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Thursday, May 27, 2010
How long and deep the ongoing correction will last?
One of the leading financial services and research firm, Morgan Stanley said its operating assumption is that the ongoing fall in the market is a correction of the bull market that began in March 2009. Indeed, given where the growth cycle and equity valuations are, it seems to be a reasonable assumption. What is history`s guidance on how long and deep the ongoing correction will last?
Morgan Stanley goes back 17 years of market (BSE Sensex) history to assimilate data on bull market corrections.
Here are the observations from history:
a) There have been four bull markets over the past 17 years (including the current one), and within those bull market there have been 30 corrections of 5% or more (including the current one).
b) The average fall during these corrections has been 13%, and the average duration of these corrections is 17 days. The worst fall (May-June 2006) was 31%, whereas the longest fall excluding the ongoing correction (July to September 1993) lasted 28 days. The standard deviation from the average fall is 5.6%.
c) The average realized inter-day volatility during corrections is 1.6% slightly more than the average during rallies.
d) The subsequent rally post the correction produces an average return of 31% over 48 days. e) India has historically underperformed emerging markets during corrections and outperformed on rallies, save for a couple of occasions.
f) It is not that FIIs are always sellers during corrections. They have been net sellers in 12 out of the 30 corrections (including the current one). Indeed, on a cumulative basis, FIIs have sold USD 6.6 billion of stocks over the past 30 corrections. FIIs have sold USD 515 million of stock in the current correction.
g) The BSE Sensex has fallen below its 200 DMA only on two occasions during these 30 corrections, i.e., in 2004 and 2006. Over the past 30 years, the market has penetrated its 200 DMA four times during a bull market with an average fall of 9.3% below the 200 DMA with the average time spent below the 200DMA being 46 days (excluding the ongoing correction).
h) There is no clear cut message from the valuations at which the market troughs, i.e., the valuation range is 11x trailing earnings to 45 times, with the average over 30 corrections being 20 times trailing earnings. We are currently at 21 times trailing earnings.
About the ongoing correction:
a) It is the longest bull market correction since FIIs starting investing money in India. This correction has already 33 days old exceeding the previous longest correction by five days.
b) The fall is in line with the average and ranks 15th in the pecking order of corrections. If the market finds a floor at one standard deviation below the average fall of the past 17 years, it could take the BSE Sensex to 14,800.
c) This is only fifth occasion in 30 years that the Sensex has fallen below its 200 DMA. As of yesterday`s close, the BSE Sensex is 4.5% below the 200 DMA and the index has spent five days below the 200 DMA. If this fall below 200 DMA matches the average of the previous fall, the Sensex will trough at 15,200.
Conclusion:
The domestic macro is strong, and the government continues to push reform (the recent gas price increase is an example). The 3G auction proceeds imply that the government`s fiscal deficit targets will be met, even exceeded, easing the pressure on the 10-year bond yield - setting the road for a bullish flattening of the yield curve. Earnings continue to be strong, with two out of three companies surprising positively in the ongoing earnings season. The fall in crude oil prices increases the chances of a decontrol of auto fuel prices. The settlement of the Ambani family dispute should also be a positive for the market, in its view.
India`s defensive behavior through the latest bout of global turmoil seems to be driven by a combination of an improving policy environment, resilient domestic growth, healthy corporate balance sheets, an improving government balance sheet and a central bank that has not been hesitant to raise rates to ward off inflation threats. Thus, the logic that India should have suffered more than the average of emerging markets, given how its external deficit is funded, has been defied, and this has come as a surprise to it. Only if the European crisis deepens further (not its base case) will India struggle to retain its defensive response to this global development, in its view. Its view is that unless this is the start of a new bear market, the ongoing correction is a buying opportunity. Its base case is that this is not the start of a new bear market.
Nifty reclaims 5K
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Global signals
European shares extended gains on Thursday tracking gains from Asian markets and after China denied that it was looking to cut its holdings of Euro zone sovereign debt. As of writing the report, FTSE 100 was trading 2.05% higher.
All the major Asian indices closed in the positive territory. Japan's Nikkei average came off a six-month low to jump 1.2%, its best one-day performance in two weeks. SGX Nifty closed 95 points higher.
The US stock index futures signal strong rebound on the Wall Street. Investors keep an eye on second reading of first-quarter US gross domestic product (GDP) growth.
Indian indices
Bulls continued to dominate the market on the second consecutive day as key benchmark index Nifty regained its psychological levels of 5000. Heavy short covering owing to May F&O expiry, strong global cues, and buying in banking, auto and oil & gas stocks helped the indices to recover heavy losses suffered in Tuesday's (May 25, 2010) session.
Weak global cues on the report that China was looking to cut its holdings in Euro zone sovereign debt and expiry of May F&O contracts set the pitch for an unappetising start. The Sensex opened 23 points higher and soon turned negative and lingered in red for brief part of the morning trade to touch the day's low - 57 points lower. However, recovery in Asian markets after China denied the report about cutting its Euro zone debt, helped the Sensex to cut its initial losses and rebound into green. The Sensex extended gains owing to short covering and buying in index heavyweights. The strong opening of European markets also supported the rally that helped the Sensex to hit the day's high of 16694 and the Nifty to regain the crucial 5000 levels. At closing, the Sensex ended with gains of 278 points at 16,666 while the Nifty shut at 5003, up 86 points.
Market sentiment
The market breadth was positive as advancing stocks outpaced declining stocks on second straight session. Of the 2,882 stocks traded on the BSE, 1,662 stocks advanced, whereas 1,108 stocks declined. Hundred and twelve stocks closed unchanged.
