Are the Markets Overvalued? - Sainik

The markets were in a reasonably tight range during most part of the week. The Nifty opened at around 5950 and saw a high of 6050, closing around 6020 for the week. The action was in midcaps and there seemed to be heavy selling by local institutions through the week.

However, FIIs came back with renewed vigor and there seems to be no let-up in their appetite. So long as the FII money is coming, the direction of the market is up.

There were a few voices in the wilderness regarding caution. The question is: Are the Indian Markets overvalued?

One of my close friends sent me comparative numbers of the Sensex in 2008 and its current level. This had been sourced by a friend from one of the largest retail brokerage houses in the country.




Based on this comparison, the brokerage house is indicating a Sensex target of 27,000.

Whether the Sensex would reach the target above would entirely depend on the global liquidity patterns. As of now, global liquidity is strong and will get stronger should the Fed begin its QE2.

Over the weekend there was an interview with a famous hedge fund manager on CNBC (US), in which the manager predicted that the stock markets in the US are ready to go much higher. The Friday rally in the US markets was attributed to this man.

Closer home, CLSA is is of view that the US markets are the cheapest since 1957. It is predicting a renewed bull run in the S&P 500 toward 1400 by the end of the year.

Currently the S&P trades at around 1150. In the local markets, the FMCG stocks seem to have become the darlings of the market. The banks and tech stocks are seeing continous purchase.

Your strategy should also be the same. Buy on all declines. The Nifty has strong short-term support at 5950 and resistance at 6150.

Mahindra-Satyam seems to have had a volatile run from Rs 95 to Rs 113 - it closed at Rs 100. It is still a buy with support at Rs 90.

Punj Lloyd seems to be on the verge of a breakout. CUB, IDBI Bank, VIP Industries, Reliance Industries look interesting and should be bought whenever the sentiment is negative.

It is a good idea to lighten up on cement and technology stocks ahead of the results season.

Whatever you do, hope it is profitable.

Inflation, Deflation, Both? - Sainik

aka Alice in Wonderland...

True to script, the Indian markets vaulted over 5500 levels to close at around 5915, which is just 8 percent below the previous all-time highs of 6340 attained in January 2008. If this level is crossed, India would become a part of a handful of countries trading at all-time highs-the Indonesian and Malaysian markets are already trading at all-time highs.

Clearly, the surge has been led, predictably, by FIIs, whose appetite for Indian equity never seems to end. Local institutions have been heavy sellers, but to no avail.

Banks and tech stocks were the leaders in this rally. It is surprising that tech stocks are hitting new highs despite negative vibes coming out of the US and the growing fear that Europe is a disaster waiting to happen, and the rupee strengthening against the US dollar. Sounds illogical? The RBI has come out with a very hawkish economic policy which should have affected banking stocks but this was just brushed aside by the relentless optimism. Well this is the stuff that runaway bull markets are made of!

While we are on a tear, there seems to be confusion in other markets. Just consider this: the US and Europe markets are going nowhere because consumers are just not biting; hence the talk is about possible deflation. With the Bond market rallying a while ago, and yields hitting new lows, the case for deflation is justified. However, a look at the Gold market which presents a different picture-the precious metal hit a new life-time high last week, and looks set to cross $1300 per ounce in the near future. Traditionally, a rally in gold means that inflation is around the corner.

So what's it then? Inflation or Deflation? Some more head-scratching to do if you observe the currency markets. Japan intervened in the currency markets for the first time since 2004 and bought dollars to weaken the yen, so as to help its exporters. On the other side, the US is asking China to strengthen its currency and threatening to label China as a currency manipulator.

What does one make of the Japanese action? Manipulation? While this going on in broad daylight it has been ignored by everyone. The whole scenario resembles something straight out of Lewis Caroll's 'Alice in Wonderland'.

The US equity markets are totally devoid of volumes and large swings can materialise without any rhyme or reason. The markets to watch are the US bond market, gold and the dollar index. These are large markets with huge number of players and cannot be manipulated by any one entity, including the Government, for an extended period of time. The direction of these markets will determine the fate of the underlying economies.

Right now, the markets are indicating that all is not well, at least in the developed economies, whatever Obama, Bernanke and other political leaders of various countries want us to believe.

Coming back to our own markets, while all the analysts are unanimous in their opinion of the indices hitting new highs and the markets continuing to flare up higher and higher, we would like to play the contrarian card and issue a short-term Sell on all rallies during this week. We would recommend lightening up on at least 50percent of the holdings, if not the entire portfolio.

