The benchmark Sensex closed below the important psychological level of 18,000 for the first time since July 30, 2010. The index shed more than 200 points in the second half of trade, dragged by shares of financial, technology, realty, auto, capital goods and power companies.
The 30-share BSE Sensex closed at 17,998.41, down 227.94 points or 1.25% and the 50-share NSE Nifty fell 69.20 points or 1.26% to settle at 5,408.70, after witnessing an intraday low of 5,391.95. For the week, indices lost 2.2% each.
Mitesh Thacker of miteshthacker.com, who had been watching 5,450-5,455 very closely, says, “Since the markets bottomed out in the last week of May and started a rally from 4,900, every correction on the Nifty has failed to close below 21-day exponential average."
"We have had three-four corrective movements where the Nifty has fallen about 100 points from the top, but every time it’s managed to close above that and then has made a new high. The Nifty has closed below that level. This is the first sign of proper weakness and a corrective kind of movement coming into the Nifty. Probably, the one important level, which we saw couple of weeks back was on the downside, 5,360- 5,350. So maybe we are heading towards that and if you break that may be even lower.”
Dipan Mehta, Member of the BSE and NSE also feels that the market is in a correction mode. “But this is more like a normal technical kind of correction. I don’t expect that is going to add up to anything significant. I think that maybe this month we could see the losses deepening as compared to what we have seen over the past two-three trading sessions.”
Q: The start to the September series has been on a nervous note and even the data, which is coming out of the developed markets, looks a little bit sluggish. What's the call on the markets? Are we in for a correction?
A: We are in the correction actually. I think that maybe this month we could see the losses kind of deepen as compared to what we have seen over the past two-three trading sessions. But this is more like a normal technical kind of a correction. I don’t expect that is going to add up to anything significant. In fact we are getting more and more convinced that this outperformance, which we have seen over the past few months, will continue well into the rest of the year and next year as well.
Although there are lot of comparisons between this outperformance and what we witnessed in 2007, but there are two major differences which are being ignored. One of course is that in 2007, that is October 2007 to perhaps January 2008, we had rising oil prices and foreign institutional investor (FII) selling whereas this time around the outperformance on the back of heavy FII buying. The fiscal picture and the economic picture for the government is steadily improving because of lower commodity prices. So, I think that over the past few months the long-term scenario for India, Indian economy, Indian equities, corporate India has improved significantly. That kind of gives us the conviction that even going forward the markets will continue to rally vis--vis the other global markets, but I think this month maybe a bit dicey.
Q: You keep an eye out on market internals as well. Is it a heavy market or an overleveraged market? Is that what you think will lead to a bit of a correction or will it remain the global frontier?
A: I think what will cost the correction perhaps over the next few trading session is negative FII flows. The market internals are okay, it’s not that they are heavily leveraged or under leveraged, they are just about normal. What one needs to keep in mind is that these days a lot of the trading activity in the positions have got shifted to the options market and kind of trying to understand what the options market is saying is bit dicey and bit difficult to gauge, unlike the futures market where we looked at cost of carry and absolute open interest positions and could have arrive at some conclusion whether the market was over leveraged or not. The same kind of studies are not possible in the options market. But my sense is that given that the implied walls are at extremely low levels, as also the fact that a lot of proprietary books of the brokers are now being deployed in what is called as delta arbitrage or delta trading, my sense is that I think that the futures and options market is not that leveraged. It is just about average levels and the positions over there are not going to cause a trigger for an upside or a downside.
I think the key number to watch out for, which we watch every single day of course, is the FII flows in the cash market. Also do keep in mind that again we are seeing pickup in qualified institutional placement (QIP) and initial public offering (IPO) and fresh issuances. So, some of the FII flows, which normally would have got divert to the secondary market, will find themselves into the primary markets. So, if getting into a bit of a tricky situation for the immediate short-term and the kind of excellent run, which we have had over the past two months, where FII flows just went into the secondary market, that picture seems to be changing. But as I said I think its just a minor blip. I think that if FIIs were selling and the markets were to see a correction of 8%-10%, I am quite optimistic that high net worth individual (HNI), retail money, domestic mutual funds, insurance companies will certainly step in at lower levels, given that they had been the largest suppliers of stock over the past two months for all the FII buying, which has taken place.
Q: You keep an eye on these pharmaceutical names, any thing that’s still worth a look or a buy?
A: I think investors are best off with the three large pharma companies as Ranbaxy, Dr Reddy’s, maybe Cipla, Lupin also could qualify for that. The business models are far superior than some of the other smaller sized pharma companies. I think that the generic market opportunity is now reaching its absolute take off stage. Over the next 12 to 24 months, we will see a fantastic growth in profits of the large pharma companies, which were operating in the US markets. That assuming of course that Ranbaxy is able to get its USFDA approval in place, so that they can start exporting to the very key economy.
Having said that, I think that this entire Piramal deal has brought in renewed interest in the entire pharma sector and the kind of valuation which it was done, I think that it’s not difficult to understand why the sentiment for the a whole host of mid size oharma companies have improved and on and off we do hear rumors of a particular company up for sale or doing some deal or some strategic kind of a tie up. I think that will take this in the pharma industry. But for the time being I think we are seeing this for the midcap pharma companies getting a bit on the overvalued zone, considering the kind of business model which they have. But largecap pharma, I think will continue to find favor with the institutional investors and they could prove to be outperformers or even perhaps get leadership positions over the next 6 to 12 months or so.
Q: The big bull of the last series was the entire oil marketing companies. You have BPCL up 20%, HPCL up about 25%. Do you think they can generate more returns from here on because the buzz is getting louder for deregulation with lower crude prices?
A: See we are very positive on the entire oil marketing space. But as things stand and it could change of course, as things stand the deregulation is only in letter and not in spirit. We are seeing still lot of covert interference from the government in the pricing of oil products and oil marketing company executives are under pressure not to raise any product prices and they are not given full freedom to operate in the way they would like to. Maybe it’s a transitionary phase and maybe six-eight months, 12 months down the line hopefully if oil prices remain stable to decline then more autonomy maybe passed on to the oil marketing companies.
One thing is certain that if these oil marketing companies have full autonomy then the kind of profits which they can generate and the revenues which they can, rather return on investment which they can generate would be quite fantastic and these stock prices could double or triple from these levels. Intrinsically, these are companies which have got very high entry barriers. The business per se has very high entry barriers and the kind of network and distribution which has been put up is impossible to replicate. So, they would be in a position then to extract the full benefit of all the hard work they have done over the past 40-50 years setting up a distribution network. Those returns will start coming in if more autonomy is given.
But if the government continues to intervene and they are not able to increase end product prices the way they would like to, I think the run, which we have seen up till now, is more or less done with and one should not then kind of expect a fantastic growth in bottom line. Of course one time growth will come because of the adjustments which have taken place in diesel, kerosene, the petrol prices. That one time adjustment will take place in the current fiscal, but then going forward I don’t think that they will view incrementally grow their profits. Do keep in mind that on the whole the volume growth is not that spectacular in the entire oil industry whether it is refining or marketing. So, that’s not going to be a major kicker for profit growth. I think it’s more to do with margin growth for the oil marketing companies as and when that takes place. That will happen only when there are more autonomy and more independence.
?