Rahul Sharma of Centrum Broking says the current uptrend is definitely strong; however, some technical correction will make the risk-reward more favourable in the near-term.
By Rahul Sharma
The current rise in the equity markets has sparked broad-based interest and we are sure that it would have also caused one to re-look at their own portfolio.
If one looks at it differently, the Nifty was almost at the same level around two years ago (9,000 in Mar’15). Therefore, the Indian market has not given any significant return in the last two years except the 4 percent gain over the previous high.
During the same time India’s GDP growth rate has been around 7 percent and to that extent, the market has not built in this growth.
Thus, one can think about the valuation comfort or discomfort, there is a high chance that market can derive comfort from the 2 years of growth that are yet to be factored in.
However, along with the Nifty going up sharply in the last 5 months, the risk associated with the markets has also gone up significantly.
Yes, trading opportunities are galore in the market, but the bigger question that almost everyone has asked is what should be the strategy at these life highs?
On one side there is a lot of new or left out money that is waiting to be invested and on the other side, there is a need to reduce the risk associated with such high levels.
The solution is to create a portfolio using Derivatives which not only allows participating on the upside but also offers a certain level of protection on the downside if there may be a correction.
What should be the Investment Strategy?
One way of doing this would be to buy longer dated put options of the Nifty Index along with the long portfolio and participate in the possible equity upside from current levels.
Such a hedge would not only reduce the risk of the portfolio but also safeguard against any increase in volatility going ahead.
Illustration: 6-month hedge for the Nifty is available at a cost of around 2.5-3 percent of Nifty depending on the options premium.
Market View: The recent rally in the markets is a classic manifestation of a liquidity driven market coupled with a lack of major negative triggers.
Every minor correction that has happened has been bought into and markets have successfully turned major resistance levels into support points.
The relative strength index (RSI) levels have remained overbought for quite some time now. As far as the options concentration is concerned, 9500 has the highest build-up of Put options whereas 9700 has seen the highest build-up of Calls.
The current uptrend is definitely strong; however, some technical correction will make the risk-reward more favourable in the near-term. A level of 9,340 is expected to act as support level going forward whereas 9,700 should be stiff resistance to cross.
On the Nifty Bank front, the 22,950 should provide good support and 23500 is expected to act as resistance.
Sectors/ideas to look out for in the medium term (6-12 months):• BFSI
• Auto & Auto Ancillary
• Capital Goods
• Select Oil & Gas stocks
• Monsoon play/rural demand based stocks
Stocks to watch out for in the near term (1-3 months):
Punjab National Bank (PNB):
PNB has retracted almost 90 percent of the rally that it saw from 135-185 and is currently trading in a key support zone of 140-150.
Sustained trading above 150 can push the stock higher and can make it retest its previous high. Expected target at 170-190 and stoploss placed at 135 on the downside.
M&M is all set to come out of the underperformance that it has been going through over the last few months now. Technical breakout placed at 1475 with the possibility of going towards Rs1,600 on the upside. Support level/exit point placed at 1350 on the downside.
After seeing a major rally in so many years Reliance Industries has cooled down a bit in the last few weeks. It has seen good buying interest at 1300 and looks good for a fresh up move now. Possible target remains at 1460/1500 and a stop loss placed at 1280. (Disclosure: Reliance Industries owns Network 18 and Moneycontrol.com)Disclaimer: The author is Head – Technical & Derivatives Strategy, Centrum Broking Limited. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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