Market Outlook

As indicated last week, this market is still looking very bullish in the short term. Although it might be difficult to find value in the large caps, one can definitely find some value in the midcap and small cap space. at the same time, one needs to be mindful of the fact that FII liquidity can further drive large cap prices. So large caps might be the best place to ride the short term momentum.

I still don’t find a bubble like situation in the market as many stocks in the small and midcap space are still languishing since June -July. As a matter of fact many stocks have gone down since July. This is unlike 2007 when each and every stock was moving up in a vertically! This makes the journey from 5000 to 6000 very different from the last time.

There is still a scope to find potential multibaggers primarily in the small cap area where stocks are still below the 500 crore market cap with PEs well below 10. So keep your eyes open and do ample research before you pick stocks in this area. It is very easy to land up with junk!

The first hurdle that needs to be crossed is the level of 5200 on NIFTY which can then propel the index towards 5400-5600 range. On the downside 4900 shall be the level to watch.

As far sectors go, I will still ride the old favourites in auto like Maruti and Tata Motors. In IT, the troika of Infy,TCS and Wipro show no signs of stopping while in Pharma Dr. Reddy and Ranbaxy still rule!

RIL might add some spark to the markets with its offer to buy Dutch  petrochem firm LyondellBasell. Read the story.

One doesn’t need to be a short term trader to make money in these markets.

Stock Watch – Jindal Saw, Jindal Steel and Power

I have been a big fan of Jindal stocks and have recommended them in the past. Stocks like JSW Steel, Jindal Saw and Jindal Steel and Power are making fresh moves and might trend higher from here. Keep an eye on these stocks and one can enter these stocks to ride the momentum.

Stock Ideas – Bharat Electronics

Bharat electronics has been a steady performer both in terms of fundamental performance as well as stock performance. The company is steadily growing at 15-20% range and benefits a lot from defence spending. The company is almost debt free and currently doing an EPS of 100. The stock is also trending up nicely and one can easily see 30%-40% appreciation on this stock in next one year. It is very likely that the stock takes a shot at its previous high of 2165 in the coming months.

Metals,Banking,Auto and IT back in focus

Metals stocks have resumed their uptrend after going through a severe correction. JSW Steel is back above 900 while Sterlite is knocking on the doors of 900 and might soon reach 950+. Hindalco too is moving up after correction.

Similarly, a stock like Hindustan Zinc which is play on Zinc, is rising steadily and is now close to 1000 levels.

Although these are high beta stocks, but it is evident now that the commodity cycle has turned again and we might see some momentum on these stocks in the near future.

IT sector is also defying gravity and is trending up. A stock like Wipro which I have been riding since 400 levels has moved to 650 levels in last 3-4 months giving a 60% return. TCS and Infosys also continue to shine and move upward. These stocks have definitely surprised a bit on the upside.

Auto stocks like Ashok Leyland,Tata motors and Maruti which I have been recommending for last few months also continue to give excellent returns. I now see the rally spreading to auto ancillary sector and there are some real gems in the sector that carry huge potential to be next multibaggers.

Banking is another sector which has shrugged off the interest rate fears and are moving up on momentum. it is very likely that market has priced in some interest rate hikes by the RBI in the near future.

At the same time, there have been many sectors like real estate and telecom that continue to drift down. Every rally is a chance to sell. It is very unlikely that these sectors shall begin their uptrends in a hurry.

If you are searching for value, you might find it in some small and mid caps. if you are searching for momentum, then it is better to stick to large caps and ride this liquidity driven uptrend.

Market Strategy

With the NIFTY trading close to 5000 levels, everybody is thinking of strategies to play this rally. There are many who missed buying in this correction because they were expecting 4300 on the NIFTY. The current uptrend might be fuelled by such players.

So if you are a momentum player, it is a good time to make some money. But if you are a value player, then it might make sense to cash out in this rally and sit tight till the next big correction happens.

We are getting out of our value portfolios as we are not finding good value and shifting to an overweight on momentum portfolios. You might have to indulge in a bit of sector rotation to play this momentum game. Also keep an eye on  precious metals like Gold and Silver which have been steadily rising.

