Markets Near Future

FII’s sell on bourses

The FII’s were net sellers to the tune of USD 2.50 Bn during the month of June 08. The selling pressure was seen through-out the month. The sale by FII’s also contributed to negative sentiment.






Tax Collections – A relief

Tax collections figures relieved nerves. Direct tax collections up to 21 Jun 08 grew by 43.45% YoY. During the same period Personal and Corporate taxes were up by 49.8% and 39.8% respectively. In May 08, Customs and Excise duty were up YoY by 25.2% and 4.4% respectively. In April 08, Service tax collection was up by 40% YoY.





Reserve Bank to tame inflation

RBI raised repo rate by 50 basis points and also increased CRR by 50 basis points to contain inflationary expectations. The revision in repo rate became effective immediately where as CRR hike would be effective in two installments in July. Following the hike in the interest rates the banks have been revising the rates of interest. Government has initiated austerity measures. Excise duty on bigger cars was increased.







Forex Reserves fall

India’s Forex reserves have seen a drop of USD 3.69 bn during the four-week period ending Jun20, 08. The
Reserves stood at US$ 312.48 bn as on 20 Jun 08 as compared to US$ 316.17 bn on 23 May 08. This is an
indication that RBI would supply dollars to defend the Indian currency at around Rs 43.







Crude at new high

Crude touched a new high of USD 143.67 per barrel on 30th Jun. Sentiment turned bullish following the announcement by Mr. Chakib Khelil, President OPEC that crude could touch USD 170. However, many in the industry maintain that such high prices are not sustainable in the long run. Gold also had a sharp run up following 170 USD forecast and touched the months high of USD 937.70/oz on 30 Jun 08.







Inflation gallops

Galloping inflation engaged the attention of investors and policy makers. Inflation pulled down the market.One of the factors contributing to inflation was the revision in the petrol and diesel prices on 4th June 2008. There are indications that double-digit inflation is likely to stay around for a few months at least.








MARKET ACTIVITY

The month of June 2008 has witnessed continuous selling pressure breaking the crucial support levels of 4450-4200, and hence confirming an intermediate term bear phase in the equity market. On the first day of June’08, Nifty made a high of 4908.80 and remained below this level throughout the month. The low for the June month was 4021.70, which is the lowest level made in last 10 months. Nifty is trading much below its 200-DMA level of 5223 and 50-DMA of 4820. Volumes have been lower than the previous month, showing lack of participation from the market players. Weak global cues, record oil prices and political uncertainty surrounding the USIndia nuclear deal will continue to put pressure on the share prices. Annual inflation rate for the week ended June 14 raced to yet another 13-year high of 11.42 per cent. Rising commodity prices and Crude oil which made its record high at around $143 a barrel continues to be important factors for deciding the trend of the market for the coming months.


During the month ended June’08, FIIs have been net sellers of Rs 10095.80 Cr. In the previous month they have been net sellers of Rs 1242. Cr. Mutual funds have been net sellers of Rs 2888.50 Cr in June’08. In the previous month they have been net sellers of Rs 387.20 Cr. i.e.huge selling pressure has been seen from both
FIIs and Mutual Funds from resistance at 4900.

As per the sector performance, selling pressure has been seen in all major sectors and all sectors closed in deep red. Realty stocks were the worst hit (down by 35.17%) followed by Capital Goods (down by 23.34%) followed by Banking (down by 23.31%), Metal (down by 21.92%), Midcaps (down by 20.32%), PSUs (down by 19.96%), Auto (down by 17.68%), FMCG (down by 14.31) and IT (down by 13.44%).

Future Outlook:
The month of June 2008 has made a long bearish candle pattern, closing at almost the lowest level of the month at 4040.55. Nifty has crucial support at 4002, which if broken can lead to further selling upto 3760 level. However, for short term, resistance at 4165-4325 will be crucial for deciding the trend. Some recovery is likely in short term if Nifty trades above 4165 level. The level of 50-DMA, i.e., 4820 will prove to be strong resistance in medium term. Retail investors must trade cautiously in present scenario, and keep stoploss for trading. Lack of buying will be seen below 4000 level.

For the month of July 2008, if Nifty sustains above 4165 level, then likely target on the upsides is 4370-4530-4680. On the downside, support levels are 4002-3750.










Bear Phase -- are we prepared for it?
The data suggests that the dream Bull Run of the market is over. Thus we are heading for an intermediate -
term phase where prices are expected to decline. The time has proven that equity is the best class of asset and would deliver a higher rate of return than other asset classes if investments were made during severe corrections. Therefore there is a need to develop a suitable plan to deal with the situation.
A peep into the history would give an insight into how to take advantage of such a situation.

