As equity markets keep moving higher , there seems to be a ‘consensus’ among the market participants that the market can continue to make new highs . This is the time we should be a bit cautious .
Can liquidity take the market higher from here on ?
Yes , certainly it can .
Will the bull market continue in the long term ?
The world is looking at good growth numbers from all the major markets. India is one of the best markets to invest in. With a pro growth stable government , the sky's the limit for India. With new policy initiatives like GST , Tax reforms coming in , we are in a long term bull market.
Is the equity market looking overvalued in the short term ?
As we see more clarity in the long term growth , markets starts to discount long term good news. Any small negative surprise in such a market ,may trigger unwinding of longs.
The Fed will have to start unwinding its balance sheet at some point . The Fed balance sheet grew from about $1 trillion before the crisis to $4.5 trillion currently, as the central bank purchased Treasury and mortgages to help the economy and keep interest rates low. And that hour of reckoning may be near . This in turn , will soak up liquidity faster than anticipated .
Which in turn will trigger short term correction across risk assets .
Traders can start to take profits . So far as investors are concerned , they should wait out the correction and then buy quality stocks !
Portfolio building is a long term process , and short term corrections are the best opportunities to build portfolios.
BJP’s landslide victory will take the Indian equity markets to new highs! The state election results surprised even the optimists, while BJP victory in UP was being factored in by the markets, the scale of victory came as a positive surprise.
This success will bring stability to the government in the centre. We will see more pro-growth policy changes in the coming days. Thus this a very positive moment for India at large and the equity market in particular.
We will see reforms taking pace.
The government will able to reduce corruption and take more steps toward that direction.
Implementing GST will be easier, as there be no further resistance.
Fiscal prudence maintained as the same gets rewarded.
Will this rally continue in the short term? Will the Fed interest rate rise spook the rally?
The market may take a breather after today's rally. While the long-term outlook looks extremely confident, earning have to improve to catch up with valuations. This gap between the long-term macros and short-term earning growth will need to be reconciled. We will also find the reduction in liquidity with US interest rates moving up.
Long: Banking stocks, IT ( At these levels all long positions need to have strict stop losses )
As we look at the Indian Budget presented yesterday the main highlights for the market are as follows
Overall a good budget for the economy and the market. We can expect the bull run to continue with intermittent profit taking.
Long: Infrastructure, Housing Finance, Banks
We will need to wait and watch on Pharma and IT sector.
As we have mentioned in our last post , the Indian equity markets saw a strong rally . This rally was partly fuelled by value buying after the overdone correction due to fear over demonetization .
The positives that will support the market rally going forward :
The short term concerns for the the market are more to do with the global situation :
While the above mentioned concerns will need to be watched carefully , and analyzed , the medium and long term rally in Indian equity market will continue .
NIFTY may see some profit taking in the next few days . However any correction will be a buying opportunity .
Indian market has started the recovery process after the crash due to demonetization. Jan / Feb will be volatile months . Both on the domestic and international fronts there are many events that will have strong bearing on the markets.
Budget : The government is expected with a strong pro growth budget. The budget has special significance in context of the demonetization . As demonetization is expected to have a negative effect on the GDP growth in the short term , government will have to take pro active steps to propel growth .
Some of the steps that the government may take in help growth are :
In a nutshell the world is changing . With US policies changing we will see pressure on IT companies . NIFTY trades can remain long with stops .
Only a few days back it looked like the NIFTY will touch 9000 , any time . Then came the demonetization . The global factors of impending interest rate hike and rising Oil prices did not help the market !
The Indian Equity market now seems to be on a recovery path . The RBI also surprised the market . It was widely expected to reduce interest rates to counter the growth slump expected out of demonetization . However RBI must have realized that with rising Oil prices , and US interest rate cuts , the Rupee needs more support !
A weak and volatile Rupee would have been more damaging in the economy in the long term .
Short term traders will benefit from being long with strict stop losses . Investors may like to buy in small lots and build their portfolio .
As the debate on the demonetization becomes heated by the day, investors need to ask a simple question, what does it do for the long term valuations of the company.The purpose of this move is to reduce black money in the system. Some of the major advantages are as follows:
Then why are the markets correcting?
