Nifty Trading Newsletter by NiftyFutures.info

NiftyFutures.info

Nifty Trading Newsletter Sunday, 15 May 2011

On 3rd May 2011, the Reserve Bank of India (RBI) raised the interest rates by 50 basis points, against the market-wide expectation of 25 basis points. In addition, the RBI has declared a hawkish stance and is likely to increase 50 basis points more in the remaining part of FY12. So the Indian stock markets have now factored anywhere between 75-100 basis points increase for FY12, of which 50 has been done already.

RBI has epxressed the view that India's GDP growth can be sacrificed to control inflation. FM Pranab Mukherjee and Ministry of Finance have toned down their earlier 9% GDP growth target to about 8% GDP growth target for FY12. But the increasing interest rate is pushing back the new capacity investment cycle in Indian industry, which is critical to increase production and hence reduce the supply-side constraints being faced by Indian population today in food production, water, electricity, infrastructure, etc.

It is these supply constraints that are behind constantly rising inflation, and unless new investments are made rapidly and they start producing, inflation will not fall. Unfortunately higher interest rates are pushing back new investments, and RBI may have to increase interest rates again to control inflation, which is a self defeating spiral.

There is a perception in the market analysts that parts of the government have not shown leadership by proactively tackling infrastructure problems and managing fiscal deficits. India is losing time. Many projects are getting delayed for one reason or the other, and it is taking several months to resolve issues that should take just 1-2 weeks. People are waiting to see a sense of urgency by the govt. On the fiscal deficit front, the govt should see how to rapidly increase revenues.

Another battle going at a global level. Rising crude oil prices mean more subsidy burden, which will increase the fiscal deficit of India. Global market analysts feel that if the brent crude prices remain above $100 for more than 2-3 months, that can increase the fiscal deficit of India to about 6% from the current target of 4.8%. The govt may try to wriggle out of this tight situation by selling its crown jewels cheaply to raise money, which means ONGC FPO could happen at a much lower price than its current price of Rs 300 per share. My estimate is Rs 240 per share, which is 20% below current prices. Given weak equity markets, there will be no choice but to sell ONGC at low prices. Hindustan Copper FPO also looks doomed with the same logic.

Whatever the case, if India's FY12 fiscal deficit crosses 6%, then we could see rating downgrade of India by international rating agencies, which can in turn, move out a sizeable about of FII capital. In such a case, the Indian equity market could correct by 10-20% before the same FIIs come back after such a correction. So the Nifty has a potential downside of 10-20% from current level of 5500 in FY12 if these events play out. However, since a lot of of negativity has been factored into current prices already, every positive move by the Govt of India, will see the market moving up, and 20-30% upside from current levels is also possible in FY12.

Overall, the Indian economy is facing a tough time, and lack of concrete action by Govt of India in 2009-2010 has created a scenario where we have to sacrifice growth that was easily possible if timely clearance and execution of various projects was done. We should not blame oil prices, we should have a mechanism to manage it. If we maintain an artificial constraint, we will have a sub-optimal solution. The latest increase of petrol prices by Rs 5 is good to control fiscal deficit, though it will also contribute to increase inflation. There is an urgent need to increase taxes on products/services consumed by the rich people of India like air conditioners, luxury products, etc. In addition, there is an urgent need to clean up the govt machinery at both centre and state levels because the capital allocated for investment is being siphoned away by corrupt govt officials and critical projects related to water, roads, electricity, health are not happening as per plan.

The Indian industry could move things forward and make all necessary investments only if government bottlenecks are reduced. The people driving Indian companies are among the best in the world, but they will not take any extra risk in a scenario where interest rates are rising, and govt clearances and policies are unclear, meaning project financing may happen but execution can not start, or worse, execution could be delayed midway because some new minister wants to exert his influence. The govt. and RBI have not been able to come up with new banking license guidelines even after 15 months of announcing the same and have missed multiple dates announced by them. There seems to a lack of political will to take a bold stance on any important topic.

It has been difficult time for the Indian stock market since Nov 2010, and as of May 2011 the Indian market is as weak and oversold as it was in the year 2008 and history tells us that maximum price damage happens at oversold levels. First we saw record capital inflow from FIIs in Sep-Oct 2010, and then constant selling or outflow of foreign capital from Nifty and Indian stock market from Nov 2010 till Feb 2011 -- the capital was going back to the US market to chase better gains, because the continous flow of negative news from the Indian political and business sectors increased the doubts about the genuineness of the Indian business profits where companies could hide false data by corruption -- and all this made India one of the worst performing emerging markets in the 5 months from November 2010 to March 2011.

