Ideal stocks to Sell in the Current Market Rally

Markets have been simply become untradable in the recent times, with volatility reaching newer highers. We saw the markets rally significantly on the news of 120 Bn Euro for Euro growth plan. When we got a 500 bn LTRO in Jan 2012, we saw markets rally all the way form 4600-5500, however this time i see a good 250 point rally in the markets. This gives us a good opportunity to sell these stocks as the Nifty may rally to 5350-5400 levels in the Next few days. 

Here are my top picks to sell in the recent rally.

1. BoB: Fundamentally the stock was a blind buy around 640 levels however the kind of rally the stock has seen , shows the strength in the counter, however i see a risk with the bank as asset quality concerns still prevail. MD Mallya who has taken the bank to new heights is set to retire in october 2012, which will be negative for the stock.

Technically the stock faces a spree of resistances around 750, the 200 DMA , and a strong resistance @ 745 will be hard to take out. if the stock is unable to sustain the breakout (which is highly probable) we can expect lower levels. 

2. Hindalco

Hindalco is just an example from the commodity stock segment, with the chinese economy slowing the way it is, it will take a while for these stocks to rally significantly.The current rally can be used as an excellent opportunity to exit the stock. Book partial profit @ 126 and 133 around the 200 DMA. This in an excellent stock to own for a longer term and should be bought on dips.

Axis Bank

We have been slowly grinding around the 200 DMA for a while now, which is holding pretty well for some time now. There are strong supports around 5080 and 5020. The Earnings season has been fairly good, and the earnings for few key sectors like banks seems to have bottomed out, and their NPA profile also looks ok. Until somethings goes horribly wrong in Europe or China, we should hold these supports and should use the current dips to buy into stocks.

Axis Bank has been one of my favourites along with ICICI. The stock posted a good set up numbers today, PAT, NII, NIM and NPA profile was impressive, however the kind of correction the stock has seen call for a short covering rally, above its 200 DMA. I expect Axis to outperform next week and expect 1190-1200 in a week or two. A positional buy above 1110. 

BHEL

BHEL is one of the few stocks that has not been able to sustain its price post the liquidity driven rally, and is close to its December lows of 222.
Let my enumerate few problems with the sector as well as with BHEL.
1. BHEL has faced the sharpest drop in its orderbook in FY 12. The company had guided an expansion of about 10% in the order intake, however Its orderbook contracted about 66% from FY11. A significant chunk of orders were wiped out of its books due to cancellations, as the power sector faced problems with project executions and high fuel costs.
2. The market share of BHEL has dropped from about 70% in FY 12 to about 40-45% in FY12.
3. The sector faces a significant amount of overcapacity with BHEL being the leader of the pack. The power ministry also has revised its power capacity expansion downwards, which is worrying for BHEL.

Valuation: The stock is trading about 9.8 times FY 13 earnings which seems very cheap for a Bluechip like BHEL, however we can only expect an improvement in earnings if we witness a growth in its orderbook which looks unlikely atleast in H1 FY13. The likelihood of a further downside remains limited. The stock is an avoid for a short term investor  as the problems will take time to resolve but if one has a view of over an year,one can look to buy the stock as most of its issues are already priced in the stock.

Technically the stock looks weak as its consistently making lower highs and lower lows, however if 240 level holds we can see it a rally of about 15-20 Rs, trend reversal will only take place above 280-290 which represents very strong resistances for the stock.
A worrying pattern is one the chart is the head and shoulders pattern which the stock has made with a neckline at 244 , if this is taken out one can expect about 20 Rs correction in the stock price which represents the shoulder.

Budget preview

Budget Preview FY13

Government Concerns:

• High Inflation in Wholesale price index, food and fuel inflation
• Exponentially growing fiscal deficit
• Current account deficit is at elevated levels
• Rising crude price, skyrocketing around 110 $ a barrel is causing the government to take a major hit due to the fuel subsidy.
• Slowing economy plummeted growth during the year.

 

India has been battling inflation for the last 2 years. Since January 2010 up till November 2011 the wholesale price index inflation has been over 8% concerning the policy makers. Insufficient rains were the cause for excessive increase in the food prices.

Higher crude prices have crippled the economy in 2011. Crude has consistently been trading above 100$ a barrel for most part of the year.

Combining this with unprecedented rupee depreciation has not helped the cause. Crude prices have risen 40% in the last 4 months, which remains a major concern.

Interest Rates have been hiked 13 times in 19 months to curb inflation. Currently the repo rate stands at 8.5% and reverse repo stands at 7.5%.

This has led to a slowdown in the economy as cost to raise capital gets more expensive. The, RBI has downwardly revised GDP growth projections for fiscal 2011-12 to 7.6% on account of slackened investment demand, stalled project execution, downward risks emanating from shaky global economics and concerns about inflation and rising interest rates eating into demand for assets fuelled by borrowed money.

However, a silver lining in the cloud being that the RBI has hinted at a reversal in policy stance by saying the likelihood of a hike in December is ‘relatively low’, given the need to balance concerns about persistent inflation and moderating growth.