The latest news flows from the US elections may force the markets to put aside their anxiety . As Clinton gets a clearance from FBI the market should be able to reverse some of the losses .
As we have pointed out TOI : Trump , Oil and Interest rates are the three key triggers for this market . The Trump fear of doomsday has lead to this oversold market in the last few days . But just for the argument sake whatever happens in the US elections will not end the world .
The next important trigger once the elections are over and done with , will be US Interest rates increase in December .
This is an ideal market for traders to go long and enjoy the ride for the next few days !
The market for the past few days has been in bit of a no man's land . NIFTY has been struggling to breach 8700 and move higher . The earnings has been good so far . Global markets are stable with an upward bias. After all Oil is now stabilized above USD 50 , with some demand supply balance emerging .
We may see NIFTY trying to move up today . Traders should remain long unless NIFTY closes below 8550 .
We will come with the list of stocks to buy during this Diwali in the next few days .
As we scan the mid cap small cap names , it is surprising to see so many small companies with the right triggers to grow big .
Tata stocks will be in focus today . With the change in the top management at Tata Sons there may be some knee jerk reaction in the stock prices .
Any such fall will be an opportunity for investors to buy these stocks . Some of stocks investors should keep an eye on are Tata Chemicals , Tata Global Beverages , TCS and Tata Motors .
Tata Steel will may also see some interesting news flows in the next few months .
Watch TOI for the next market trigger
In India TOI stands for Times of India , one of the most popular newspaper . However in this case it is Trump , Oil and Interest rates ! This new TOI is the key driver of the Equity market for the next one month .
Trump : The market has never faced anything like Trump . He is disruption personified . Is the market prepared for a Trump win . No as it cannot factor in such an event . The market is very bad at pricing in unpredictability .
Oil : Just when we convinced ourselves that we will have cars running on solar power batteries if not on wind power, Oil recovered from its lows . Those who thought Oil is headed towards 15 tweaked their prediction to 51 !!! The oversupply situation continues , however with Opec and Russia coming together , the story of supply side actions looks more credible .
Interest Rates : Will US raise interest rates this year . As conflicting indications from the Fed keeps us guessing the market will remain volatile based on the news flow.
China : If TOI is not good enough , look at China . China growth numbers will be competing with the other three factors to influence the market direction .
Prepare for some volatility on INR /USD . On NIFTY day trades can go long with strict stop losses. Take your profits on previous Short positions .
The escalating problems at Deutsche Bank has send shock waves across markets ! Is it not ‘ too big to fail ‘ ! If this can happen to Deutsche Bank , what's the inside story of other banks . And all along regulators have been promising that the system is much better this time .
Indian equity markets corrected on the news of geopolitical tension. The markets were overbought and richly priced . Thus this news gave an excuse to book profits . We may see increased volatility in the next few days based on the news flow.
Investors should keep a close eye on this market and start buying if the valuations become more attractive .
So far as traders are concerned : We have suggested shorting the market at higher levels . Those can be maintained for now.
We expect increased volatility in the Indian equity market over the next two weeks . The major factors to watch out for are :
In absence of any strong domestic factors , global sentiments will drive the market . The USA elections will be of great significance for the market . This is more so for the diametrically opposite views of the candidates involved .
Opec meeting will determine the next course of movement for Oil. In case the meeting remains inconclusive like the last few meetings , we may see a sharp correction towards USD 45 for US Oil . Any hope of production freeze or greater cooperation on the other hand will take US Oil past USD 47. Oil has been range bound between USD 45 and USD 47 for some time now. We may see a breakout in the next few days .
RBI is expected to hold rates in their October meeting. In case RBI surprises the market with a rate cut , we will expect the rally in rate sensitives to resume.
NIFTY trades should look at taking short positions with strict stop losses .
Investors can wait on the sidelines for the market to correct before taking new positions.
In recent past the spread between the Large caps and Mid caps valuations has narrowed down . We expect this trend to continue . With GST and other structural reforms we expect some of these companies to emerge as large caps in not so distant future .Investors may keep an eye on our Multibagger stock Ideas .
Fed has decided to keep interest rates unchanged for now . However there more and more voices within the Fed that thinks that the time to raise interest rates in near . We can expect a rate hike in December if everything else remains the same !
