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Monday, April 09, 2007
Sunday, April 08, 2007
Index Outlook
Sensex (12856.1)
The rather exaggerated response to the RBI's move last Monday stresses the fact that the path of least resistance is currently downwards. Another spunky fight back was required to pull Sensex back from the brink. What is worrying at this juncture is the underperformance of our equity markets vis-à-vis the rest of its global peers in March.
Autos took it on the chin and the BSE auto index is now headed towards its June lows. Healthcare and metals can offer refuge in these choppy times. Mid-cap and small-cap stocks are in a state of hibernation and are best avoided.
A cautionary stance adopted by market participants ahead of the earnings season was reflected in the low volumes recorded last week. FIIs were selling in the cash segment last week. But they have been net sellers in the derivatives segment on days that the market fell and net buyers on the days that the market recovered. Such myopic activity reflects the general air of indecision prevalent in the market.
This ambivalent air is echoed in the daily momentum indicators as well. The weekly momentum is showing the first signs of cracking. The 14-week RSI is positioned at 46 and the 10-week ROC is beginning to move deeper in to the negative. The 10-month ROC will be an interesting oscillator to track over the next two months. It is poised above the zero line. This indicator has not dipped in to the negative since 2003!
Sensex reversed from a low of 12425 last week. The 200-day moving average has once more come in handy in supporting the index. The e-wave counts are unaltered. The medium term outlook stays negative as long as Sensex stays below 13800. The short-term trend is currently sideways. The second wave from the top of 14723 could be evolving in to a flat pattern.
The next minor wave of this flat can take Sensex higher to 13086 or 13495 next week. Any up-move will struggle to cross the 13500-level, as a cluster of technical resistances is present there. The outlook for the week will, however, turn negative if Sensex fails to rally past 13000. The downward targets in this scenario would be at 12359 and then 11992.
Investors can bide their time till the market makes up its mind about Infosys' earnings and guidance. Traders should stick to intra day trades.
Nifty reversed from a low of 3617 last Monday. The recovery thence has not been strong enough to make the short-term outlook positive. Wait for a rally past 3800 before playing long with a target of 3820 and then 3946. Failure to get past 3800 will be a cue to play short with a stop at 3825. The downward targets would be 3594 and then 3486.
The important resistance that investors need to watch out for is around 3900.
Global Cues
Equities across the globe had a splendid week, with many of the indices leaving the woes of February far behind and hitting new highs. The out-performers included many Asian markets such as China, South Korea, Indonesia and Taiwan. India was at the bottom of the heap with Sri Lanka and Pakistan. Neighbourly solidarity!
Nymex light crude could not get past the resistance at $68 and eased down towards $64 on the resolution of the Iran-UK standoff. The long-term average present at $63 would now be closely watched. Fall below this line can take the price to $60.5. The medium term outlook, however, continues to be positive.
Nifty (3752)
Trader's Corner
There are many animals that stalk the corridors of the stock markets. Among the four-legged ones, we have the bull, cat, dog and even stags. But none is as dreaded or as unwelcome as the bear. For bears personify periods of great distress when the portfolio whittles down to less than half of its original worth.
The origin of the word `bear' in the stock market parlance can be traced historically to London jobbers who sold bearskins before they had received it, hoping to profit from the difference between the sale price and the near-future purchase price — akin to short-selling today. Investopedia defines a bear market as a prolonged period in which investment prices fall, accompanied by widespread pessimism.
There is no strict limit for the magnitude of fall that should be recorded before a bear phase can be pinpointed. But the consensus veers towards a drop of over 20 per cent from a long-term peak that prolongs for more than two months.
Falls that are less than 20 per cent would then be called a bull market correction. If we go by this definition, the correction of May and June 2006 would meet the percentage-of-drop criteria but it would fall short on the time criteria as it lasted less than two months. The correction witnessed since February 2007 is nearing the two months deadline, but the correction has been only 16 per cent from the peak of 14723.
