard to come by, given the current economic scenario. Hence, fundamentally ICICI bank is not one of the greatest picks right now. Technically, it has already broken its 2-year and is headed further down. A temporary bounce was expected and is already underway.
   
   
3. Infosys is a victim of the current economic uncertainty. It broke its 2-year support and looks to head further down.

Given this, I don’t see the fall to stop as early as this. It should take a while before we would begin to see some confidence. The other case is to look at how markets behave internationally. If you look at Dow, it has already broken its 5-year support. The Nifty on the contrary has only fallen a little below its 2-year low.

Dow rises

Dow 8,979.26     +401.35    +4.68%

On the monthly charts, Dow looks positive till it breaks 8451. I would prefer to watch this level on an intra day basis for further conclusion. Some buying looks to emerge at these levels which is a good sign. However, it would take some time to bottom out. So, one cannot conclude that the bulls would soon be in.

International markets including India would take some cues from the Dow close. So, I expect the Sensex and Nifty opening on a positive bias. Local participation in India especially from mutual funds is a cause of worry as most of them have very little cash in hand. Some of them have churned their portfolio to reduce the impact of the fall. This probably makes us overly dependent on FII money.

RBI infusion of funds

RBI's current move in advice from the government would bring some respite to the markets, however not immediate. It is only natural that Mutual funds would need enormous cash in order to invest in such a falling market. In the short term, there's enough to worry for fund managers. However, easing the liquidity situation is a timely step by RBI.

Trend is down

 S&P CNX NIFTY    3338.40       -180.25(-5.12%)

So far, Nifty and Sensex have been behaving predictably. For the immediate term, I see Nifty to take support closer to 2663. It has broken 2-year support which means its headed down further from current levels. Traders could buy closer to the next support in expectation of an intermediate uptrend. There's not much international support, so I dont see any immediate triggers for the market. 

Sensex Update

Sensex 11483.4   +174.31

Sensex lost most of its intra day gains towards the end of day and only drifted southwards from its high of 11870.22. I see the start of a fresh downtrend. Sensex could fall further without touching its next resistance level of 12600. Traders should remain cautious at current levels.

Trading recommendation: Buy PNB

PNB 499.5    +39(8.47%) NSE

Buy PNB with a stop loss of 460. This is a delivery based short term trading recommendation. Exit at 550-560 levels. I expect PNB to reach the target quoted before its quarterly results on October 31, 2008.

Bounce back!

Sensex 11,309.09    +781.24(7.42%)

As mentioned on October 6, 2008 Sensex tested the next lower support. Today is probably the start of the next intermediate bull within the bear rally. The next resistance would be around 12600 levels. Traders can use this range to buy and short positions.

Dow sees Red!

Dow 9447.11

I mentioned earlier that for the short term 9700 is an important level to watch. The level came and went by! At close today, Dow dropped 508 points to close at 9447.11. This means that it has broken its 5 year support. If Dow moves below 9333, then it completes a 33% retracement from the highs of October ’07. Since it’s very close to its support range, I would wait and watch till further trends emerge. An intermediate bounce would come by, though the medium term trend is down.

Sensex trends

Sensex 11,801.70

As predicted, Sensex has started its intermediate downtrend. Fundamentalists are attributing it to a huge FII sell off. Well, that is true and is happening! Where is it going to stop? No one has a clear cut answer.

Based on chart trend, I have spotted the following. I am giving rough figures here and may not be accurately match the actual Sensex numbers.

1. Sensex topped at 20873 during Jan 2008 before starting its downtrend. It made an intermediate bottom at 14809. This translates to a 29% fall. It then had an intermediate rise to 17600 translating to an 18% retracement.
2. It started its downtrend to 12576 from 17600. This translates to a 28.5% fall (roughly 29%). After the bottom, it made an intermediate top again at 15504 translating to a 23.2% rise.
3. The third leg of fall expectedly would fall in the same range as the previous fall. Hence, I expect the next support at 10850-11200 levels.

At this point, traders are advised to buy and wait for an intermediate uptrend. The fall would be sooner than the rise -  I expect Sensex to touch the quoted support level within a few weeks(and not days).

What’s happening to ICSA?

A stock which grew at over 50% every half-year and been a darling for FII’s is now witnessing heavy selling pressure. And it’s not falling because fundamentals have changed! With an order book of Rs 900 crores and no signs of sales/profits dipping, it’s certainly not a sell even in deteriorating market conditions. Then why has it fallen 36% in just one month? Here’s my analysis on the stock. 

1. The promoter holding for this stock is considerably low at less than 20%. FII holding has always been higher. September 2006 data pegged FII holding at 39.15% while the promoter holding was at 17.09%. This hasn’t changed much over the years. FII holding as on June 2008 stood at a staggering 47.83% while promoter holding was at 18.47%. It’s only evident that such a stock with very little diversity in terms on its holding structure would fall in prey of the hands of high net worth individuals/promoters/FIIs.
2. The stock changed hands from GOLDMAN SACHS INVESTMENTS to DEUTSCHE SECURITIES on Sept 18 2008. In fact Goldman Sachs has been selling the stock in parts at various times during the year.  Average volumes for the stock have been on the higher side this month.
3. Apart from the bulk deal which witnessed change of hands, it is still not clear as to who might be selling the stock at such a low price. The Sept 2008 data expectedly to release by end of October would show some clarity on this. For now, it looks like the US based FIIs like Morgan Stanley, Merrill Lynch and Goldman Sachs have all been selling. It looks like a distress sell to me than anything else. It just shows how desperately these investors need money to salvage their business!

Fundamental picture still looks very strong. I wouldn’t like to take a contrarian call until I see some dip in sales. Technically, this stock is breaking support levels every quarter. So, it’s hard to predict the long term picture. For the immediate term, I expect some buying to take place at 200-210 levels.  Intermediate uptrend should take the stock to 270-290 levels.

Note: This is a high-risk high reward stock predictably from its holding structure. Long term investors are advised to stay away from this or book profits/loss once the target is reached. For high risk/aggressive investors, I recommend averaging your positions at 200-210 levels. Fresh buying is not advised as there are lots of fundamentally attractive stocks with better price control available.

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