But there is a lot of things that can rock the boat before that . We have the Presidential elections coming up . As we come closer to the outcome , the market will follow each and every news (rumour ) on the expected outcome .
The Bank of Japan was more directional in their approach . It will be targeting the yield curve , and is expected to continue with negative interest rates .
Overall the above mentioned news is bullish for today's equity market . In line with the global markets Indian Equity markets are expected to open higher .
The two central banks Fed and the Bank of Japan will come out with important announcements today . This is on such rare occasions that two major Central Banks are expected to come out interest rate comments on the same day !
Thus the global currency market may see some added volatility . This volatility will finds its way into equity markets .
The expectation of a rate hike by Fed in December is growing . We have to see how the market reacts once the same looks more probable .
In case the Japanese Central bank does not cut interest rates further into the negative territory we will see JPY strengthen against other currencies . In any case the expectations are too high thus some JPY strength can be expected after the announcement .
The Fed on the other hand will have to take a more definitive stand on rate hike in December . We may see some weakening in INR in the next few days .
Indian equity markets may open soft and trend sideways . The odds of some correction will increase based on the Fed stand on interest rates .
The next few days , we may see some profit taking in the Asian equity markets . With the Fed lead uncertainty increasing the VIX ( volatility index ) has gone up during Friday .
This indicates market expectation of higher volatility ( read higher risk ) for the next few days .
Indian markets are set to correct in line with the global markets.
However these corrections does not change the long term direction of the market . It only provides some churning of equities .
Investors should use any deep correction for building up their portfolio.
Panic is equally bad for driving and stock market investments .
US jobs creation has been slow . Its lower than what the markets expected . We are again in the period where ‘ Bad News on US economy will be good news for the global equity markets ‘
Markets expect the Fed to go slow on US interest rate hike based on the latest job date that has come in . However we have to appreciate that this sentiment can change very quickly .
We have some important data coming in from China this week . As the expectations from China has been very low , even mildly positive date will be good enough for the markets.
One point of concern that may come back to spook the party is falling Oil prices .Also we have to keep a close eye on Fed .
Indian markets will follow the global sentiments and will gyrate based on that .
NIFTY may open strong . However these are all time high and it will be advisable for investors to look for profit taking opportunities .
As they say ‘ You cannot sell at the top and buy at the bottom ‘ . So like systematic investment , a system of regular partial profit booking will help !
On Tuesday, the executive arm of the European Union ordered the Irish government to recoup up to 13 billion euros ($14.5 billion) in back taxes from Apple, plus interest. Apple’s low tax rate in Ireland was based on a tax agreement with the country . This clawback on taxes agreed will have serious implications for EU business. With companies like Tata Steel , Tata Motors , Hindalco , TCS and others having significant business interests in EU , we may have to take a closer look at their contingent liabilities in light on this news.
Yesterday Indian equity had a strong breakout on the upside . We are in a long term bull market . Thus after consolidating for a long time market got ‘tired’ of waiting . However as the prices climb and valuations get stretched we should look beyond the index and be stock specific in our investments .
As we have mentioned in the past US Oil continues to face strong resistance around USD 47 levels . Traders should wait to see whether the breakout from the range of USD 48 to USD 45 before initiating new positions .
On stock specific ideas for the Indian equity market some of the mid / small caps that looks good for accumulation are , Linde India (BOC), IVP and Snowman Logistics . We will discuss these stocks and a few more in our Multibagger stocks section . However always remember mid / small cap stocks have higher risk component . Apart from the risks of market movements these stocks also have high company specific risks .
The markets have reached an inflection point . The next Fed move if it sounds a bit hawkish may turn the tipping point towards a meaningful correction.
Japan consumer prices keep dropping ignoring all the money being pumped in by the central banks . It is clear that like electricity liquidity chooses the path of least resistance .
In simple language :
This vicious cycle continues as the problem is in the sentiments , not in the absence of cash .
Coming back to Indian equity market we may see some more correction in line with the global markets . Investors are advised to stay on the sidelines .
Traders can take short positions for day trading .
We all want to make money from the stock market .
What do we think will make money for us :
However with the analysis and superior knowledge we sometimes fail as traders or investors. So is there something more to it than science ?