In fact, even when the Nifty stocks were rising in Septemeber-October 2010, the broader market was flat or falling, and during the fall in Jan-Feb 2011, the broader market stocks (mid caps and small caps) fell by up to 50-60%, which is a massive fall. Even as of end-April 2011, the broader market is still at price levels of Nifty 5200. Unless the broader market moves along with Nifty, the rise of Nifty itself will be short lived, like we say in November 2010.

The Indian capital market still lacks depth, because with about Rs 6000 crore of net selling, which is about 0.001% of the Indian stock market capitalization of about Rs 75 lakh crore in Dec 2010, which is now at Rs 60 lakh crore. 20% market fall with 0.001% selling. In other words, just selling 1 share in 100,000 shares has dropped the price by 20% -- that show lack of market depth, because the Indian stock market is dominated by traders who can’t hold stock for even 1% falls, and thus the selling cascade starts if one can somehow short-sell the market down by 3-5%, the remaining 10-15 fall% will come by itself as the weak trading hands look for escape at losses. Long term investors don’t sell their stocks at such market falls, but such investors are a minority.

Another way to see the same market fall is that because market price has fallen by 20% on low volume (1 share in 100,000 shares), the price will also move up rapidly when the market mood becomes positive. Overall, not much has changed in the India growth story on the ground level; the focus on corruption and governance is positive, but how much of it is for real, and how much is for short term political gains, is yet to be seen.

On 28 Feb 2011, the Finance Minister of India published a well balanced budget, trying to balance different priorities of containing inflation while supporting growth. Given the government disinvestment target of Rs 40,000 crore in FY12, we may see tight liquidity in the Indian capital markets. Remember Indian markets were rising till Coal India IPO in October 2010, and that IPO took away a big chunk of money from the secondary capital market. ONGC and SAIL FPOs are planned for March-April 2011 and then IOC and Hindustan Copper FPO are planned for later in FY12 -- each of these FPOs will take out liquidity from the secondary capital market putting downward pressure on Nifty, which will then need new capital infusion from FIIs to stay flat or move up.

As a trader, investor and fund manager, I observe FII and DII trading trends daily, and the trend has been consistent selling of Indian stocks on every rise to take away their capital either to the US where the economy seems to be improving, or to other favorable emerging markets, especially Russia (oil & gas exporter) or Brazil (better on food inflation).

Trading in the Indian stock market can be profitable over the long term, only if your trades are alinged with macro-economic situation. Since the FIIs have many times more capital than DIIs, understanding the reasoning, mood and behaviour of FIIs is critical to making profits in the Indian stock market, and avoiding losses by taking strong contra positions against them.

By trading, we don't mean intra-day trading because the intra-day timeframe is very small and the risk of getting caught in short term volatility is high. However, one can trade with Nifty ETFs or Indian stocks with conviction and profits by trading with timeframes of about 1-10 weeks per trade, which gives you better control over your trading positions.

Based on the experience of helping many traders and investors of the Indian market over the last 2 years, I am starting a simple weekly newsletter that will cover the trends for Nifty index. This newsletter is not about individual stocks, its about Nifty index and trades you can do financial products related to Nifty.

Following are some of the main Nifty trades in last 2 years:

Year 2009: Buy@2880 Sell@4550 Gain +58%

Year 2009: Buy@4100 Sell@5020 Gain +22%

Year 2009: Buy@4580 Sell@5230 Gain +14%

Year 2010: Buy@5140 Sell@5480 Gain +07%

Year 2010: Buy@5530 Sell@6250 Gain +13%

Year 2011: Sell@6070 Buy@5750 Gain +05%

Year 2011: Sell@5980 Buy@5200 Gain +13%

Year 2011: Buy@5200 Sell@5900 Gain +13%

Year 2011: Sell@5770 Buy@5490 Gain +05%

In addition the above large trades, there are many smaller trades of 100-200 Nifty points that are not listed above but could easily have been used by traders. As you can see, it is possible to make good trading profits by trading Nifty.

