An interview with Sushil Kedia of K&A securities triggered a few bells and alarms for me. He said that the trading range of the Nifty within the next three months is 3750 to 4750, therefore the downside is three times the upside.
He also says you shouldn't go short right away, but to wait for a trigger. That point is about 4100 on the Nifty, with an interim break at the 4250 range.
Also, he says, September has been the worst trading month 88% of the time in the S&P in the U.S. And while there is talk of writing straddles and strangles in options, there is tremendous downside because of potential volatility.
For the option writers who aren't convinced of shorting (and he's not either), he would write covered calls on the Nifty, reversing at 4400. Meaning, buy a future, write a call (like the 4500 call) and close it out if the future goes below 4400.
A very key thing he mentioned was that Ben Bernanke, the U.S. Fed chief, has made people "write him a free call option". In that he has said he will "whatever it takes to support the market". Meaning, if it goes down, he'll respond on Sep 18 with a rate cut. If it does not, well, it does not.
I think Sushil is a respectable person and chartist but it occurred to me that I need to question the underlying theory here.
Firstly, the US market has had very little correlation with us in the "near" past. The last two weeks have been rapid upmoves for us, while the US markets have faltered. As I speak, the US markets are down 250 points on the DOW, something common for the Sensex but unnatural for the US. But right now that means nothing as we have barely followed any US cues.
Next, the September theory is bunk. I remember 2003 - when I started investing seriously - CNBC would throw these people at you who kept saying things like "December has traditionally been a bearish month as all the US FII fund managers need to book profits to close the year". Since then, there has been one year with a December downside (2006) and the others were all up. September is not a holy grail for the bears, and if September sounds like a bad month to you, I have 11 more months that sound just as bearish. (Octobear, Novembear ...)
Now while he does not recommend going short, he has asked for exits from a large number of stocks. Also he expects the trading range to be very far out, anywhere around 4100 down to 3750. Yet, he recommends writing covered calls.
Honestly, if you don't hold a position in the market, please don't write covered calls. Especially not on the Nifty, if you are bearish. Covered calls are not really covered. They have a huge downside. They can hurt you MUCH more than taking a one sided position like a naked call or put. Now a bearish person may want to write calls, and even call spreads to limit risk, but buying the underlying is like crossing a fence and saying, "I know the grass back there is better but I am going to sit here".
Lastly what he says about Ben Bernanke is important. The Fed will rescue the market on the downside. If you believe that, you should be buying.
And what happens if he doesn't rescue it? One reason he will NOT, is that the index recovers by September 18. Which means there won't be much change for India. That leaves us the last remaining option: What if the US indices go SERIOUSLY down, and Ben B. does not rescue it by reducing interest rates? Then the US hits a downturn.
The impact on India will happen then, for sure, as money flees out of equities.
But if he does reduce the interest rate, this will take world indices to new highs, and we *might* follow. The chances of the upside here are far higher than the downside.
On a different note: the put options in India are showing huge interest. Even today the week ended with puts gaining interest - usually around this time there should be strengthening of calls and so on. The way it's looking right now, the nifty will get pegged between 4500 and 4600, with a bias towards the latter.
Oil hits $80 per barrel, and please buy Reliance Industries
Categories: Commentary, Stocks
Meaning: these companies are a sell. Deccan aviation, Jet airways, HPCL, BPCL and IOC.
But buy Reliance Industries.
Why? Aren't they also a sorta oil company? The short answer is yes, they are. Their refining margins seem to keep going up as crude prices increase! But they process heavy crude, a variety that is cheaper than the brent crude whose prices you see are high. The difference can be as much as $20 a barrel, as noted last quarter. Reliance and RPL are strong players here and will tend to make the best of it.
Secondly, they have made some interesting M&A news. They just bought HUALON, a Malaysian polyester company. RIL also acquired Gapco, a fuel retailer in Africa, for a retail AND storage foothold in Africa, plus trading abilities to other countries. RIL and IPCL have merged, and IPCL gets a P/E of 10 (RILs is about 24). The merger record date is Oct 5. And of course there is their retailing foray, their SEZ forays, a new healthcare foray they announced, RPL ownership etc.
Lastly, there is a certain accounting issue you need to be aware of. Everyone and their uncle was booking "foreign exchange gains" on loans taken from abroad last quarter - in fact companies like Tata Steel would have been terribly unimpressive had the rupee not fallen so much. Reliance, which had a gain of 300 cr., has not taken it on its books, saying instead that it will not take it. The gain will come in sometime this year, if the rupee stays low, and this gain is something that's unreflected in it's EPS reported figures. It's a small sum perhaps - but it accounts for 10% of their quarterly profits - and this quarter, there will be ANOTHER 300 cr. or so as the dollar stays low. Tehcnically, that means nearly 20% of their quarterly profit is just sitting there waiting to be accounted - something we all can take advantage of.
Disclaimer: I hold this stock. I had recommended first in December 2005, and recommended a "hold" in March 2006, with a target of 1200 in August. I'm now saying hello to this stock again.
Posted in Commentary, Stocks