Mkt may rise 2% more from current levels: Dipan Mehta

Excerpts from Closing Bell on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 09/02/12 Are Mutual Funds betting on Nifty?

Equity benchmarks closed at 31-month high on Monday on the back of uptrend across the globe post better-than-expected US employment data, which indicates some hopes of recovery. The Nifty too slowly marched towards 5600 level, rallying 100 points during the day.

US non-farm payrolls fell by 54,000 jobs in August as against expected decline of 100,000 jobs. Private payrolls gained 67,000 jobs while expectations were 41,000.

In an interview with CNBC-TV18, Dipan Mehta, Member, BSE & NSE gave his perspective on the road ahead for the markets.

Below is a verbatim transcript. Also watch the accompanying video.

Q: After seeing the kind of upmove today and that cocktail of good news that we got from the globe, you think the markets can build on from here?

A: I guess that they could build on another percent or two or so over. Thereafter I think resistance will come in. Do remember that valuations are getting a bit stretched at these levels.

What we are seeing today is that more laggards in the index have done well which is why we are having this kind of a fantastic upmove. But my sense is that the main players driving the index are the institutions. I think maybe 2-3%, a couple of percent higher they may start getting a bit uncomfortable about the valuations.

Today's upmove also may have been partly to do with the options positions which are there. The range was set at 5,600 for this particular series and that we are near about 5,600 you may have seen short covering taking place directly indirectly in the options market which may result in this kind of an exaggerated move.

At the same time today being a holiday in the US market perhaps we are seeing two day gains coming in one day itself that being today. So my sense is that no doubt the medium to long term outlook is great, but I think for the moment, from a trading perspective one should get a bit cautious and maybe take some profits. One never really knows when the top is created and we have seen the corrections thereafter being quite swift.

Q: We all have been discussing for the last couple of months how the one factor which is probably coming in the way of a series correction is that there has been no euphoria in the market this time around. Do you think this move could be suggesting that we might see some phase of euphoria before that correction happens?

A: I think one day could suggest that we are under the euphoric stage. But if the index starts moving up from 5750 and beyond, you may have to conclude that we are in a euphoric phase and maybe some other stocks within the market would have reached a little bit of a bubble territory. I think it is great.

One of the major uncertainties is gradually getting out of the way that being the jobs market in the US that gradually gives some amount of certainties coming over there. That is playing out in the equity market and the commodity markets globally as well as in India. Maybe if you have 2-3 more weeks of better jobs report coming out from the US market then there would be even more confidence in this particular rally.

You could then perhaps be able to sustain or maintain these levels. At the same time then a lot of the midcap and smallcap stocks are going to have a great run over the next few trading sessions. Gradually action which has already been concentrated there would get even more concentrated over there.

So you may see the index remaining flat or maybe not having as much gains as the midcap stocks. The money has to be made in these small midcap stocks where typically the retail will try and get in first. Let us just wait a while, next two trading days are important to really take a judgment on whether retail investors have really taken the plunge.

Q: Do you think retail will manage to sit this one out as well if the market moves another 100 odd points from here or do you think it will eventually have to participate, it will be difficult to set out completely?

A: You just cannot draw a line that from this day retail has started participating. On the whole, retail participation has been improving gradually and more and more people on the periphery i.e. traders, investors are getting into the act.

One cannot draw a line that say above 5,500 we will see participation. It is just that it has to be a gradual process and you would have to see the markets trending higher nicely neatly at least for a few trading sessions and that is when greed comes into the play. Right now there is still some amount of fear.

As we speak, the fear is gradually disappearing and then you reach a stage where retail feels really comfortable taking a plunge in the market. When you see the B2 stocks those are the ones which start going up. That is when you know that retail is there full flow.

An important statistic to watch out for would be how many stocks hit the upper circuit. I do not think that too many stocks as of now have reached the upper circuit. So that clearly suggests that retail is there but it is no euphoria. It is not that the dumb money has started getting into the market. Maybe that phase will come but it is some time away.

Maybe at this point of time what we are seeing is the effect which is there in the options market. What investors or traders are doing is that they are shorting the options which are out of the money. So when the series started around 5400 the best strategy was to short 5600 calls and maybe 5200 calls.

