Budget Analysis: CNX500 Gainers from 30 May 2014 lows

Nifty index made low of 7118 on 30 May 2014 and gained 7% to close at 7751 on 4 Jul 2014.

Budget is on 10th July and the gainers and losers from our CNX500 constituents can give us insights into budget expectations.

Also it will tell us what is powering the current rally.

1.  From Top 50, Textile sector has 6 stocks with Welspun, Alok Ind, Trident gaining about 45%. Textile stocks as a whole gained around 27%. 

     Textile stocks always gain before Budget but this time the gain is unusually high as are expectations.

2. Construction and Automobile stocks are second highest gainers with 5 stocks each. Worth noticing is that Auto sector gainers are ancillary component manufactures. TVS is major gainers with 31% gain. For Construction sector the stocks have good fundamentals like D/E like Orbit and HCC.

3. Financial Services sector has 4 stocks which are NBFC. Worth noticing is that SREI and PTC are top gainers which are Infra sector lenders. MOSL a brokerage has a lot of plans as it intend to enter Housing sector lending. No major Bank is top 10 Financial sector gainer. Have they rallied too much?

4. Industrial Manufacturing stocks have also gained considerably with 4 stocks.

5. Last major sector is Chemicals with 3 stocks. There are some major expectations from Budget for this sector.

Worth noticing is there are no IT, FMCG and Pharma stocks. Also missing are large Banks which have powered rally till now.

So there seems to be high expectations from Textiles, Construction, Auto and Manufacturing sector and all of them are domestic and manpower intensive sectors.

Its good to note that there are no major expectations from Banks, IT and Pharma sector. These heavy weights if gain anything from budget then the rally can continue further.

Global Macro Strategy second half 2011: Inflation outlook

In the previous post we postulated some of the main factors which can dominate the second half of 2011.
The factors are:

1. QE3 or not?
2. Interest rates outlook for Emerging economies.
3. Will Fed hike the rates in 2H 2011?
4. The persistent European problem.
5. High levels of household debt and
6. Double dip or not....


Lets have a discussion about how each one of the above will affect the undercurrents of the markets.


As of now Fed has said that they are not doing any QE3 and I am sure they will not start any other money printing  program by the name of QE3. The Fed is already buying the bonds from the proceeds of maturing securities. 
That amount is not much and is staggered so the impact will be minimal.


The dual target of Fed being Inflation and unemployment cannot be met through the QE program now. While launching the QE2 there were fears of Deflation which is why the Fed started the money press. Now the CPI is rising so much that the US has released crude from the Strategic Petroleum Reserves. 


About employment the Fed cannot do much as it grows with the GDP. Unless there is growth in real economy the will not be much employment. To grow an economy one needs policy and incentives which is job of an administration, any reserve bank cannot do much in that space. 


So we feel that there will not be any QE3 program unless the inflation gets tamed.


It is expected that Fed will start raising rates in 2nd Half 2011 but as of now there are no indication in that direction. In the last Monetary Policy assessment Ben said that he is looking for an extended period of low interest rates. It is through the low rates that the Fed can keep giving the stimulus to the economy. Although it is debatable as Japanese low rates have not stimulated their economy in any way. 
I feel that unless there is a pickup in GDP to above 3% for two quarters Fed will not raise rates.


The ECB meanwhile has given indications of raising rates again as there target is to control inflation rather than unemployment. 
Given the worries on sovereign scenario for many European countries it does not make a case for any steep increase in interest rates but another 25 bps cannot be ruled out as the German and France industry is in good shape.


The scenario is very different in the Emerging economies as some of them has already raised the rates as the fight against inflation is intensifying. India, Brazil, South Africa, Taiwan all have raised rates minimun of 3-4 times in past 1 year.


There are now talks from China and India that the interest rate rise might be over as Inflation is showing signs of peaking. I think that with crude down to $90 levels there can be for sure some cooling off signs in inflation. 
Vietnam has actually reduced their rates this weekend as the growth suffered a lot. 


What we can see is less raise in interest rate rise from here.


In short there is for sure signs of abating inflation as there is no QE from US and crude below $90 levels.
This can reduce pressure on Emerging economies not steepen the rates which can improve their GDP growth in next 3-4 months.


The developing countries on the other hand will raise rates esp ECB as they feel the inflation heat.


All this can reverse the money to EM stock markets which fled earlier this year on inflation outlook.


Rest in next part

India Macro Strategy Part 1: Factors to consider

India has under performed for the first half of 2011. The performance was one of the lowest among the emerging markets inline with Egypt, Vietnam and Brazil. While Egypt and Vietnam has there own specific internal issues Brazil is in same set as of India. The problems plaguing India are Inflation, Investment slowdown, Inaction by policy makers.

