MARKET OUTLOOK
Dear Investor,
Perception is Everything
"When the fist of fundamentals meets the face of technicals, the patient usually falls down," I announced in my typically hyperbolic fashion as were trading live in our chat room on Friday. The IIP, growth rate numbers had printed much hotter than individual company industry news and the market moved sharply higher taking Sensex from near 16,000 to 17,000 levels in 3 trading sessions.
The key question facing the investors in the last one month was - trade it or fade it? as the markets were range bound between 15,000 – 17,000 for the last 7 months. Markets started taking cues from global markets in its movement on daily basis, which started experiencing bad news after 11-month rally. Also supported by the history of Sensex, markets always experienced pre-budget rallies and went down post-budget.
Though technically, charts shows a clear bounce in the immediate term, but decision to go ahead was sting by analysts short-term bearish call on the media. Some analysts stated that price had hit technical resistance and was unlikely to go much higher. I had already taken out a quick 10 stocks out to trade. In the first few minutes of budgetary session, there started some action in all of stocks, and many started to take fresh positions on my picks. I took the opposite point of view believing that Sensex could rally more as d-day came nearer. In the end I turned out to be right as markets rallied for 1000 points in 3-sessions and ironically enough retracing almost all fall in the last one month.
I share this little vignette not to gloat about my forecasting skills, but rather to point out a trading truth I've learned the hard way - price is not everything. In a world of charts and indicators and support and resistance levels we tend to venerate price activity above all else.
But price is often not the master, but rather the slave to news.
Technicians love to point out the multitude of times when news fails to move the price in the expected direction. Certainly news well anticipated will have minimal impact on price, as market will often adjust ahead of time to the data. However, when the news is unexpected it tends to have a meaningful impact on price action that does not get captured in the first five minutes of trade.
Financial markets are vast and it takes some time to change people's attitudes. As traders that's all we do - we trade perception. Ironically enough there are plenty of intelligent, well reasoned voices that argue that budgetary outcome were suspect. And they may ultimately they may be proven correct.
In stock markets we trade perception and perception is driven by newflows and priceflow. That's why as traders we try to be complete mercenaries, holding allegiance to neither technicals nor fundamentals and only act when we see an alignment in both.
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In my last outlook, "Technically, markets went into oversold position and should retrace to atleast 5000 levels on Nifty…Though the rally in IT & Auto sector that started in early March'09 has ended, there are rallies in other sector like CD, Banks, Power, which can put the index in range bound or even above 5000 for sometime to come."
Just as expected markets bounced back after touching low at 15650. Since then markets moved between a narrow range of 15800-16300 for 4 weeks, but later pushed to above 17000 levels on positive budget.
Though markets entered into overbought position with this week's rally, its unconfirmed to call peak of the rally.
Technically, there exists a divergence between a/d ratio and market movement, which only indicates that market cannot sustain at these levels. Markets could be range bound for some more time atmost till the first week of next month, and should experience the much awaited correction.
Alternatively, Sensex might rally further in line with foreign markets(explained below) for some more time and form a new high since 2008 crash.
Either of the alternatives, sensex is in the last stages of extended pullback rally or end of the rally that started at 8000 levels. We recommend investors to maintain caution and trade stock specific.
In my last outlook, we recommended, "Short term investors can buy in defensive sectors like Pharma & FMCG. Buy Index stocks for short term profits during pullback rallies." The strategy has paid off with a return of 5-15% in Pharma & Index stocks.
Markets started its rally from 8047 levels on March 6th, and made the peak at 17790 level i.e., a rise of 9743 points or 121.08% rise. The target levels for correction is placed between 12000-13000 levels and would take few months to bottom out.
Investors should take the opportunity to build up positions for the longterm. The rally that follows the correction will be intense and large, which would recover the most losses that incurred in 2008. Till then retail investors and longterm investors are advised to wait on the sidelines.
Let us take a look at some of the key issues.
CURRENCY- Rupee/Dollar
In my last outlook, "The rupee is expected to weaken further."
