Uptrend intact; pvt banks, pharma good: Phillip Capital

The steep fall in benchmark indices on Monday was surprising, but it is too soon to call a trend reversal, feels Vineet Bhatnagar of Phillip Capital. That is because the market is not yet in an overbought territory, he says.

The Nifty closing above 6000 in the current derivative series should confirm the uptrend, says Bhatnagar. In an interview to CNBC-TV18, he said foreign institutional investors are long on Nifty futures. He feels for the index to touch 6100, Reliance Industries, Infosys and TCS will have to perform. Bhatnagar is bullish on private banks and pharmaceutical shares, and sees a positive build up in Tata Motors and Hero Motocorp. Below is the verbatim transcript of his interview on CNBC-TV18 Q: It has been a good run in May so far; do you expect the Nifty to extend its gains? A: Our expectation as of now is that Nifty should close this particular monthly expiry above 6,000. There seem to be certain sectoral lids that seem to be limiting the gains as one would expect beyond 6,100, at this point in time. Sectoral indices like Bank Nifty seem to be capping the upside on Nifty as of now. Q: The big talking point is whether this two year peak of 6100 plus will be taken out in the May series convincingly or not. What is the Futures and Options (F&O) data suggesting to you on that? A: The F&O data is suggesting that there is a long bias in the market. If you look at how the buildup is in terms of Foreign Institutional Investor (FII) positions in the index Futures, it is a long of about Rs 4000 crore. The open interest itself is up by about 55-60 percent over the previous expiry. Underlying market in the cash segment also has been seeing consistent buying by the institutional players. There is a positive cost of carry that is visible in the cash Futures arbitrage books as well. So, overall there seems to be a clear long bias as far as the institutional space is concerned and that could be the determinant in terms of expiry being above 6,000. We are still reluctant to stick our neck out and go for 6,100 at this stage though. Q: What did you make of Monday’s move on the market and at this point what would you say is the potential downside risk for the market? A: The extent or magnitude of the correction was a bit surprising, although the direction or correction itself did not alert us in terms of having resumed a complete reversal of the uptrend that has been visible for the last few weeks. We say that because the indicator that we keep track of, which is an estimate of the amount of money that is going in the F&O space, still did not indicate any kind of panic or topping out when the market started correcting on Monday. Therefore there is still a good sense of market not breaking down below 5,920. Q: While the index has been fairly strong, any points of concern on individual heavyweights for example this run on ITC has been quite worrying. Faces like Reliance Industries, Infosys haven't really been moving too much in tandem with the market? A: That is precisely the reason why we are looking at marrying the lids that are there on Nifty to cross higher levels, because of some of the heavy weights either sector wise or individual stocks not showing the strength or the momentum that one would like to see for Nifty to cross 6,100. The names you mentioned are clearly the reasons why one is a little bit concerned. For example there was an across the board pessimism around PSU banking stocks. There was negative build up in some of the heavy weights day before yesterday and yesterday as well. Today, we are seeing some lift up in some of the front line stocks but Infosys and Tata Consultancy Services (TCS) are not doing much. There is a negative buildup that is visible in names like Bajaj Auto and HCL Technologies as well. So, we may wait and watch in terms of whether there will be a confluence of individual stocks as well as index level momentum now moving together. Q: What have you spotted from the FII activity for the last few days in terms of how they are being positioned now? A: The FIIs actually did not panic react on Monday, when the correction did set in. We did not see any kind of reversal or closeout of the long positions that were visible in the first two weeks of this particular month. In fact on a day to day basis even yesterday we were seeing that there was an accretive addition to the long positions on the index Futures, as well as on the long side of the cash segment. Same was the case yesterday, although the market did not move up considerably yesterday either. However the trend or the approach to the local market seems to be on the positive as of now. _PAGEBREAK_ Q: Which clusters of stocks from the F&O data look like they could be the most supportive in a journey to 6100 for the Nifty? A: Some of the private sector banks are looking positive. Private sector banks like Axis Bank, ICICI Bank, even State Bank of India (SBI) had a long buildup yesterday, IndusInd Bank, these are supportive. Pharmaceutical as a basket is looking supportive. One had seen the conviction in terms of positive momentum in stocks like Lupin, Cadila, Pharmaceuticals, the Ranbaxy story is in front of all of us, what happened on the stock yesterday, not withstanding what happened to Dr Reddy’s Laboratories actually. However these are the stocks that are looking okay. In the auto sector, there is a positive buildup that we are seeing in Tata Motors as well as Hero MotoCorp. These are the sectors that I think will be supportive. If Reliance were to show some momentum which will take it a little higher, and if some more life was to come in frontline IT stocks like Infosys and TCS, we should be then marching beyond 6,080 towards 6,100. Q: Any extrapolation you would make right now on how you think this series might expire and what kind of position someone could take on that note? A: To the extent that we have a long bias on the market, the strategy that we proposed is a simple one of buying one Call of 6,100 strike and selling one Put of 5,800 strike for Nifty. If one were to look at as to where the expiration will come about, it is a bit too early. We would have a greater sense of how much money has moved into the Nifty Options markets particularly by this Friday or early Monday next week and that is when we will be able to get a greater sense. As of now we strongly believe that the expiry should remain above 6,000. Q: Last week saw some fairly sharp gains for the midcap space as well - anything that has stood out there in terms of individual stocks on which you are seeing a huge long run? A: We have not been too focused on the midcap stocks particularly because the top down approach that they are looking at or that we are ascribing to at this point in time comes from a point where, if you were to look at the entire global equity space - The developed markets are doing very well and therefore for global money managers it is only going to be sensible and natural to allocate money to markets like US, Japan and even bit to Europe because it is not looking as bad as what everybody had predicted. In that light what would happen to emerging markets in Asia? Will India be the relative beneficiary because of its underlying performance in the last year or so? In that particular context, if one were to start looking at the market, we really end up stopping only at the front line stocks, and the large caps when our analysis for Indian equities come about. Q: Nothing in the data points right now is suggesting to you that the market has moved on to overbought territory? A: No at this point in time we are not seeing the overbought setup visible to us. It is inching towards it, but the speed with which the Nifty moves and the speed with which the indicator moves are not really same in terms of velocity. So index could go up to 6200 or 6150. This is only a hypothesis at this point in time but the indicator still not may move to an overbought condition. Today at 6,050 as an opening today it is not showing an overbought condition. Q: In the past you have worked with a lot of pair strategies. Are you still going with that or is there just so much momentum on the index that is the best pace to stick with? A: Some of the pair trades that we came about either in cement or sometimes in IT or perhaps even in pharmaceuticals is not necessarily making too much sense because hereafter, if the optimism of higher Nifty levels were to come about as we are witnessing even the pharma sector - all boats in a particular sector will rise together. That is the mentality that the traders or the retail investors may sometimes hold, if pharma is looking good almost everything is looking good. Therefore doing pair trade in such a situation could turn out to be actually risky.