In addition, RBI expects inflationary pressures to subside in December and continue on that trajectory into 2012-13, based on normal south-west monsoon and first advance estimates that suggest a record kharif production.

Possible Implementations:

Higher tariff's on personal diesel vehicles: Diesel cars, which were about 23% of the overall car market in 2005-06 , now command close to a 40% share, and this is rising rapidly. Their popularity is largely driven by the controlled price of the fuel, which many sections of the government are opposed to as diesel car owners are seen as benefiting from the subsidy directed to keep public and goods transport costs lower.

Petroleum minister jaipal reddy has approached the finance minstry to impose tax on personal diesel vehicles as the oil companies continue to bleed severely due to the diesel subsidy.

The tax difference between the low end and the high end diesel car remains unclear, however we may see an increase in the tariff's in both the segment.

Income tax exemption limit may be set between Rs 2- 3 lakh:

Prior to the budget the MP panel are likely to revise the income tax exemption limit between Rs 2- 3 lacs and tax break on investments upto Rs 2 lakhs.

This would be a great relief as the nation suffers from high inflation, thereby stripping their purchasing power parity.

Members also felt that the total tax saving deduction limit, which include investment in provident fund, life insurance, children education and infrastructure bonds, should be raised to Rs 2.5 lakh from Rs 1.2 lakh.

Implementation of the Direct tax code bill: The direct tax is to be implemented for 1 April 2012.

Features of the Direct Taxes Code bill

• Common threshold income tax exemption limit for men and women proposed at Rs. 3 lakh per annum (proposed), up from Rs. 1.8 lakh
• 10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh
• Tax burden at highest level will come down by Rs. 41,040 annually
• Proposal to raise tax exemption for senior citizens to Rs. 2.5 lakh from Rs. 2.4 lakh currently.
• Corporate tax to remain at 30 per cent but without surcharge and cess
• MAT to be 20 per cent of book profit, up from 18.5 per cent
• Proposal to levy dividend distribution tax at 15 per cent
• Exemption for investment in approved funds and insurance schemes proposed at Rs. 1.5 lakh annually, against Rs. 1.2 lakh currently
• Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act
• Once enacted, DTC will replace archaic Income Tax Act.
• However, many provisions in Income Tax Act will be a part of DTC as well.
• FBT will be charged to the employee rather than the employer.
  

 

Industry wishlist:

Infrastructure: The sector wants the government to stick to the plans of heavy investing in the sector.The government had laid out plans to invest one trillion dollars in the course of the next five years, out of which around half of it comes from private firms, however,with a slowing economy, high interest rates and more importantly delayed decision making, infra projects and infra companies face an uncertain future.

The government should increase spending in development under various development schemes.

Banking: Top demands include security transaction tax (STT) reduction and tax exemptions for non-performing assets (NPAs), the banks have hit in sectors like aviation, power, textile etc, currently the tax on NPA's is at 7.5%.Bankers want more diversion of domestic savings in to equity markets and transactions should be simplified as well as they want higher deposits in the banking system.

Automobile: The automobile sector is against extra tax on diesel vehicles as it could plummet the sales of diesel cars. Instead they want the government to increase the price of diesel as diesel cars contibute about 15% of the total diesel consumed.This step would be negative for Tata Motors and M&M. R&D benefits could be provided to the sector to be extended to attract incremental investments in the sector.

Information technology: IT sector finds that from an investment perspective, infrastructure, education and skill building are the areas which require investment because the industry requires talent and requires investment in infrastructure.

Retail: The retail sector hopes the Budget this year brings in pricing policies and taxation schemes which benefit the textile sector.FDI in single brand segment is already benefitting the sector and 100% FDI in multi brand retail segment would be a welcomed initiative. In the textile sector, the probability of extending the TUF (Technology Upgradation Fund) Scheme is high. This will surely boost the cost effectiveness, productivity and the quality of garments for the future.

Real estate: The sector demands for setting up of a real estate regulator to ensure fair play and transparency in the industry and protection of consumer interests. The main idea behind having a regulator is to create a level-playing field.The government should provide appropriate subsidies to the builders and help in lowering carbon emissions. On the other hand the consumers should also be given reduction in stamp duty for opting for green development.

Power: Power sector wants benefit in terms of relief in the service tax.

There is a severe shortage in terms of the investments.But even the more serious problem is of under investment in the transmission and distribution (T&D) sector. The transmission lines are loaded 90% as against the world standard of 60-65%, allocation of funds in transmission will benefit the sector.Non availabilty on coal along with subsidy on power prices is causing a severe distress in the sector.

Healthcare:India is producing anywhere around 25,000 doctors and the supply needs to be doubled to 50,000 to meet the current demands. So we actually need to modify the rules of creation for medical schools and other paramedical facilities.Healthcare allocation this Budget needs to atleast double of what it was last time, which was Rs 26,000

My view on the Markets

Today, was a good day for the markets as we came out of a 14 month channel and closed above it, however telco's except Bharti and Idea got hit. Supreme Court will investigate Chidambaram's role in the 2G scam, we can see update on that on Saturday, If we get a negative news in might have an impact on the markets.

