Market has run way ahead of itself, says KR Bharat

Q: We hit a record high on the index and that was supported by some solid FII flows. Do you think that good run could continue in the run up to the elections? If yes, is this still a buy on every dip market?

Bharat: Sometimes I feel that the market is smoking something. It seems completely surreal because there is absolutely no economic basis for what is happening. The market is always right, there is a serious momentum that’s built up.

A lot of funds that had given up on India a couple of years ago are coming back now and are investing reasonable amounts of money back in India. So, the momentum is very strong. If you analyse what has happened in India over the last 7-8 weeks or maybe even three months to see what has changed, absolutely nothing has changed on the ground from a macro economic perspective except politics.

Today, market has discounted the fact that you are going to have a new formation in place in Delhi come the last week of May or first week of June. The market has also seemingly discounted the number of seats that the new formation is going to have and now the market is in the process of discounting some new policy initiatives that are going to be taken by the new government. There is no reason for me to disagree with what the market has discounted in terms of the fact that there is a new dispensation that is going to take shape.

I see no reason to disbelieve the results of virtually every single opinion poll that is being published, plus or minus the usual margin of two or three percent. Why do I say that I can't fathom what the market is smoking? The reason I say that is because the one thing I do know with certainty despite agreeing with the market on the points that I just made is that the new Prime Minister and the new Finance Minister certainly do not have a magic wand.

Whatever they may seek to do in terms of revitalising the investment cycle, removing the policy paralyses that we have all been complaining about in the past, the process is going to take a minimum of 12-15 months. So, the feeling that I get from an intellectual perspective, from a macro economic perspective is that this market has run way ahead of itself.

I do not believe that this momentum will run away because momentum is a very strong thing and it does not necessarily listen to intellectual or quasi-intellectual arguments. The pre-election rally will continue albeit with the kind of profit taking that we are seeing. It will perhaps ignore economic realities in India and overseas and also the geopolitical realities that you spoke about globally.

I would be cautious about the medium-term, maybe post election after the initial euphoria, if what the opinion polls are saying is correct there will be profit taking, there will be correction when people and investors realise that the new government is going to take a good 9-15 months to sort out some of our problems. The way I see it is the pre-election rally continues, the euphoria continues immediately post elections followed by a prolonged process of profit taking and correction and an initiation of a long-term bull market which will start in first or second quarter of calendar year 2015.

Q: Do you concur with Bharat's view that perhaps riding on this sentiment at this point in time could be playing with fire? Who knows whether this euphoria could last, some people even talk about a post election sell-off in the market. To sum it up how are you going to play this rally or this sentiment wave from hereon?

Kedia: Lot that Bharat said resonates with my way of currently looking at things. To make it condensed and a little simpler, the Modi premium on the market is not going to let you comfortably do any short trades. You will be as anxious in doing short trades due to the Modi premium as you would be anxious in doing long trades due to the Ukraine or the other global macro risk factors. The usual habit of looking at so many things in the world and connecting them together – we can't get so spontaneous even if many of us are reading Bhagwad Gita we just cannot keep ignoring so much information that we are all used to.

So, when I am looking at global charts where oil has begun going down, gold continues to go up which looks like more risk premium, the dollar index is likely to be perhaps making a strong up move from later next week, it is scraping the bottom of the barrel. The Euro looks like it is more or less topping out, I am talking say about a month to two months time frame, we will cut it finer to a week. The sort of dissonance that you are noticing across correlations worldwide, while China is close to scraping the bottom of the barrel the DAX and S&P500 are going through the stratosphere, Korea and India are stuck somewhere in between. This euphemism about a new high in India I have never believed in these new highs.

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If a new high was a logical point to buy merely because it is a new high the next day also there should be a new high and stock prices should go to infinity, that has never happened and the same way for the new lows. So, that is just one of the things.

Cutting all of these together say quickly into our own Indian stocks context it is a very stock specific market. The usual advance decline indicator that has been very badly abused, I urge anybody who practices technical analysis to do something simpler, divide the price of CNX500 by the price of the Nifty index and you will get to see the relative performance of the broad market versus the focus Nifty index and that is not inspiring. That has not been going up. So, while there are odd stocks here and there that have produced some humongous returns but because we have been so tired and bored in the last two years that this is more like a release of our pent up boredom that so what if did not do too much we still have a lot of stocks going up, no that is an illusion. Please look at CNX500 by Nifty and focusing within Nifty.

Q: I agree that on the macro front not too much has changed. The ride from 6100 to 6500 has been pretty swift in this market. Now there is a bit of a left out feeling not just for long term investors but even for investors who are looking for shorter term pre Modi rally pop, if you have to advice some of these shorter term investors what would your view be? Would you get into the market now and if yes what should be the sector or the stock approach at this point?

Bharat: We are talking about two different kinds of investment. Your question was on the short term investor, clearly if you are a short term investor you look at the momentum you will tend to go with the momentum. I see no reason why short term investors or traders shouldn’t sort of go on the long side and try to take advantage of this pre-election rally that is playing out, the caveat being that be very strict with your stop loss, I am not the greatest person in the world to advice traders.

The momentum is your friend, the trend is your friend, clearly if you look at what is happening in the rest of the world vis-à-vis what is happening in India, global investors are taking a special interest in India and the only reason they are doing so is not because of what is happening in the economy but because of what is happening in the sphere of politics. I do think this momentum will continue. I do think short term traders can try and take advantage of this momentum albeit with very strict stop losses.