Rupee made its top at 45.20(intraday) in January'10 and rallied in the next four weeks to 46.8, which is the beginning of the longtterm rally(rupee weakness/depreciati on).
Though rupee has moved back to 45.45, it is only a short term correction, before a major upside swing.
We assume that the correction in dollar has ended and started its rally against the global currencies. As shown in my previous outlooks, we assume that the multi-year rally towards Rs. 60/dollar has just begun.
Bottomline: The rupee is expected to weaken further.
GOLD
Bottomline: Our downside target towards $680 remains intact.
Gold started its downtrend on 3rd Dec'09, when prices turned down after pushing to $1227.20. It made its first leg of interim low at $1043.8/ounce on 5th Feb'10. As in last few outlooks, we have been saying that, Gold continues to be inversely correlated with Dollar. Gold bounced back to $1145.25 on 3rd March, it is when Dollar moved sideways.
If our assessment is correct, markets are experiencing "All-the-Same market scenario" (this type of scenario prevailed between Oct, 2008 – Mar,2009), suggests that all markets are on the verge of another phase of decline, including gold and silver. Most markets should start accelerating lower after few trading sessions.
A break of 5th February's $1043.80 low basis spot will indicate that the next phase lower is underway in gold too, with the $950-$970 as next short term support levels, or a close beneath $1080 confirms that the Gold trend to a new low is already underway.
Bottomline: Our downside target towards $680 remains intact.
USA MARKETS
In my last outlook, "If a bounce develops in 2-3 days it should be good opportunity to get out ahead of larger decline.."
Dow took support at 8877.9 levels moved to 9544 levels which met our minimum target levels from March lows. Dow continued its pullback rally and made its top at 10729.9 on 19th Jan'10 and pulled down thereafter erasing the some of the gains.
In Dec,2008 outlook, "On the crisis front, months ahead from now, we would witness few hundreds of banks falling into clutches of bankruptcy". As per records till 12th March'10, 185 banks in US have recorded bankruptcy. We firmly believe few more hundreds will follow the suit.
Dow made is double top formation in its previous bear market rallies Jan-Mar'2000 & July-Oct'2007, with NASDAQ outperforming Dow and S&P 500. The previous double tops led to declines of 51% & 58% respectively. We think this current decline will be even bigger.
If the market continues to rise, the upper target lies at 11600-11700 levels. Though the upper target is another 900 points from the current level, anyone going long on the market should be ahead of the time and place strict stop-loss and the such level if achieved should be used to place short positions.
I think our strategy- buying or selling at perceived extremes – is the best approach.
Investors holding positions should exit all long positions and enter into short positions on every rise. The safest of all would be going short on markets or buy Inverse Index Funds.
Bottomline: "Though there might be some more upside from the current levels, we recommend traders to play cautiously and investors to exit on every rise"
INDIAN MARKETS
However, given that markets tend to experience fall for few more weeks & months to come, it should be used as an opportunity to build longterm positions in sectors like Infrastructure, Banking, Automobile & Pharma.
Since the markets entered into correction phase ending the 12-month rally that started on 6th March, its highly recommended investors to move out of aggressive stocks and readjust the portfolio in defensive like Pharma, FMCG, Agri-based & consumer durables. Fresh investors should desist from entering the markets at current levels.
Inflation moved to 10%+ levels, which might push RBI to hike interest rates. Any such move would only impact bond yields. If the yields rise, return falls in GILT/ Income Funds. Hence we recommend investors to avoid investments in Long term Debt funds for the timebeing.
OUTLOOK
The market's current rally looks shaky and might take trigger from global markets for correction. Try to exit long positions by 20% of portfolio on every rise of 100 points on Nifty or 300 points on Sensex.
STRATEGY
Longterm investors are recommended not build fresh positions until the markets go below 13000 level. Short term investors can buy in defensive sectors like Pharma & FMCG.
The ideal portfolio would be 90% in short term Debt funds & 10% in Equity(30%- Largecap, 30%- Banking & Pharma, 40% -Mid& Small cap stocks).
Disclaimer: The above said comments & recommendations are of my personal opinion and 