We have been bullish on consumption stocks namely the FMCG for the first half. The rationale was to be in defensive sector as the first mid cycle slowdown hits the global economy.

Before forming strategy lets outline the major factors to consider:

1. QE3 or not?
2. Interest rates outlook for Emerging economies.
3. Will Fed hike the rates in 2H 2011?
4. The persistent European problem.
5. High levels of household debt and
6. Double dip or not....

All of the above issues were there in Jan 2011 and we are still having the same issues. Structurally noting has changed expect that QE2 has ended and fed has not indicating of any further QE measures at least by in name,

The same set of problems are still in the global economy.

Coming to India the main issues we need to consider are:

1. Inflation.... will this Genie ever get into the bottle
2. Investment slow down across the sectors.
3. Inaction by Govt. on policy formulation.
4. GDP Growth concerns

The policy inaction on number of fronts has been the main concern for the India. Recent corruption scandals has impacted the county's image a big way. FDI like Posco has been in limbo for a long long time.

These are the factors we will consider to arrive at strategy for this half.
We will explore in detail each of the above factors in next post.

Nifty multi time frame trend: Strength of convergence

In my last post on trend indicator I mentioned that there is struggle between short term traders and long term investors which makes trading difficult as the range comes into play and trend gets erratic. Link here.

After that the Trend indicator gave a confirmed sell signal on both the Hourly and 4 Hour time frame. With that the last range was broken and RSI also shifted to bearishness as it broke the support of 30 levels.

Today the index declined 2% which came as surprise to many but our Trend indicator indicated quite early that trend is bearish now.  Attached is the chart.

Confluence of trend gives the best trading opportunity. 

SPX multtime frame trend chart

SPX has come to 1264 levels after breaking from the 1300 levels. We posted earlier that any break of 1300 levels can lead to straight fall. Link

The index has broken the first support of 1275 and is heading to 1250 levels.

In our multi time frame trend indicator we had a sell from 1330 levels. Attached is the chart.It shows how the bullish trend was captured and then the decline also. There were 2 whipsaws one long and one short. But the loss was not much. The trend followers look to capture the larger trend like the first bullish signal while keeping the losses minimized.

Nifty Trend multi time frame The fight of long and short term traders

Nifty has bearish trend activated from mid Friday and after touching the 5480 support the index is now flat.
The bearish hourly trend was of smaller duration.

Were there any indications of that happening? Yes there was.
The answer lies in the higher time frame trend. The 4 hour trend was bullish.

Whenever there is mis alignment of traders (short term) and investors (long term) the profitable trend is less.
It is there alignment also where trend is smooth and trade able.

SPX 1300 the line between Bulls and Bears

The SPX index closed just above the 1300 levels on Friday.  The candle was full body down with a negligible uptick from the lows. This shows the kind of pressure in selling.


The  last few attempts at 1300 were defended except for the sell off in March. And there is a very remarkable similarity between this and March's candle. Both were full body downsize candle. The other two attempts exhibited a bullish hammer at 1300 levels.

Will we break the 1300  levels this time and give a conclusive close below those levels?
Well the kind of candle does indicate sellers in control of the market with 3 consecutive bearish candles below the 50 SMA.

Any follow on below friday's low with bearish hourly candles is a sell opportunity.

Nifty Trend indicator in Sell mode

The trend indicator has turned to sell mode on Friday mid day.

The index turned down exactly from the 5600 levels which has been resistance for last 3 rimes.  This was the 4th touch and it has failed to take that level out which paints a very bearish picture. 

The buy from 5427 turned to sell at 5543 levels. 

Emerging Markets ETF

Emerging markets are generally regarded as the risker trade then the SPX. They are generally leading indicator of the change in the risk perceptions around the world.

The EEM etf is a good way to track the performance and perception about the emerging markets.

This etf has been in range for some time after breaking out from the resistance of 48 but then it reverted back to channel just when the commodity selloff started. This was also partially attributed to the QE2 end when risk reduction started globally.

The ETF now is holding the grounds quite well as it held the last range support of 45 and now has formed a falling wedge kind of pattern from where the breakout is happening.  The bullish breakout is confirmed above the 48 levels as it will be then above the range high.

Worth noting is the change in slope of relative performance w.r.t SPX.

Does this indicate the change in perception to risk especially when the US indices are falling?
As the emerging markets have both growth and domestic consumption not depend on US economy.

Nifty Resistance still holds though picture is looking good

Nifty hit the old resistance at 5600 levels and saw gap down opening. Though the sell off was more news based but our charts predicted that the bull bear line at 5600 matters a lot.

The picture is bullish as the hourly trend indicator is still bullish as price is above the levels.

This is the third time 5600 is hit in last 1 month for Nifty and it has failed to cross. The next touch of 5600 will set the trend.

Nifty in hourly trend.