Alpha Trade: short HDFC; Long HDFC Bank: ICICIdirect.com

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Alpha Trade: short HDFC; Long HDFC Bank: ICICIdirect.com

ICICIdirect.com has come out with its report on alpha trading strategy. The research firm has recommended to short HDFC January futures in the range of 667-669 and buy HDFC Bank January futures in the range of 445-447, in its January 5, 2012 research report.

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ICICIdirect.com has come out with its report on alpha trading strategy. The research firm has recommended to short HDFC January futures in the range of 667-669 and buy HDFC Bank January futures in the range of 445-447, in its January 5, 2012 research report.

Parameters:
Current Price Ratio (HDFC /HDFC Bank): 1.50
Target: 1.34
Stop loss: 1.58

Rationale:
• HDFC Bank and HDFC Ltd have outperformed the broader indices but there is an opportunity to trade on the relative outperformance of one over the other. HDFC Ltd has observed significant increase in open interest in January series amid decline in roll cost suggesting build up of short positions. However, HDFC Bank had observed continuous rollover of long positions in the last few series and the same trend is continued in January series as well.

• HDFC Ltd has so far showed resilience to the mounting selling pressure in the broader indices. However, with the prevailing pessimism in the street and addition of fresh short positions, the stock may see downside momentum.

• Being a subsidiary of HDFC Ltd, HDFC Bank has a high correlation of almost 70% with it. HDFC Ltd holds more than 23% stake in HDFC Bank. Hence short HDFC would be better hedged with long HDFC Bank positions.

• Banking stocks may show some resilience in the near term as they are already quite oversold and may consolidate. While NBFC's like HDFC may witness downward momentum.

• The current price ratio of HDFC Ltd /HDFC Bank is reverting from the downward sloping trend line and we expect it to move further downwards due to expected underperformance of HDFC Ltd over HDFC Bank in the near term

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To read the full report click on the attachment