We need to trade on low volumes and need to be stock specific, and need to keep booking profits on every rise, markets are critically poised, some more momentum and we can easily see 5400, however stop need to get tighter, my new stop for tomorrow is 5210.

Go long with a very tight stoploss

One can go long on the Nifty, at current levels, keeping a tight stop of 5180, for a target of 5400, markets are over bought and may continue to remain overbought, If we open positive we will come out of the 14 month channel, and we will see some short covering, however it is best to play high beta, and to be stock specific.
I do feel that we are in an intermediate uptrend, and markets may continue to surprise us.

The Inevitable

As predicted by me on Friday that it was time to build shorts in sectors like :The Bank Nifty , Infra  Metals, Capital goods. Let us see how the leaders in the segment have preformed

Bank Nifty- Axis bank down 4.8% , Icici down 4.1% 

Infra: JP Associates close to 7% GMR close to 5.5%,L&T down 5.52% 

Capital goods: BHEL down over 10% ,Crompton over 8%

Metals: Sterlite down close to 7%,Tata steel down close to 4% , Hindalco down 5%

Shorting Candidates

The Nifty has moved almost 13% in last 20 trading sessions. The likely hood of a correction is very high.. Lets see which are the best candidates for building shorts in the market

1) The Bank Nifty has moved 23.2% which gives us a β of 1.8

2) Infra has moved 22.3% giving us β of 1.72

3) Metals has moved 25.8% giving us β of 1.98

4) Capital goods has moved 28.2% giving us β of 2.17

If the markets have to correct we will see a correction in the above. With the above leading the pack

Time to go short???

We are in a downtrending channel for a year now. I have'nt  been recommending any longs because of the risk reward since touched 5050.We got a trigger yesterday, a 50bps CRR cut which catalysed the rally, however we should be aware that we are heading to a strong resistance @ 5240 levels. This rally has to loose steam, its is just not possible to hit another 300 points in next 5-7 trading sessions. We are overbought, and if we had to go higher we need a consolidation. We managed to cross 200 dema which itself is a resistance.
I strongly advice to book profits and avoid taking long positions in this market. If we correct around 250 points and stay above and consolidate above 4875 then we can expect to go higher.
This rally is too good to be True..
We can build small short positions in the market around 5200 and above, say PUTS of Feb and March series..

We will have triggers from the UP elections , Budget and a likelyhood of an interest rate cut , in a couple of months.

A View on Indian currency

Had written this 2 days ago, @ work, it was useful as the currency fel more than 2 %

Over the last few months we have seen rupee depreciating from 43 levels to 54.30 which was the high recently, there are a lot of reason for this a few macro economic factors like :

Interest Rate Differentials

Large fiscal deficit,

Inflation

Global factors like euro zone crisis,because of which dollar has emerged as the strongest currency, However the currency has quickly bounced back to sub 51 levels, in a short span of time.

A few reason for this appreciation in Rupee:

1. RBI intervention to control falling rupee ( we had spent 15 billion USD to strengthen currency,which is almost 5% of our reserves) 

2. Hiking Non Resident External (NRE) deposit from 3 to 9.5% which has led to $9 billion Inflow (annual NRE flow is $3bn)

3.FDI in single brand retail approved.

4.Hiking Import duty on gold from 300Rs/10 gm to 3% of the total Imports, which is why rupee has gone below 51 today.

As inflation is at a 7.47% for december, which is at a 24month low, the RBI can be tempted to cut CRR and going forward the Interest rates, which will bring huge FII inflows an strengthen currency further.

I expect rupee to go to 50.5 within next few days and consolidate at levels between 49-50.5 for rest of the year.

COAL INDIA

COAL INDIA looks very weak right now, one can but puts @ strike 340 for targets of 330 and 325...

ESSAR OIL

ESSAR OIL looks weak one can go short at the current market price, with a target of 55 with a stop loss of Rs 59.5 

SOME MORE PICKS

SHORT GAIL

Buy PUTS strike 380 target 360
STOP LOSS  380

TOMORROW"S PICKS

I am Bullish on JP Associates, buy call strike price 60, expect targets of 65  to 70 very quickly (maybe in 2 days) stop loss 57.2)

INFOSYS DECIMATED!!!!

Today we had the result announcement of infosys .The earnings were better than expected but the companies has cut is estimated profits for the fourth quarters and weaker earnings in the next quarter. The market reacted and stock was down 8.5% today, i dont see the stock falling alot from here maybe 2% to 2500, but will not advice shorts rollover for tomorrow. The DAX is up nearly more than 1% our markets may react to that tomorrow, so square of your short is the advice.
IT made good money for us, I enjoyed beating the stock, already beaten blue and black.

INDIAN EQUITY MARKETS

Today was a strong day for equity markets.  We rallies more than 2% today, a relief for the markets as it inched and closed above its resistance level. I see  the markets  rally  another 250 points.I have a target of 5050,in the nifty.We might see some selling pressure, but i am positive for a six months horizon.

Ashutosh Mishra
Technical analyst
Mob-+919743374152