The Reserve Bank of India (RBI) surprised the market with a rate increase of 50 basis points, which was higher than expectations. All stocks are sensitive to interest rates and equity prices are inversely correlated to rates. However, in particular, three rate-sensitive sectors —financials, realty, and automobiles — are likely to be badly hit. A near-term technical perspective:
BANKNIFTY
The impact on the Bank Nifty is obviously bearish. The financial index has a strong correlation with the Nifty (better than 0.88) and a high-beta (1.2), so it will impact the overall market. In the short term, as marked on the chart, there was a high volume downside breakout on May 3, when the index dropped below 11,200. The minimum downside target should be around 10,500 where support is marked.
In the longer term, the BankNifty has traded below its own 200-day moving average on May 2, when it dropped below 11,400. We would, therefore, expect it to move lower since the long-term trend is also bearish. Given the previous move from a low of 8,150 (February 2010) to a high of 13,300 (November 2010), we have already seen substantial correction.
Using Fibonacci ratios, the correction could continue till either 10,200 or till 9,600. Those would be good levels for index traders to bear in mind. It is difficult to hedge BankNifty index positions since the options are not very liquid. Bear in mind that the BankNifty has an average daily high-low swing of over 200 points.
Of the constituent stocks, all the banks are well-correlated and they can be expected to move more or less as a group. Among index scrips, Axis Bank is a high-beta, very liquid counter, which will offer exaggerated movements in the futures. The trader may be able to exploit if he can stand the higher risk. Outside the BankNifty, YES Bank offers another high-beta, high-correlation alternative for traders trying to maximise.
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CNX REALTY
The CNX Realty has been a consistent underperformer through 2010 and 2011. The perspective has been very bearish since October 2010 and this rate increase will raise the downward pressure. As of now, there is some support at the index level of 260. However, if 260 is broken, the index could slide down to 220 at least. The implication is that it will hit new 52-week low (the current 52-week low is 250)
Unfortunately, the Realty index is completely illiquid and cannot be traded at all. However, several of the constituent stocks are very liquid and highly traded in the F&O (futures & options) segment, so the movement can be picked up. Again, given the above, the implication is that individual realty majors are likely to test and break their current 52-week lows.
Unitech, DLF, and HDIL are the three most liquid realty stocks in the index. Parsvanath and Indiabulls Real Estate (IBRE; not in the index) are also quite liquid. In each case, a short position looks marked. In every case, one would expect new 52-week lows to be registered in the next 2-6 weeks. The trader would, however, have to maintain disciplined stop-losses and allow for extreme volatility, including sudden bounces on short covering.
KEY AUTO STOCKS
We looked at several key, highly-liquid stocks that are available in the futures segment.
Tata Motors, Bajaj Auto, Maruti and Hero Honda all appear to offer currently bearish perspectives. However, stocks in the auto segment are far less correlated to each other than financials or realty stocks. Individual scrips may not move in tandem.
Brief notes on some auto stocks are given below with the potential downsides and potential upsides estimated with a timeframe of 6-8 weeks.
Tata Motors, CMP: 1,163
POTENTIAL DOWNSIDE: 1,000
POTENTIAL UPSIDE: 1,250
(May stabilise at supports in the 1,100-1,125 zone. Has potential defensive value. If 1,100 is broken, it would drop to 1,000.)
Bajaj Auto, CMP: 1,367
POTENTIAL DOWNSIDE:: 1,200
POTENTIAL UPSIDE:: 1,500
(Long-term trend seems bearish and so is the short-term trend. Apparent downside breakout on May 3. Therefore, looks worth a short.)
Maruti, CMP: 1,274
POTENTIAL DOWNSIDE:: 1,160
POTENTIAL UPSIDE:: 1,325
(There is strong support at current levels, down till 1,200. May have some defensive value.)
Hero Honda, CMP: 1,657
POTENTIAL DOWNSIDE:: 1,375
POTENTIAL UPSIDE:: 1,800
The long-term trend is bearish, short-term downwards breakout seen. Hero Honda is a highly volatile stock that could see big intra-day swings.