After gaining 81 per cent in 2009, the Sensex managed just about 17 per cent in 2010. While Devangshu Datta believes the chances of a downside are more, Mukul Pal feels the Sensex will fall 30 per cent from the 2010 highs before participating in a commodity-based bull market in the second quarter of 2011.
A breakdown or range trading are more likely
Devangshu Datta
Before risking a prediction on the 2011 market direction, let us list some of the key parameters:
* Current valuations (PE, PBV, PEG) are high. These are mean-reverting ratios and being over the respective mean levels indicates a correction is more likely than not.
* Rupee interest rates are rising – this usually has a negative effect on equity prices.
* Domestic institutional attitudes have been negative since Nifty’s 5,400 level.
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* Foreign institutional investors were strong net buyers through 2010. If they maintain a positive attitude, nothing else matters.
* The Nifty has gained steadily since March 2009 (2,500 levels) while it bottomed in October 2008 (2,253). This has already been a very long bull market.
Between January 4, 2010 (5,200 points) and December 31, 2010 (6,134) , the Nifty gained around 18 per cent. It peaked at 6,338 in November 2010, at levels close to the all-time high of 6,357 (January 2008). Of the subsidiary and sector indices, the breadth and performance have been mixed. The Junior has done about as well as the Nifty. The CNXIT and Bank Nifty have both outperformed, hitting all-time highs. The CNX 500 (which is the broadest index we have considered) has underperformed (+13 per cent) and the realty and infra indices have delivered negative returns.
In technical terms, we can mark off several important levels. One is the zone between 5,500-5,700 – this is key for support in corrections. The 200-Day Moving Averages (simple and exponential) are in this region. On the upside, there’s strong resistance between 6,300-6,400 – in fact, between 6,300-6,350. In between 5,700-7,300, there’s support-resistance at roughly 50-point intervals.
The market could move three ways. One: It could range-trade 5,700-6,400. Two: it could break out up to new highs. An upside breakout could mean moves till 6,700-plus and maybe, till 7,000. Three, it could break down and drop below the 200 DMAs and 5,500. In that case, support would come in around 5,300.
My feeling is that a breakdown or range-trading are more likely than an upside breakout beyond 6,350. If you are bullish, wait for a breakout past 6,350, preferably 6,400, before betting heavily. If you’re bearish, be prepared to go short if the market drops below 5,675 or so and increase the short position below 5,600.
Creating a long-term hedge on the downside is relatively cheap. A bearspread of a long June 2011 5,500p level (premium 107) and a short 5,000p (52) creates a position that costs 55 and offers excellent protection.
The author is a technical and equity analyst
Get ready for inflation investing in 2011
Mukul Pal
This is what we said in our 2010 outlook: “Any rally in Indian markets should not last beyond Q1 2010 (high of 2010). At this stage however, we see the market opening positive on January 4 and pushing higher. A net positive 2010 is a low probability scenario at this stage. India is in a multi-year trading range for us, something like the 1990’s US bear market.”
The March 2010 high for the Sensex was 17,793. The markets closed 2010 with a 15 per cent gain. 2010 became one of the least change years on the Sensex since 1990. Now one may say, so what, it was positive. Well, getting in and out of the market costs money. The Nifty indeed went to sleep in 2010, as the fear gauge VIX went to historical lows and stagnated at sub-20 levels. A sub-20 VIX for multiple months is high complacency, which did not deliver. High complacency that does not deliver is like an exhausted market in a state of rest before tumbling lower. For me, a sub-20 VIX after almost 24 months of a rise can never be an absolute buy. I need to see a real volatility spike for at least a few weeks before any return of the absolute bull.
In 2010, we made cases suggesting relative opportunities and illustrating how absolutism was old tech. A marginal move on Sensex just proved us right. Relatively, we talked about ‘Health Care outperformance’ on September 2009. We talked about top shorts on November 19 in ‘India Pair Grid’ when we mentioned that banks were a sell and Federal Bank, Bank of Baroda, Cummins, Corporation Bank, Canara Bank, Andhra Bank and LIC Housing Finance were best shorts. LIC Housing cracked more than 30 per cent after the signal. We also talked about best longs like Punj Lloyd, Suzlon, Housing Development and Infrastructure, Sesa Goa and NTPC. We got many of the calls right. Relatively, we were able to capture alpha. We ended last year with ‘The Rieki Hedge’ (December 9) where we illustrated how a hedge could be made profitably.
About 2011, we are in an inflationary environment that should stretch well into the end of the decade. And any fall in commodity should be the last opportunity to buy metals, energy and materials. BSE Metals, BSE Oil are the worst performing sectors (52-week Indicator), the very reason they should outperform in 2011. The 30 and 90-year cyclicality and the rising CRB (commodity index) vs Global Bond Index ratio confirm our case further. A rising CRB (commodity index) vs Bond favors inflation stocks. And if BSE Oil is going to outperform, BSE Auto should underperform. If BSE Auto underperforms, financials and technology (other early economic sectors) can’t be best performers either.
I won’t be surprised if the Sensex erases 30 per cent (from the 2010 highs) and then participates in a commodity-based bull market from Q2 2011.
| 2010: MUTED RETURNS | |
| Year |
Returns (%)
|
| 2008 | -52.45 |
| 1995 | -20.79 |
| 2000 | -20.65 |
| 2001 | -17.87 |
| 1998 | -16.50 |
| 1996 | -0.81 |
| 2002 | 3.52 |
| 2004 | 13.08 |
| 1994 | 17.36 |
| 2010 | 17.43 |
| 1997 | 18.60 |
| 1993 | 27.94 |
| 1992 | 37.01 |
| 2005 | 42.33 |
| 2006 | 46.70 |
| 2007 | 47.15 |
| 1999 | 63.83 |
| 2003 | 72.89 |
| 2009 | 81.03 |
| Absolute returns for the calendar year | |
The author is CMT and CEO of Orpheus CAPITALS, a global alternative research firm