So going by conventional parameters, we are not in a bear market yet. But even if we are, is it as bad as it is made out to be? As the saying goes, all good things come to an end. Investors should accept the fact that bear markets are part of stock market cycles. The value investors should welcome a bear market when the mood is absolutely pessimistic and the stocks have no takers. The blue chips can be picked up at attractive valuations in such periods of prolonged down trend.
Investors who dislike being in a market when the stock prices keep sliding lower can reduce their exposure to the stock markets and channel their money towards fixed income securities instead. Traders would be the least fazed by the onset of a prolonged down trend. All they would have to do is to change their strategy from buy-in-dips to sell-on ralliesDeciphering the analyst's jargon
When analysts recommend stocks, they often use such terms as `overweight', `underweight', `outperformer', `neutral' etc. I thought that you could only buy, sell or hold a stock. What do these terms mean?
They are often just investment-speak for a recommendation to buy, sell or hold a stock. But there are subtle nuances to each term, which can convey an analyst's opinion on the returns expected or risks attached to a stock.
To start with, analysts may use different terms to convey the same view on a stock. Therefore, an `accumulate' rating on a stock often means the same as a `buy'. A `book profits' suggestion means the same as a simple `sell'. A `book profits' is usually suggested in the place of a sell, when the analyst has already recommended buying at a lower price and the stock has run up subsequently, leaving you with profits. In contrast, a `cut losses' recommendation could be an admission of guilt! The message it sends out is that the earlier `buy' recommendation has not worked and you had better exit while the going is good!
Standard terminology
A `reduce' recommendation asks you to trim your exposure to a specific stock in your portfolio; it is generally a milder form of an unequivocal `sell' (which means that the stock is expected to drop like a stone). Every brokerage or advisory house usually adopts standard terminology to convey its views on stocks and sectors and this is applied uniformly across the stocks and sectors that it covers. A basic `buy', `sell' or `hold' recommendation conveys whether the analyst expects the stock to rise, fall or trade sideways from its current price. A stock may appreciate 15 per cent from a price at which you bought it; but will you be happy with the pick, if the Sensex rises by 20 per cent over the same period? Maybe not. If you own a portfolio of stocks, you would probably like most of your stocks to do better than the market. This is why ratings such as `outperformer', `overweight' or `neutral' are used to add on another layer of information for those who own an entire portfolio — they talk about the stock's performance relative to the market as a whole. An `outperformer' rating on a stock or sector conveys the view that the stock or sector will do better than the market in future. Similarly, an `underperformer' rating suggests that the stock may lag the market.
Do note that you could lose money on a stock that is an `outperformer', as the rating does not convey absolute returns.
If the Sensex slides by 16 per cent over a month, a stock that was battered by only 14 per cent would be an `outperformer'... but you would not have made any money on it! Similarly, `overweight' or `underweight' ratings tell you about the exposure that you should take to a specific stock or sector in your portfolio, relative to an index.
`Neutral' rating
If an analyst puts an `overweight' rating on Reliance Industries, he is asking you to take a larger exposure in the stock than it has in the benchmark. You could probably choose to invest 15 per cent of your money in the stock, though it has only an 11.5 per cent weight in the Sensex basket.
If recommendations such as `outperformer' and `overweight' convey a strong positive view on a stock, a `neutral' rating can mean several things. In the strict sense of the term, a `neutral' rating is an indication that, though the analyst in not wildly enthusiastic about the company's prospects, he believes that it will perform in line with the markets; therefore the stock is worth holding. However, a `neutral' rating can also convey that an analyst has turned ambiguous about the company's prospects.
`Neutral', in some cases, could also be a euphemism for an outright sell recommendation! To interpret a neutral rating, it may be best to check the ratings on the stock before the latest recommendation. It is a negative sign if the view on the stock has turned from a `buy' to a neutral and a positive one if the view has turned from `sell' to `neutral'.
We hope we've covered the whole gamut of investment terms that you've come across while researching stocks. Hope this helps you navigate the minefield of stock market investments better!
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