That is where the open interest was concentrated because in the first 2-3 trading sessions, you were approaching 5600 and that to in such a short period of time. We are seeing a lot of calls being squared up at 5600 and written again at 5700. When that process takes place some amount of effect does come in the futures market especially the Nifty and the kind of discount premium that keep getting adjusted as well.

So part of the volume can be explained because of this particular phenomena where people are trying to manage their gamma at this point of time. But I do not think that the retail has come in at such a huge flood that we should really be worried and the concern that the top is now finally getting formed.

Even in terms of technicals it does appear that around these levels maybe 50-100 points higher on the Nifty there should be resistance. So the market has moved a bit too quickly over the last 2-3 trading sessions and that itself also may cause some amount of deciding to take place or at least investors were waiting to buy immediately. Having seen this kind of a move today may just cannot stay a little bit more on the sidelines.

Q: After seeing the kind of ground the market has covered today, don't you think the valuation concerns would be heightened at this point in time and where does the real pocket of value really lie in terms of a valuation leeway that many of these sectors would have?

A: That is the biggest concern at this point of time because as we go deeper into the market almost every investment grade company is going at the PEG of around 0.75 to 1.25 and by investment grade we are looking at companies which are not commodities. We are looking at companies where there is high degree of comfort in the management, looking at companies which do not have a cyclical type of business, and where there is decent amount of visibility 2-3 years down the line.

So you would see some of the private sector banks, the pharmaceutical companies, software companies, midcap, largecap. We are looking at some of the engineering companies over there, the capital good companies. These are the kind of sectors where investors are most comfortable investing because of the visibility that these sectors gave.

But I think the prices have run up significantly within these sectors. Right now I think that the margin of safety is diminished significantly. It is fine to say that in FY12, FY13 they appear to be cheap but in FY11 certainly they are on the expensive side. I think that is where the problem will start coming in for the stock markets per se because for the PE expansion to take place in a material manner you will need that kind of retail euphoria.

So unless you have that massive retail euphoria which buys any stock at any price, PE multiples I do think that there will be some amount of resistance around these levels or so. Do remember institutional money just does not keep on chasing the stocks and as and when they do get expensive, institutions do kind of take a back seat.

I would not be too surprised if the domestic institutional number can even be more negative because these are perfect situations for the large insurance companies to press sales. Basically the complexion has not changed significantly over the past few trading sessions.

But we are getting to a situation where retail will come in big time. Markets will get into that frenzy kind of a zone. I do not think it is going to happen in the next 2-3 days or maybe over the next two weeks or so. It is more of an event we have been looking forward to somewhere in October.

Thereafter, when we know that the market has been consistently trending higher, now it would be the third month the market has not collapsed or has given at least some marginal gains. So these are the kind of situation signals that one should look out for. Maybe at these levels one could get a bit cautious.

Q: For something like a metal space and the change in the commodity cycle that the markets are witnessing right now how far do you think all of this talk about increase in rising prices, the supply demand constrains could take the entire commodity cycle upwards and how much do you think these metals stocks would be impacted?

A: Commodity prices will lag equity markets. If you are going to see global markets rally over the next few trading sessions, I am pretty certain that commodities also will follow suit and accordingly commodity stocks will also do quite well.

But from an investor's point of view, one needs to keep a slightly medium to long term kind of view in mind that being that overall growth rates and the world's largest economies US, Europe as well as Japan, China are going to be flat to slightly lower than what we were expecting earlier. Perhaps it makes sense to expect that commodity prices also will remain pretty much flat or at least they will not have the spike up, which we had seen earlier in 2007 and even in 2008."

Today it is having a field day because of the kind of move which we have seen in the global equity markets. Whether it is going to get sustained is a big question mark because at the end of the day the demand at the ground level is not growing as fast as what we'd thought two or three months ago.

So one needs to keep that in mind and perhaps get underweight in the entire commodity spectrum and rallies such as these give good opportunities to liquidate or go slightly underweight on the commodity side and go perhaps overweight on the commodity consumers where we do feel the margins should remain stable or would be able to manage margins better because of commodity prices remaining flat."