The recent bull trend continued till January 2008 when Nifty touched 6357. The Nifty had recorded a low of 849.95 in September 2001. There after, there was a bull run wherein the stocks appreciated by more than seven times in six and half years. There were many corrections in this journey. However there were two significant corrections, which threatened to abort the Bull Run.
The first correction was noticed in 2004. The Nifty had touched a high of 2014 on 9th Jan 2004 and corrected all the way to 1292 on 17th May 2004. Thus the market dropped by 35.85% in a period of 4 months and 8 days. The investors may recall that so ferocious was the fall that trading had to be halted.
The second correction came in 2006. Nifty had touched a high of 3774 on 11th May 2006 and corrected all the way to 2595 by 14 the June 2006. This fall of 31.24% was completed in less than five weeks. The trading had to be halted during this period also.
The current downtrend started on 8th Jan 2008 from a level of 6357. Nifty had touched a low of 4021on 30th June 2008. The drop so far is 35.74% and this fall has taken 5 months and 22 days.
Does it mean that the necessary correction is over? The pointers are otherwise. The current appears to be on account of factors, which may not get rectified in short run. The fall in May 2004 was uncertainty due to election results and fall in May 2006 was due to melt down in commodity prices. This time the concerns in the minds of investors are more fundamental like:
• Inflation and high-energy prices
• Rising interest costs
• Slow down in Industrial and Economic growth
• Weakening of macro economic fundamentals (fiscal deficit, trade balance etc)
• International developments and global slowdown.
• Impending elections.
These factors are not expected to melt away quickly.
In view of these we believe that the markets are not going to go up in a hurry. The correction in 1992 was of the order of 53%. The correction in 2000 was of the order of 52.7%. It took about 11 months in 1992 and 19 months in 2000. The peak of 1992 was scaled in 22 months and peak of 2000 was scaled in 46 months. It has also been noticed that in last two decades the maximum time the market took to scale the old peak (peak of 1994) was five years. The above observation has been given merely with the intention to explain past behavior of our markets.
In case the history repeats the bottom will take time to form and one should be prepared for another one year of the downtrend. It would be prudent to ensure that one is adequately funded to meet the financial requirements, as market conditions may not be suitable for encashing the shares.
A new peak gets scaled in three to five years. Thus the index can be expected to be above 6300 in about three years (between 30 and 54 months). It is advisable to continue to hold the leading blue chips through the downtrend as the cost of holding is not too high and these scrips usually bounce back faster than the rest of the market.
Some of the possible strategies would be
1. The FMCG and Pharmaceuticals stocks are traditional defensives as the products of these companies are price inelastic.
2. Utilities such as power and telecom are also defensives as the demand for their services is not expected to go down.
3. Invest in companies with high dividend yield. High dividend yield ensures that these shares do not go down much. Besides good yield these shares also offer prospects of decent appreciation.
4. Gas offers a lower cost fuel compared to fuel oil or naphtha. Therefore we believe that usage of gas would continue to expand.
5. Commodity stocks which may gain due to deprecation of Rupee. For example, the landed cost of imported paper would go up which would be beneficial for the paper industry. These stocks offer an attractive dividend yield also.
6. Bank stocks have been beaten down due to apprehension of problems in the financial services.Many of these are available at a significant discount to their book value. Such a discount has emerged due to concerns of high interest rate. These PSU banks offer a good dividend also.












NIFTY (4137)

Nifty closed in the red for the sixth consecutive week falling by 211 points for the week and 733 points down in the month of June with one day to go.



Pivot Point trading levels for the Week 30th JUN- 4th JUL is as under.
S2 S1 PIVOT R1 R2
3936 4036 4194 4294 4452



100-WMA 4492

20-DMA 4485

200-WMA 3478



Pullback from support levels will be seen, but will be shortlived. Only a move above 4500 will show first signs of some bullishness. Higher levels to be used for shorting only.



CORRECTIONS IN A BEAR MARKET




TOP
BOTTOM
PEAK
BOTTOM
Value
FALL
Period of

YEAR
YEAR
VALUE
VALUE
Of Fall
%AGE
Correction









APR 1992
APR 1993
1281
600
681
53%
12 Months

FEB 2000
SEP 2001
1818
850
968
53%
20 Months

JAN 2008
So Far
6357
4093
2264
36%
6 Months




53% was the correction in both the earlier two bear markets which occurs every eight years 1992, 2000 & now in 2008 (Do you calculation?).

LEVELS ------- Below 4500 ..... 4253 ....... 4002 ....... 3900 ....... 3604 ...... 2954

2954 - 3000 is the MAXIMUM I forsee Nifty going to, in this bear market.

I dont say it will happen, but its a possibility.

The reason being:

1. Support of 2003 trendline will meet at 2954-3000 on a linear scale chart.

2. Fibonacci Ratio of 61.8% is at 2954 of this entire 5 year Bull Run.

3. If for the third time we have 53% correction in this bear market it works out to 2954-3000

4. All above three signals, point to 2954 - 3000 as WORST CASE SCENARIO.