Expect Nifty to touch 8650-8700 by year-end: JM Financial

The recent market rally witnessed over the last few weeks has cemented the base for a bull market in the long-term, is the word coming in from Gautam Shah, Associate Director & Technical Analyst at JM Financial. “The market has climbed the wall of worry,” Shah said. Nifty has seen a 15 percent upmove since February. Correction from 8000 levels, seen last week, is a healthy phenomenon.Level of 7750-7800 is a strong support zone as well as a good buying opportunity, Shah said, adding that Nifty could bounce back to 8100-8150 levels. Shah expects Nifty to touch 8650-8700 by year-end. Speaking on Bank Nifty, Shah said levels of 16300-16400 are a good buying opportunity. “Banking is like Pied Piper,” he said, adding that when it moves up, market also rises. Public sector banks, which tend to be underperformers on a day-to-day basis, are a good buying opportunity over a six-months time frame. The best sector to look at now is the auto sector. The two-wheeler segment is gaining strength, he said.Below is the verbatim transcript of Gautam Shah’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: The run has been fairly smooth and sharp on the upside. Do you expect some roadblocks here or do you think that the uptrend will continue? A: The market has really climbed the wall of worry because if you go back to the months of January and February, there was so much in terms of negativity and the market has negated all of that in the rally that we have seen in the last three to four weeks. With what has happened in the last one week, this correction from around 8,000 levels, I think this is pretty normal and quite healthy because you need to understand this in the bigger context.It all started off on the first trading day of this year, I mean on January 1st you had the Nifty at 7,972 and from that level Nifty came off all the way to 6,825 and then this spectacular rally has taken the Nifty back to 7,970-7,980. So, in that sense, a V-shaped recovery got completed. It is a big 15 percent move that has taken place on the index. If you go back to the last six months, the level of 8,000 has really been a tug of war kind of a level for the market. Every time the market is got to that level, that has always been selling pressure and most of the time, the bears have emerged victorious. So, it is healthy that the market has come off once again from around that level of 8,000. I think it is just the weaker hands which have indulged in some profit booking that has led to this decline. However, we have created strong supports around the 7,750-7,800 band. So, I would like to believe that in a normal scenario, in an ideal scenario, the market should find support in this zone and from there we should see a rebound taking the Nifty back above 8,000 and then towards that target of 8,150 and 8,300 that we have been working with for quite some time. Latha: We are not at far cry from 7,750-7,800. It could well get broken without too much of an effort. If 7,750 breaks would that be an important negative signal? A: I think so. I would be a little worried if 7,750 breaks on a closing basis because a lot of studies are pointing to that particular level. If you look at this 1,000 point move that has taken place on the Nifty, corrections have been very shallow and I think it is important to not look at this market from a day-to-day perspective. I think look at it from a bigger context and I think what the market has done in the last one month is that it has just laid a foundation to a bigger bull market ahead.If you look at the technical factors, last 15 months we have been making lower tops and lower bottoms, that sequence has been punctured and it does seem as if now we have got into that sequence of higher tops and higher bottom so there will be corrections along the way but I don’t think they will be deep enough to really puncture this sequence that has started. The moving averages, something that always provides resistance during a pullback have now started to provide support during a decline so that is a significant change that we have seen in the last couple of months. Some important trend lines have been taken out on the upside. The patterns look very confident and if you look at the volume activity, the days on which the market moved higher, the volumes are always higher and during phases of corrections, the market volume turns out to be pretty dry. To top it all, if you really look at the foreign institutional investors (FII) action in the F&O space because I like to combine the derivatives data with the technical data, on the Budget day the FII long short in the market was about 1:2 and as we talk today, it is completely the reverse, it is 2: 1. So, the larger players in the market have also realised that India is a market that has to be chased when it is running and this run is going to continue. So, while today might be a bad day or you might have a few more bad days, I think from a risk reward perspective, 7,750-7,800 is a great buying opportunity. I think since the foundation has been laid at lower levels I would be very surprised if 7,750 breaks on a closing basis. Sonia: If the market does resume its uptrend at some point in the near future, what are the stocks that are showing the strongest chart in F&O patterns now? A: As we always say, it has to be banking because that has clearly become the pied-piper of the market. If this sector does well, the entire market goes up with it and it is interesting that in the last few weeks, it is the banking stock that have really lead the market higher. The Bank Nifty is up, 2,500 points in the last one-one and half month so that is a serious move and just like the Nifty has completed its V-shaped recovery at 8,000, the Bank Nifty will complete that at around 17,000. So, I think any decline towards 16,300-16,400 I think is a buying opportunity for a near-term target of about 17,000 and then we start working with a much bigger target of about 17,500-17,700. What is important for the Bank Nifty is that the PSU banks have started to make small moves. So