MARKETS ON RED ALERT – 20/06/2008.
Please recollect what we had written last time and see how accurately the market follows our direction. Last week markets crashed, but before crashing the markets did give a bounce and if the readers had followed our article, then they should have taken the opportunity of going short in the market. Please remember biggest wealth creations have always happened in a Bear market. My sincere advice to our readers, don’t go for bottom fishing. It will be like catching a falling knife. You will bleed but the knife will pass through. So please SELL at every rise, or atleast learn to hedge your positions.
WELCOME TO THE WORLD OF BEARS.
IS THE BULL RUN OVER?
WHAT SHOULD THE INVESTORS & TRADERS DO?
Why the markets will collapse further?
INFLATION, THE KILLER:
HOW TO TRADE?
LAST WEEK S RECOMMENDATIONS:
THIS WEEK S RECOMMENDATIONS:
Whatever goes up has to come down. This is what the great Issac Newton had said. But till early January of this year, our stock market was defying this Law, and was moving in only one direction and that is up. This crazy gravity defying Bull Run began in early 2003, when the Sensex and Nifty were trading at 2904 and 920 respectively. The golden Bull Run was based on the India Growth story. The Indian companies were putting up a sterling show quarter after quarter. But now suddenly everything has hit a roadblock. The Bulls were selling us the Indian growth story like a sweet dream, which has abruptly ended. Good morning say the Bears. We are now facing the reality and the reality is grim and bitter as it is no more the Bull market of the past, it is the Bear market and it has returned with a vengeance after a hiatus of five long years. Bears are having the last laugh after five years of unprecedented Bull Run. Welcome to the world of Bears. The answer is both Yes and No. The Bull Run is over, if we take the medium to long term view i.e. if we consider a period of six months to a year. But if we are looking at the super long term i.e. a period of three years and above, then the structural Bull market is still intact and we are just undergoing a prolonged Bear phase in a long term Bull market. Just as after every day, there is night; in the same way after every Bull market there is a Bear market. And after the Bear market is over, the Bull market will resume. It is like a cycle which keeps on repeating. If we take the entire rise from 2003 to date for the Sensex & Nifty, then we are undergoing a correction of this entire rise. The Sensex had gone up right from 2904 to 21206 and now it is retracing this move and the corrective levels are placed at 14215-12055-9896. The Nifty had seen its rise from 920 to 6357, and the corrective levels are placed at 4280-3630-2997. This is the correction in the multi year structural Bull market. Investors with an investment horizon of more than three years certainly should think of getting in stocks where the long term growth story is still intact, but only on sharp declines. These corrections should be used as excellent entry points from the super long term point of view.Trading is a game of probability as the chances of your success depends on the volatility and uncertainty prevailing in the market. I feel as the direction of the market is clearly down, there is no question of uncertainty and thus if the trader trades or positions his trade by being inline with the negative trend, then he is bound to succeed more often than not. Every rise should be used as an opportunity to go short. Traders can use F&O strategies to take advantage of the situation.
Major factors affecting the growth of the economy is the crude. The crude, which is hovering in the range of $135 to $139 per barrel, is a big negative for emerging economies like India. High crude means the input costs for many industries too goes up; as a result the profitability is further eroded. The government has left the Oil marketing companies to die as they have allowed only a meagre fuel price hike and the under recoveries are as high as Rs 27 per litre for petrol and Rs 17 per litre for diesel. These downstream oil marketing companies are counting their days to bankruptcy.
The fuel price hike has already put the inflation in double digit; and it is over 11%. This will make life tougher and more expensive for the common man. The voting public, as history suggests, has never been kind to the government in whose regime the inflation has reached mammoth proportions. Thus there seems little doubt over the destiny of the government.
Since the inflation is already at 13 yrs. high & above 11%, it is very clear that the RBI will take more actions and will increase the interest rate further. Already the profitability of the companies is affected by the high interest rate regime and now further rate hike will only make the profitability go down further. Thus Growth will take a back seat now as the Inflation takes centre stage. At the start of the Bull Run in 2003 the P/E ratio of many frontline companies were in single digit but the growth rate picked up and people started buying the same stocks at higher rates because they knew the price will rise further because of growth. This lead to a phenomenon, which was referred to as P/E Expansion. i.e. people pay higher to buy the stocks which are having very good growth prospects.Now the Bull Run is over and in this bear phase people are scared to buy even at prices which are the lowest in a year. This is because the growth rate has subsided and thus people will fear to buy the stocks even at current low rates. This will lead to a phenomenon called as P/E Contraction.
Inflation came in at a whopping 11.05% for the week ended June 7th, 2008. It is at a 13 year high. The inflation was expected to come in at very high but just under 9.85%; as a result of fuel price hike. But this figure above 11 is a complete shocker. No doubt now the RBI will gun for more rate hikes. The market will, no doubt find it difficult to digest, but the reality is that growth will now take the back seat and inflation will be in the forefront. `
Sensex opened the week at 15333, made a high of 15789, low of 14519 and closed the week at 14571. Thus weekly loss for the Sensex was 618 points. All indicators are suggesting further weakness. The downward momentum will gather momentum as suggested by the Price ROC indicator.The Trendline Resistance will be at 15063-15122-15332.Sensex has given a Bearish Head & Shoulders breakout and is now headed towards the danger zone. Targets are 13882 – 12225.For the week ahead, Resistance is at 14645-15063-15332. Support is at 14215-13882-13779.
Nifty opened the week at 4536, made a high of 4676, low of 4333 and closed the week at 4347 Thus, weekly loss was 170 points on a weekly basis. The Trendline Resistance for the Nifty is at 4468-4574-44620. The Nifty OI PCR is at 1.40. Lot of call writing is visible at the strikes of 4500 and 4600. These levels will be difficult to breach. Technical Indicators and chart pattern suggest continued weakness. For the week ahead Resistance will be at 4369-4468-4574. Support will be at 4280-4200-4004.In the wake of this ongoing bear onslaught, chances are that the Nifty may well be on its way to test the levels of 4280 and 3630. Please watch out.
SELL RELIANCE FUTURE AND HEDGE BY BUYING A CALL. RPL IS HEADED DOWN. TARGET IS 150-143. BUY RPL 170 PUT AT 4 AND SEE THE AMOUNT MULTIPY.
Inspite of such a VOLATILE market, all our recommendations achieved their TARGETS. THREE CHEERS.
BUY AUROBINDO PHARMA : TGT 346-355 reached 358.
BUY NIIT LTD : 120 reached 118.
BUY ORCHID CHEM : TGT 262. Reached 263
BUY GAIL : TGT 397-402. Reached 419.
BUY GLENMARK PHARMA : TGT 726. Reached 730.
BUY SPICE TELE : TGT 69-74. Reached 66.
SELL SUZLON : TGT 236-227-221. Reached 238.
Sell Reliance 2099 SL 2156 Tgt 2039-1948.
Sell rcom 491 sl 514 tgt 476-458.
sell abb 925 sl 959 tgt 875-799.
sell l&T 2564 sl 2635 tgt 2362-2296.
sell sterlite ind 767 sl 784 tgt 741-715.
sell rpl 171 sl 177 tgt 160-150-143.