Sectoral & stock screening
Like yesterday (May 26, 2010), all the 13 sectoral indices on the BSE closed on a positive note. The BSE Bankex led the pack of gainers, with gains of 2.55%, followed by BSE Auto that surged by 2.10% and BSE Oil&Gas that added 2.09%. Remaining indices closed in the range of 0.53%-1.70% higher.
On 'A' group stocks' front; The star stock of the day was Areva T&D that was up by 11.91%, followed by REI Agro that surged 8.60% and Apollo Hospitals that rose by 8.02% on stock split plan. On other hand, Adani Enterprises slid the most by 6.47% after block deal, followed by Max India that fell by 3.92% and Piramal Healthcare that shed 3.86%.
Viewing volumes
Anil Dhirubhai Ambani Group firm - Reliance Natural Resources saw highest trading with over 0.90 crore shares changing hands on the BSE, followed by diversified conglomerate - Adani Enterprises (0.55 crore shares), India's largest developer - Unitech (0.49 crore shares), Iron and steel maker - Sesa Goa (0.49 crore shares) and India's leading steel maker - Tata Steel (0.42 crore share).
Turnover spurts as traders roll over positions to June 2010 series
Nifty June 2010 futures at discount to spot price
Nifty June 2010 futures were at 4,985, at a discount of 18.10 points compared to spot closing of 5,003.10. Turnover in NSE's futures & options (F&O) segment jumped to Rs 1,54,507.23 crore from Rs 1,32,052.82 crore on Wednesday, 26 May 2010 as traders rolled over positions in the derivatives segment from May 2010 series to June 2010 series ahead of the expiry of the near-month May 2010 contracts today, 27 May 2010.
Infosys Technologies June 2010 futures were at discount at 2645 compared to the spot closing of 2655.
Suzlon Energy June 2010 futures were near spot price at 58.50 compared to the spot closing of 58.25.
Reliance Industries June 2010 futures were at premium at 1030.40 compared to the spot closing of 1024.55.
In the cash market, the S&P CNX Nifty rose 85.70 points or 1.74% at 5,003.10.
Asian stocks rise further
Markets rise for a second day on risk appetite, commodity prices
Asian stock markets added impressive gains for a second day, notwithstanding a late sell off in the US markets overnight as strong commodity prices and a continued recovery in the Euro supported the sentiments. The markets were also given a life by optimistic US economic data and very positive cues from the US stock futures throughout the day. The single currency added sharp gains on reports stating China would not be reviewing its euro holdings, ending a speculation that had riffed the markets in the last few days as the Euro tumbled to four year lows against the dollar.
The Australian market rose on miners as speculation that the Australian Government might amend its super tax proposals, as well as the smart rally in local currency against the US dollar supported the sentiments. The benchmark S&P/ASX200 Index advanced 72.00 points, or 1.67% and closed at 4,379, while the All-Ordinaries Index ended at 4,399, representing a gain of 68.70 points, or 1.59%.
On the economic front, data released by the Australian Bureau of Statistics revealed that capital spending by private sector companies in the country recorded a small decrease between January and March. Further, the report noted that most companies have also toned down their investment spending plans for the rest of the financial year, suggesting that the economic recovery may be less robust than previously thought. As per the report, private sector industries' capital expenditure between January and March fell a seasonally adjusted 0.2% compared to the preceding quarter. It follows a 6.1% increase in the previous quarter. Total capital expenditure amounted to A$27.70 billion during the three-month period.
The Japanese stock market ended in positive territory, lifted by exporters in late trading session as the local currency, yen, eased after sharp gains in the last session on signs of stability in the Euro zone. Exporters led the gains as a weaker yen boosts export realizations from abroad when converted into local currency. The benchmark Nikkei 225 Index added 117.06 points, or 1.2%, to 9640 while the broader Topix index of all First Section issues was up 10.89 points, or 1.3%, to 870.
On the economic front, a report released by the Ministry of Finance in Japan revealed that the country registered a merchandise trade surplus of 742.262 billion yen in April, topping forecasts for a surplus of 700.5 billion yen, following 948.9 billion yen surplus recorded in March. On an annual basis, trade surplus was up by 1,415.2% over surplus of 48.988 billion yen reported in the same month last year. The report further revealed that exports surged 40.4% on year to 5.889 trillion yen - beating forecasts for a 38.3% annual increase after jumping 43.5% in the previous month.
Chinese markets rose for a second day as markets sniffed the country's central bank delaying its monetary tightening campaign slightly given the recent turbulence in the global markets and seek an assessment of the Euro zone impact on the Chinese export demand. The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, climbed 30.13, or 1.2 percent, to 2,655.92 at the close. The CSI 300 Index rose 1.6% to 2,859.98. Concern that the government will step up measures to curb property speculation and government debt in Europe will prevent nations from bolstering their economies has dragged the Shanghai Composite down 19 percent this year.
In Mumbai, stocks were flying right from the start and heavy buying was seen in blue chips. The Sensex closed at 16677, up 289 points and the Nifty was at 5003, up 85 points, as per provisional data. Banks rose and the sentiments were seen getting stronger on reports of the monsoon reaching the Indian coasts in the next three-four days. The rebound in sensex from levels near 16000 earlier in the week also proved critical.
In other markets, Hang Seng in Hong Kong added 1.22% while Straits Times in Singapore rose1.62% while the TSEC in Taiwan moved up 1.06%
In commodities, crude oil rose sharply on tremendous risk appetite. July WTI gained $1.79 to $73.30 a barrel, hitting a high of $73.67 earlier in the electronic session. Dollar is unable to garner much of gains and trades above 1.2300 against the Euro. Gold hit highs near 1220 and eased as rising equities led to some profit selling.
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