My trading experience in that one can easily trade with Benchmark Nifty ETF or Nifty Junior ETF -- they both have good liquidity and trading the index offers the safety of portfolio diversification. And FIIs are mostly trading in the 100 stocks covered in Nifty and Nifty Junior stocks.

My personal favourite is the Nifty Junior ETF because it is also a great investment because it is valued cheaply at PE of just about 10 for FY12 (a deep 50% discount to Nifty which is at P/E of 15 for FY12 earnings). The Nifty Junior has 50 of India's best stocks, and all of them are on high growth path, and high growth at PE 10 is attractive to me.

And you are protected from the big risks that face individual stocks. I used to own many shares in Satyam, and one day it was 70% down. Large losses happened to my shareholding in RelCom due to various reasons. Corporate governance issues can hit you out of nowhere, and your stock will be down 25-30% before you get a chace to exit.

Summary:

It is risky to depend on individual stocks. No stock is safe from 20% instant cut, even RIL, Tata Motors and Infosys are not safe from vicious cuts.
The more trusted a stock, the deeper the cut will be on any major bad news. While I can readily put 100% of my portoflio capital on the Nifty Index ETF, I am uncomfortable to put more than 20% portfolio in any one stock.
The risk from company-specific accident is high, even for blue chip companies. In addition to that, no individual stock can defy the Nifty direction for long, especially on the upside. So if you are trading along the direction of Nifty, you will be profitable, else you will face losses.
Over the long run, if you are a trader, you will find equally good, if not better, profits when you trade Nifty ETFs or Nifty Futures, because Nifty is the place where FIIs buy, and only when FIIs buy, the Nifty and the Indian stock market moves up.
This Nifty Trading Newsletter will give you my neutral external perspective, which you can't have because of your existing long or short positions in the market, and the fee is very nominal for any serious investor or trader in the Indian stock market.

This weekly Nifty Trading Newsletter will give you the following inputs:

At what level Nifty becomes attractive for buying?
At what level Nifty becomes ready for selling?
When should you avoid trading and wait on the sidelines?

You will receive the email newsletter every weekend - either on Saturday or Sunday.

Following is a sample of the weekly Nifty Trading Newsletter:

----------------------------------------------------------

Nifty closing price on Friday: 5687

In the coming week we will

Buy and hold Nifty above: 5750

Exit or Sell Nifty below: 5620

You can use the above information to trade using Nifty ETF or Nifty Junior ETF, Nifty Futures, or Nifty Options -- its your choice based on how much risk you want to take. Nifty/Nifty Junior ETFs are the safest way to trade and good option if you can get low brokerage on cash delivery trades. Using the above information, one can also trade with frontline banking stocks like SBI and ICICI Bank because they have a high correlation with Nifty and the Indian economy, and can be used as proxies to Nifty. Please note that trading in Nifty Futures and Options involves high risk and trading capital can be lost rapidly, so be very careful. Please use stocks/ETFs for trading unless you are a professional trader.

-----------------------------------------------------------

Subscribe to this weekly Nifty newsletter to benefit from independent market analysis and buy/sell prices on Nifty.

Fee: $150 for 3 months (Rs 6,725)

Fee: $250 for 6 months (Rs 11,225)

Fee: $450 for 1 year (Rs 19,975) -- with Performance Guarantee of 1000 Nifty points

Fee: $900 for 2 years (Rs 39,950) -- with Performance Guarantee of 2500 Nifty points

Performance Guarantee: This newsletter will generate at least 1000 Nifty points of gain every 12 months, and at least 2500 Nifty points of gain every 24 months -- guranteed. Nobody gives a guarantee on anything related to the stock market, but this newsletter wants to set a new benchmark. You are welcome to search on Google and come back. How does the guarantee work? For example, if we buy Nifty at 5500 and then sell Nifty at 6000, that is 500 Nifty points gain. After we sell Nifty at 6000, if Nifty falls by 300 points to 5700 and we buy Nifty again at 5700, that is 300 points of gain. If we fall short of the guarantee, we will refund you pro-rata. For example, if the newsletter generates only 800 Nifty points gain during your 12 months of subscription, then we will refund 20% fee to you. If the newsletter does not deliver gains, we don't want your money. We value your trust more than money.

To subscribe, please email: info @ niftyfutures.info (please remove spaces) and you will receive a link to pay the fee. You will be added to the list of subscribers immediately, and you will start receiving the email newsletter from the coming weekend. Looking forward to hearing from you. Thanks for visiting this website.