Back above 5000 – where are we headed?

Would you be surprised if the markets touch 6000 and make an attempt at previous high in next 2-3 months? If you would be, then be ready for that surprise.

Would you be surprised if markets head back to 4300 in next 2-3 months?

The markets are at a point where they are poised to give big moves. If you ask which way- I’d say that 70% probability is on the upside while 30% is on the downside. So it makes sense to play for the bulls while covering your risks.

My prime reasons for beign bullish- I see a healthy scepticism about this rally. Most of the TV guys are still taking about a range or a negative bias. The historical trends (Oct-Jan) are in bulls’ favour. And the biggest of them all – the fall of dollar might bring in loads of money into the Indian markets. As rupee is in a clear uptrend against the dollar, I see rupee touching the levels of 43-44 in next 2-3 months. ( And RBI will allow that to happen!)

As an FII, you get the double advantage of equity gains plus the currency(rupee) appreciation.

This doesn’t mean that markets will go up in a straight line- we will witness some minor sell offs in between. I am keeping a close eye on the risks and there are couple of them which can change the game in next couple of months.

As far as stocks/sectors are concerned, my guess is that most of the good companies will participate in the upsides. At the same time, the bad ones will fall more during corrections. This might provide you with a good opportunity to reshuffle your portfolio and get out of the bad apples.

And as I always say, if you only look at rewards without looking at risks, you might again feel trapped by bulls in this rally. You’d be making a big mistake by filling your portfolio with junk small cap stocks just because they are making these wild moves in the short term. Just in case, you plan to trade them, then plan your exits in these.

Kwality Dairy- 25x in 10 months!

If you had a chance to see the chart of Kwality Dairy again, you’d have noticed that the stock has now run to 1100 levels!

From 40 odd levels in Jan 2009, this stock has multiplied more than 25 times in less than 1 year. This must be some sort of record even in Indian markets! This means that if you invested 1 lakh in the stock, you’d now be having 25 lakhs worth of stock.

This is an excellent example of how market trends work and how stock moves can go beyond all expectations!

Investing Principles by Charlie Munger

Charlie Munger is the partner of Warren Buffet and is considered by many to be the brain behind Buffet’s success. I found his investment principles which are worth reading.

Risk – All investment evaluations should begin by measuring risk, especially reputational

• Incorporate an appropriate margin of safety
• Avoid dealing with people of questionable character
• Insist upon proper compensation for risk assumed
• Always beware of inflation and interest rate exposures
• Avoid big mistakes; shun permanent capital loss
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Independence – “Only in fairy tales are emperors told they are naked”

• Objectivity and rationality require independence of thought
• Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
• Mimicking the herd invites regression to the mean (merely average performance)

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Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”

• Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
• More important than the will to win is the will to prepare
• Develop fluency in mental models from the major academic disciplines
• If you want to get smart, the question you have to keep asking is “why, why, why?”

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Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

• Stay within a well-defined circle of competence
• Identify and reconcile disconfirming evidence
• Resist the craving for false precision, false certainties, etc.
• Above all, never fool yourself, and remember that you are the easiest person to fool
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“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

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Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions

• Determine value apart from price; progress apart from activity; wealth apart from size
• It is better to remember the obvious than to grasp the esoteric
• Be a business analyst, not a market, macroeconomic, or security analyst
• Consider totality of risk and effect; look always at potential second order and higher level impacts
• Think forwards and backwards – Invert, always invert
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Allocation – Proper allocation of capital is an investor’s number one job

• Remember that highest and best use is always measured by the next best use (opportunity cost)
• Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
• Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven
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Patience – Resist the natural human bias to act

• “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
• Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
• Be alert for the arrival of luck
• Enjoy the process along with the proceeds, because the process is where you live
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Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction

• Be fearful when others are greedy, and greedy when others are fearful
• Opportunity doesn’t come often, so seize it when it comes
• Opportunity meeting the prepared mind; that’s the game
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Change – Live with change and accept unremovable complexity

• Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
• Continually challenge and willingly amend your “best-loved ideas”
• Recognize reality even when you don’t like it – especially when you don’t like it
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Focus – Keep things simple and remember what you set out to do

• Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
• Guard against the effects of hubris (arrogance) and boredom
• Don’t overlook the obvious by drowning in minutiae (the small details)
• Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
• Face your big troubles; don’t sweep them under the rug

Can we break 5200 on NIFTY?