far it has been purely because of the private names and they have done exceedingly well, look at an HDFC Bank, look at an Yes Bank, I think phenomenal movers there. Even in IndusInd Bank, but I think some of the PSU banking stocks are now exhibiting a lot of strength because they have created a strong base in the last one-one and half months and only now are they preparing themselves for a big move. So, maybe the charts are indicating that something positive to come up. However, apart from banking, the sector which looks the best from the charts would be auto. I think the two wheelers in the auto space probably has one of the best setups right now in the marketplace and you need to have 20-25 percent of your portfolio in autos because I think whatever the market does, whatever the volatility that might happen because of global markets, I think banks and autos are probably the two of the best names to track right now. Latha: You have not mentioned one sector that has actually shone since mid February between 40-60 percent in terms of gains, the metals. More to go or is the tactical run over? A: There is a lot more to go there. Look at the last three years, the BSE metals index lost 50 percent in value in the last two years. If I am not wrong, the BSE metals index came off from about 14,000 to 7,000 and post that the last six months has seen a lovely basing pattern on the charts wherein the index just traded in a 1,000 point band yo-yoing in a 1,000 point band. From that band we have seen a breakout in the last two weeks. Obviously some of the popular names like Tata Steel, JSW Steel or Hindalco have already done well but I think this is just the beginning of a much bigger move. So, metals is another sector that we like from a buy and hold perspective. You don’t have to really trade it on a day-to-day basis because it is really not high beta. Sometimes it does not move with the market but if you have a three to nine months view, metals is one space that we like simply because it has had so much damage and there is so much to recover there in the coming months. Latha: PSU banks often track this up move in metals. So even in PSU banks there is more juice left? A: I would say but I am not very convinced about the PSU banks setup from a day-to-day perspective because they tend to be a underperformer, they tend to be a laggard and on good days for the Nifty and the Bank Nifty, you could have a PSU bank like State Bank of India (SBI) doing nothing. So, you don’t want to get stuck in that kind of a scenario and that is the reason I would recommend buying into PSU banks purely from a six month perspective, anticipating a return of about 15-20 percent. However, if you have to take a day-to-day or a week-to-week strategy, I think it still has to be in the private sector banks wherein the setup is much cleaner and more reliable.  Sonia: What is your forecast for the Nifty by the end of 2016, is there more upside to go? A: I think so and since I have said that this is a foundation for a bigger bull market and while the correction happened last year, I was probably one of the few people who kept saying that this is a correction in a bull market because I thought 2014 breakout around election period was huge and that will continue to take this market higher and the fact that we have come to levels of 8,000 so quickly, I think further substantiates that. So, while our near-term target is about 8,150 and 8,300, I think the kind of breakout that we have seen in the last one month, I think 8,650-8,700 realistically is the kind of target that we could keep for 2016. It could well surprise us on the upside but I think those are really minimum targets right now and 10 percent moves in the marketplace these days happen just like that. The only worry is that global VIX and India VIX have come to such low levels that there could be a minor correction coming sometime in the next two to three weeks. Just looking at the VIX levels but otherwise the price action has been pretty clean. Latha: Which would be some of the more outperforming indices, would they be emerging market (EM) indices or would they be developed market indices? As well how are you looking at the crude and DXY charts?A: It has to be the EM basket and within the EM basket I think I would be biased towards India because it has one of the best charts in the basket right now and what I have also noticed is that some of the other popular markets like Hong Kong and Singapore have also developed nice basing patterns in the last one-one and a half months and they are also likely to start their move up and you could see moves of 10-15 percent. However, I am a little concerned with the placement of the US markets. If you look at the Dow, it has just been trading in that 15,500-18,300 band for the last one and a half years now. Every time it approaches the lower end, it seems as if the big breakdown is going to happen and that is what global participants have been talking about. However, it just keeps rebounding from that level and now we are at the upper end of the range, around 18,300 on the Dow, 2,100 on S&P 500. If these levels get taken out then you would sort of have a confirmation that this one and half year of range bound activity was actually consolidation and not a reversal. I think there is debate in the marketplace whether this is consolidation or a reversal but looking at the recovery that we have seen in the last one month, I would like to believe that this is more like consolidation and the US markets will eventually take out 18,300. Once that happens, I think emerging markets will do a much better. Coming to your point on crude, I think I mentioned last time on your channel as well that USD 34-35 per barrel is sort of a base for NYMEX crude, I think I maintain my view, you could have volatility on a day-to-day basis but the target for NYMEX crude for this run is about USD 48-50 per barrel and if we were to get there, I think a global equity market should continue to do well because they are having that correlation right now and people want to watch it  on a day-to-day basis.