Very rarely would one like to issue a Sell call, because if it goes wrong, all one hears are curses. But we are ready to be cursed. Do note though that I am not advising shorting the markets as yet, since it is very risky in markets which are irrational such as these.

If one were to sell in a calibrated manner over the next few days on all rallies, we believe one would get some good bargains in end October, just before Diwali.

The sectors which look ripe for profit booking are the banking, technology and cement. One would be able to buy ITC, Satyam, Maruti, Bhel, L&T, and TVS Motors, on a decline of 5 percent from current prices whenever it happens.

Whatever, you choose to do, hope it is profitable.

All Hopes for a Blowout Rally

The indices last week have broken out of the trading range of 5350-5550 conclusively, and even 5600 held comfortably, on Thursday, ahead of a long weekend.

The announcement of blowout IIP numbers over the weekend, and stable global markets, should add fuel to the fire of the impending rally in the week ahead.

Big players are all expecting a huge rally of around 10-15 percent in the next few months. Hence the mad rush by the FIIs to woo India.

This was the Buying Panic which a few commentators were expecting some time ago.
The standout performing sectors were the Financials and Cement. It is a known fact that cement companies are struggling to make profits in the past 4-6 months mainly due to a lack of demand.

However, the market buzz is that cement prices would be increased by around 20-25 percent during the festival season. Interestingly there are good scrips still available at reasonable prices, even at these lofty index levels.

Just check out my favorite, Satyam Computers, which is hovering around Rs 90 and it has just started hiring from the campuses, after a layoff of nearly two years.

Even Reliance Industries and Bhel look reasonably priced versus the index. ITC is another blue chip which can be bought on all declines. TVS Motors and Maruti should do well going forward. Among dark horses, sugar stocks are looking good.

Watch out for Punj Lloyd. It seems to be stabilizing at around Rs 110 level, similar to Suzlon which is forming a nice base at around Rs 50.

The only risk to all these recommendations is that if the blowout rally does not happen, the we know what should our stoploss be: Nifty 5350.

Whatever you are up to, hope it is profitable.

Laborious Markets - Sainik

September 6 is celebrated as Labor Day in the USA. In a strange sort of way the Indian markets also seem to be celebrating it, in spirit, for the past so many weeks, with the Nifty being rangebound between 5350 and 5550.

Every time the Nifty appears near either of the numbers, the excitement is palpable; everyone in the market who is technically inclined is left wondering whether it will break the shackles this time at least.

The Nifty, like a cruel mistress flatters to deceive, again and again. Last week it happened at the lower end of the band, when the Nifty briefly went below 5350, and then bounced back, to close the week out at a respectable 5480 levels.

September was quite a bullish month last year, and a very bearish month during 2008. Which way will this September be?. Will it be another heartbreakingly slow month like this August was. Only time will tell.

There is a well-observed phenomena in the US markets leading to Labor Day: The markets are bullish and then become bearish after the day. This year, the first part of the phenomena has remained true. Will the second part too fulfill the observation? Only time will tell.

As a reader of the article, it is justifiable to expect that the writer would stick his neck out and make some prediction-any prediction-but as our late PM, Narasimha Rao demonstrated very well: No decision itself is in itself a decision. Hence, no prediction itself is in itself a prediction.

However, looking at the market internals, here are some interesting tidbits:

1. FIIs have been selling of late and their purchases have reduced in quantum.

2. The advance-decline lines have been in favour of declines.

3. The mid-cap index looks a little more vulnerable than the frontline.

4. There seems to be a "rotation" of scrips which are leaders in volumes (This has bearish implications).

The pick of the week was Satyam Computers which seemed to have risen from the Ashes, literally. If this week the strength continues, it would certainly be a very good candidate to accumulate at all levels. While Rs 94 is a strong resistance, watch it, and buy it anywhere close to Rs 85. If the results get announced as per schedule then we may see some interesting times for this scrip.

BHEL and Punj Lloyd also look interesting.

Reliance Industries is ready for a short term pop till Rs 980.

ITC will continue to remain an evergreen favorite below Rs 160.

The tech stocks look ripe for a significant correction.

Sugar could be the dark horse going forward for the festival season. Watch Renuka for a quick spurt some time soon.

Patient investors can wait and keep their powder dry since the "best prices" are yet to come and there could be many "Diwali bargains". Until next week then, whatever you do, hope it's profitable.

Yours, friendly neighbourhood analyst...