Jul 23, 2013 08:28 AM IST | Source: CNBC-TV18

Nifty may remain flat; good time for pair trades: Udayan

This week too the focus will be on largecap names, individual stocks that are coming out with results as global and local markets consolidate and stabilise over the next few sessions, says Udayan Mukherjee.

One can expect this week to be flat as the market wades through earnigns season. This week we will see earnings reported by largecaps starting with Larsen and Toubro (L&T) on Monday, says CNBC-TV18's managing editor, Udayan Mukherjee.

Therefore this week too the focus will be on largecap names, individual stocks that are coming out with results as global and local markets consolidate and stabilise over the next few sessions, he adds.

Also read: Is RBI unwilling to raise rates to strengthen rupee?

So, instead of focusing on Nifty, traders can look at creating pair strategies because one knows which stocks to go long in and which to go short in. It is a good market for doing this pair trades, he adds.

Below is the verbatim transcript of his market commentary

On broader market

The midcap index and the smallcap index ended in the red and large number of stocks did not do very well. So, optically the Nifty held out, but underneath that the market was not that strong.

However, Nifty at 6,000 is holding out rather well and this despite the fact that last week was horrendous for the Bank Nifty. So, if the Bank Nifty has down seven percent then the Nifty is stable, then there is something to be said for it. Of course the markets getting narrower and narrower and after looking at the results of some of these companies like Tata Consultancy Services (TCS) last week, one can understand why people are flocking to the safety of these very expensive sectors like fast moving consumer goods (FMCG) and IT. Stocks like Oil and Natural Gas Corporation (ONGC) held out and Reliance Industries did well. So, these small cluster of 9 or 10 stocks are holding the market. But otherwise, underneath that the market still seems a little vulnerable.

However, things are stable and that is the key thing. Therefore the market might well become very stock-specific. We are talking about it being a boring rangebound market for a few days;  possibility of that are fairly high with the Nifty not going anywhere special

So, for investors it has been a very stock-specific market, but even for traders now you just want to be backing the winners. It is a good market for doing this pair trades. You know what to back on the long side, you know what to back on the short side and you create some of these pair strategies and they should do much better than tracking the Nifty now.

On Global markets

Global markets too have been quite stable. This time the most important thing over the last 72 hours is that post the Bernanke testimony, there hasn’t been any kind of panic in global markets. The US bond yields has behaved itself under 2.5%.

Most markets or not just markets, most asset classes have done well, gold and crude have been very steady, which is not good for us. But most markets seem to be saying this is our period for stabilising and being in one place and then we see what the next bit of news, which comes out and hits us. Everybody is going through their own earnings seasons, and the focus now has moved down a bit from top-down macro to a bit more micro. We saw what happened to Microsoft on Friday, so it has become far more stock specific even globally.

There is some talk that after the Japanese election outcome, we could see some more and more money coming in from there, which might keep asset classes afloat for a bit longer. So, this is a period of a bit of stabilisation in global markets. So you probably will see most markets for now being in a flat to positive kind of a groove and then see how things go post the earnings season.

On Nifty

Nifty is still rangebound and that 5,900-6,100 ballpark range is still in place. The challenge will be if the Nifty continues to edge higher and gets to that 6,100 level - what will push it further ahead? Will it still be more gains in Lever and ITC these kinds of names, because this week at some point Lever should start a correction, once these technicals play out? These levels are not sustainable for Hindustan Unilever (HUL) in the near-term. Over the longer-term anything can happen. But Lever should start coming off now and get closer to that range of between Rs 600-650. So, if you take that out; Reliance has had a good run, results were inline, in fact operationally might have been a bit weaker than people expected.
So what takes the Nifty up - will ITC valuations expand much more from here? IT has already done quite well. However, IT could support one or two price-earnings (PE) multiple on the way up. So, that remains a card which can still help the market.

Therefore, if banks don’t start rebounding or there is short covering visible in the banking space, the Nifty probably will struggle to get significantly beyond 6,100 and you can see headwinds pegging it back into that trading range.

It is still better for people not to focus too much on chasing the Nifty for another four-five percent immediately, rather they should actually be trying to look at individual stocks, if they are not comfortable about HUL they could start looking below that at some of the other consumer names which are slightly better off; maybe a few pharmas will do well. One would like  to be stock-specific in a market like this, which is trapped in a sort of high trading range because people are less worried about global liquidity just for the moment.

Focus on defensives

That has been the case, because six months back we were talking about the fact and HUL was a Rs 150 lower than this and ITC was a good Rs 50-60 lower than this and we were saying how much more for valuation expansion out there? But that is not the psychology with which investors are approaching this market. They are saying, if we want to be in India, we want to be with these 10 or 20 names because nothing else is working. You do not want to take that dangerous cyclical trade although that plays out from time-to-time. They get oversold, and then they will give you a 10 percent rally. If you are smart you can play it, However, to be in those names from an investment perspective is hurting portfolios.

So, everybody is in that hurt zone right now saying okay, all my neighbours have these same stocks, I am going to be with them, not be a hero and pick Nagarjuna Construction and Tata Steel and then get whacked for it. So, we are all in the same boat, when the music stops playing we will figure out what to do.

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