If you go by the logic that this rally is happening because people are expecting a political change then the old favorites - IT and healthcare are no longer the old favorites, people are taking profit there and people are moving to the cyclicals and the infrastructure etc. They are moving to the sectors where they believe the new government or the new dispensation is going to focus on. So, those will be the sectors to concentrate on.

Q: In the week gone by we have seen a big move coming in on the oil marketing companies. I wanted your specific thoughts on that because that seems to be the biggest pro Modi sector favourite these days. BPCL was up about 6-7 percent as well last week. Would you advice any trades within this sector itself – the oil and gas space and the oil marketing companies?

Kedia: Within the oil and gas space the kind of massive up move that has happened on BPCL from Rs 250 to Rs 450, the juice has definitely gone out now, what is left is volatility. It may swing up a little bit more. It doesn’t fit into my style of trading. There may be some sniper traders, non-institutional sniper traders who may still be able to grab something more left on them. I will rather wait for a top out to happen on them now. They have swung up heavily and it is a little early on BPCL, HPCL.

RIL has a very interesting perch on which it is poised on right now. Rs 800 is the lower boundary, Rs 900 is the upper boundary roughly speaking where a five year consolidation pattern, a triangular pattern with declining tops and rising bottoms. Currently Rs 800 and Rs 900 are the two fulcrums. If Reliance breaks past Rs 900 and then closes above it may be Rs 300-400 kind of a brisk move should come. Looks less than likely right now, may be one more dip back down to Rs 800, this chart has come up as more like a Rubik's cube puzzled to any chartist. It is so beautifully poised over these last five years that until it makes that breakout beyond Rs 900 or Rs 800 it is foolhardy to talk about it but once it makes it is going to move big. So, if I have to make a guess I would still tilt my hat to saying that we have one more dip on Reliance back to Rs 800 before the elections.

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Right away however for people to be still trading in the sector and looking for a long bet – I do not know how to explain this if HPCL, BPCL are still no longer great buy's and RIL is perched between a stone and the rock right now. ONGC is still a stock which you can take small nibbling positions into and still try to ride an uptrend. That can give you a decent risk adjusted returns of another 10-15 percent. It is possible.

Q: In the week gone by we did see a big knock on Infosys. The stock was down about 9 percent last week. The management stating that perhaps they will meet the lower end of their guidance in the quarter to come or rather for the entire year. How would you approach that name in particular and since you mentioned that IT may not be the flavour of the moment atleast would you take profits off any of the IT names?

Bharat: Let me answer the second question first. When I said IT and healthcare or not sort of flavout of the month and people are taking profits and moving to cyclicals my comment was in relation to your question of do you think the pre-election rally will continue. I would now like to split my answer in two parts, one, what we expect to happen between now and the election results being announced and two, what one expects to see post the election results. What you see happening now is a lot of money coming into India because of what people perceive is going to happen in the elections, i.e a change in government, a government which is more sort of pro market etc. In that context what you are seeing is rupee which is stronger relative to other emerging market currencies to the dollar.

What you are seeing is people moving away like I said from pharma and healthcare where they have made lots of money in the past and moving to industries and stocks which they believe will be the focus of the new government. So, pre-election I think that’s what is going to happen. However coming to your specific question on Infosys, in the medium to long term I actually believe that the rupee will sort of start depreciating slowly again certainly post election and I believe not withstanding the outlook given by management I think in the medium to long term I would certainly be a big fan of Infosys. However I wouldn’t be putting any money in the stock now.

I would probably go back to IT and healthcare post election results when I believe there will be profit taking that will set in. Profit taking will set in not because people believe that the new government will continue with policy paralysis or will not be able to do anything but because the reality will dawn that it is impossible for anyone to fix a problem of this magnitude overnight. To give you an example, you could be the best oncologist in the world but if I come to you with stage II cancer you are not going to be able to cure be tomorrow. It is going to take you a good 12-15 months that is the logic I keep giving a lot of people. I actually see profit taking coming post elections and that is the time when you will sort of position yourself for long term investment. To answer your question short term yes certainly not bullish on the IT space but medium to long term yes I think post elections, post the dip that I see happening in the market I would be back in IT and certainly in stocks like Infosys.

Q: Since you were mentioning that someone could make a bit of gains in ONGC stock. That was the sector I asked you about but if yourself had to give us a couple of trading ideas on the long side for next week what would your top bets be?

Kedia: I have had a short bias and market hasn’t been too kind. Again if I find much more cogent short signals that are fresh – I am not having any convincing immediate short term long ideas. If I don’t have those ideas I will not push the envelope across the table.

To me it seems if one has to be a short term trader which is not the best thing to do in the life ahead of such massive events but if we have to do it there are better signals for shorting in Bank of Baroda, Punjab National Bank, State Bank of India, even ICICI Bank but I will wait for a confirmation on Tuesday. If it closes lower than four days ago then there will be confirmation. Ranbaxy is a stock, it is not too risky to really – you really keep on pyramiding and punishing the stock. It can devastate from here. These are four or five key short fresh ideas for now.

HCL Technologies has already had a decline, it has been in a very massive long term uptrend but from a make or break point yesterday the lower close today has given a down trend extension. The same picture remains on Infosys and Wipro. While they have shown some decline in the long term uptrend is very strong in them. People who have piled up lot of trading profits in the recent past should get into these slightly riskier shorting because there has been already a decline. So, Ranbaxy and banks are my top trades to be taken on the short side for the coming week.