Today’s rally was not entirely unexpected although the markets took their time in recapturing 4850 mark and then zooming ahead. The rally is looking promising and is making the way for 5200+ level on the NIFTY. This might be an early or premature call but bulls definitely have a upper hand and might want to prove a point. The biggest advantage now is that one can clearly define his or her downside risk and go long on this market.

I am still hoping that Oct-Dec rally actually plays out. It looked very doubtful when we corrected so sharply from 5200 levels to 4500 levels. Now conditions are looking much healthier after this deep correction.

In terms of sectors- banking has made a roaring comeback! Look how old favourites like ICICI, SBI, HDFC Bank etc. moved up. If NIFTY breaks 5200, this will be the sector to watch. From Allahabad bank to Yes bank to UCO bank, you will find many good stocks in this sector for short to medium term. at the same time, this sector is prone to a major sell off if RBI decides to hike interest rates as part of their monetary policy.

Auto stocks like Maruti and Ashok Leyland continue to hold promise and are steadily climbing up.

In midcaps, selected stocks like Dabur or Deccan chronicle are still climbing up nicely.

In IT, Satyam made a big move today and this might be the beginning of a journey towards 140-150 levels in next month or so.

In pharma, Lupin, Ranbaxy and Dr. Reddys has given decent returns in  past 2-3 months and continue to deliver.

In oil and gas, Gail and Cairn India are shwoing sustained momentum on the upside.

Lets closely watch the market action this week and see if we manage to close above 5000 on a weekly basis. That will be the beginning of final assault by the bulls.

I am spending most of my time in researching some mid cap ideas for the long haul.

Will this sharp recovery last?

Today’s recovery was largely unexpected by the bears. Infact, the NIFTY pulled back more than 130+ points from day’s low! As such volatility is found near market reversals, one has to very cautious. If such intraday volatility persists, one needs to be sceptical of building aggressive positions on the long side. This volatility might tempt you to trade but such trading can easily go wrong!

The only positive I see is that most of the market participants are still short on the market, so that might act as some cushion for the markets in the short term. 4800-4850 is the zone of resistance for the bulls.

Once this short covering is over and the volatility subsides, one needs to find stocks where real buying is happening. One such sector is auto where a stock like Ashok Leyland has continued to maintain a neat uptrend. Another sector is pharma where a stock like Dr. Reddy labs continue to climb higher.

It might look tempting to buy stocks like RCOM or Suzlon but there is nothing in their performance which indicates that the worst is over for such stocks.

Buy the dips or short the rallies?

Bulls come up the stairs while bears go out of the window! That’s what we have witnessed in the last few sessions. Gains for a few weeks have been erased in a few days. This is a classic bull market correction.

Technically, we have hit the supports of 4550 on the NIFTY and it is is very likely that we show some bounce from here. At the same time, if I am trading short term, I won’t see it is an opportunity to go long. I might see it as an opportunity to exit my dead stocks (real estate, telecom etc.).

We need a real sharp pull back above 4850-4900 in order for uptrend to resume again. Otherwise, this market can continue to slip or remain sideways. Watch for 4350 on the downside and 4850 on the upside.

Suzlon,RCOM and Unitech are good opportunities to sell on rallies. Same holds true for all ADAG stocks like Reliance Capital, Reliance Infra,Reliance power etc.

Value Investing Ideas

In one of my earlier posts, I had emphasised the fact that “value” and “momentum” style of investing can be complementary to each other. I have been sharing my philosophy regarding the “momentum style” on this blog for some time now. Now I have partnered with a good friend of mine to bring some “value investing” style of thinking to you. We intend to share our experiences and learning when it comes to value investing via www.indianvalueinvestor.wordpress.com. I hope this will allow you to combine two different styles of investments in your portfolios and achieve superior risk adjusted returns.