Forgive me if it sounds a bit philosophical but the key to being successful in your trading and investments is :
So we see that in the world full of multibagger ideas and make money quick ….we have to step back a little and think !
As we scan the market for the key drivers of this market for the next few days , it becomes evident that the bulk of the news flow will be from Oil and the Fed .
The global equity markets are at all time high , mainly driven by liquidity , higher Oil prices and improving economic news from USA .
However Oil seems to have some strong resistance at USD 47. Also the rally is mainly driven by expectations of some action from the oil producing counties . Thus we have to watch closely for any news flows from this . As on date it looks like we may see some correction in Oil before it stabilizes at around USD 45.
Will the Fed raise interest rates this year ?
The key to this question is another question :
Can the Fed be at odds with all other central banks , while UK and Japan continues to reduce interest rates do the Fed really need to rush through its Interest rate hike ?
However we have to understand that with improving fundamentals and delay in Britexit , Fed may act sooner than expected . In such a scenario the equity market will see some meaningful correction .
India equity markets also took a breather after the run up . With GST being built into the prices of equity , the key drivers of this market will be global liquidity .
Investors and traders may like to wait to see how the situation pans out before jumping in .
The GST bill is one of the biggest positives for the Indian market . This will make India an integrated market across states . In a nutshell GST will pave the way for increased efficiency and remove bottlenecks for conducting trades in India.
The markets has been expecting this good news and have been rallying in anticipation . We are looking at PE which are high by any standards . However we have to keep in mind the forwards PE may not be that high .
The US job numbers that came out on Friday has been better than expected . The US markets moved up after the good news . This in turn may trigger a rally in Asian markets . All eyes will be on the Fed . Strong growth in jobs may support another rate hike in the near future .
Will the Fed raise rates while all other central banks continues to reduce interest rates in hope of better growth ?
Coming back to India , RBI is expected to keep the rates unchanged this week . As GST is inflationary by nature RBI may need to be more cautious before any rate cuts .
NIFTY and the mid cap rally to continue in view of the positive global and domestic sentiments . As value looks a bit stretched we should be prepared for some profit booking at some point.
Dollar should strengthen supported by strong job numbers .
Concern over falling Oil prices , may dampen the Risk On sentiments in the emerging markets . In its exuberance markets seems to have looked over some of the concerns coming up .
India equity markets continues to move higher buoyed by strong liquidity . In a world market which is flush with liquidity and returns keep diminishing , India was the oasis for investors . The government's strong commitment to growth and stability changed the outlook towards India . As China slowed down the World needed some new destination for the funds .
The GST bill is expected to be approved by Wednesday . However it will take some time ( may be a year or more ) before we see the same getting fully reflected in the earnings of the companies . The markets has already factored in the same . Thus in the medium term overall market may be flat .
In the short term , strong sentiments may take it higher from here on . Investors should look at individual stocks instead of the overall market . They have to look deep into the numbers and core strength of the companies . At these high valuations , the margin of safety is low for most of the good stocks .
Traders can and should keep following the trend with trailing stop losses .
The one positive factor for the EM equity is liquidity . Its this huge surge in liquidity that has got the markets to its present heights . The earnings and other fundamentals are trying hard to catch up .
Indian Equity has also been supported by the the prospects of improved growth due to GST . However as of now the markets looks overstretched . Having said that the trend remains upwards . As developed markets returns remain very low … hot money has moved to EM in search of better returns .
Thus for them valuations are not the deciding factor , but trend is .
If the trend remains upwards , and central banks keep liquidity high the party may continue for some more time.
However for investors they are in a state of panic investing . The feeling of being left out of the mega carnival in Indian Equity is forcing them to invest at high valuations .
The market rally that started after the initial all fall due to Britxit continues . As market continues to climb higher on wonders if the fundamentals will be able to catch up ! Markets tends to move ahead of fundamentals be it bad or good news . That's why we sometimes feel the market may be running too fast .
In India NIFTY has moved from strength to strength . What are the major positives and negatives from the market :
So what all factors can spook the rally :
Market is like the little boy who likes to run either way . Fundamentals are like the parents who move more slowly . Once a while the little boy looks back and if he can't see his parents then he runs back towards them .