Markets capitulated during the week ended due to the spike in crude oil prices triggered by the Libyan crises and the FII sell-off on the F&O settlement day. On the BSE, the Sensex ended 511 points lower at 17,700 and the Nifty on the NSE closed at 5,303 shedding 156 points. Market breadth was very weak reflecting nervousness of market players.
As expected, the Railway Budget with visible populist agenda was a dampener. The Economic Survey indicated that ‘all-is-well’ with the economy but also pointed to inflation worries and emphasised the correlation between inclusion and inflation. Instead of trying to reduce or close a perpetual budget deficit which is like the dog that chases its own tail, analysts feel that subsidies must be rationalised and leakages should be plugged.
Market watchers feel that even if 20 per cent of policy expectations raised in the economic survey are fulfilled in the Budget, it will be a “big” bullish budget. Analysts feel that if violence in oil producing countries continues, it will bring more fear into the stocks and oil markets. For the week ahead, chartists predict a wide trading range between 17,250 and 18,250 for the Sensex and 5,150 and 5,550 for the Nifty.
If indices slide below the recent lows after the Budget, markets may move into strong intermediate downtrend. Initiate fresh positions if the indices stay above 18,000 and 5,450 levels on closing basis. More than at any other time, market needs a pragmatic budget this time to boost the morale of investors. The market is dangerous when it looks best; it is most inviting when it looks worst.
FUTURES & OPTIONS
Volumes touched record levels on the settlement day in the derivatives segment during the week ended. However, with the Budget on the horizon aggressive rollovers were absent. Open interest was less than Rs 1,00,000 crore.
Budget movements are difficult to predict but to take advantage of directional breakout, punters suggest the strangle strategy for Nifty futures. Buy out-of-the money call option of Nifty-5400 strike and out-of-the money put option of Nifty-5200 strike.
Major rollback of stimulus is not expected but more services may be brought under the service tax bracket. Though the rumours of amnesty scheme to be introduced to garner windfall revenues like in 3G auction are doing rounds, analysts do not expect it in the light of the Supreme Court’s strictures.
Strong agriculture focus expected in the Budget. Track fertiliser stocks and counters like Jain Irrigation, United Phosphorus and others. To attract FDI, opening up of multibrand retail and hike of FDI limit in insurance are expected.
Re-capitalisation of equity of some PSU banks and changes in banking license norms may prime the banking sector.
Buy on declines banking stocks.
Industry watchers do not expect continuation of exemptions for IT companies. Midcap IT companies may suffer more than the frontline ones. Beleaguered infrastructure sector may see some of the issues addressed. Steps to ease funding are expected. Wild swings in many midcap stocks like Mphasis, Aurob-indo and also in frontliners like Tata Motors, Reliance Infra are making trading risky.
Use stop loss orders whenever practical. Don’t trade on the basis of “tips”. In other words, “trade with the trend, not your friend.”
STOCK SCAN
When there is blood on the street, there are big bargains in midcap and smallcap segments, which have the potential to become multi-baggers.
Selan Exploration Technology is one of the few private sector firms in exploration and production of hydrocarbons. It has five oilfields spread across 200 sq kms near Ahmedabad and is at advanced stage of developing Indorora field. Debt free with `100 crore on its balance sheet and production expected to quadruple in two years, the stock is a good buy for a target price of `550 in medium term.
Ador Font-ech is enga-ged in the manufacture of welding electrodes and flux cored arc welding consumables. Products and services incl-ude low heat input welding alloys, solid and flux cored wires, welding and cutting equipment. While sales have just doubled, operating cash flows has more than quadrupled since 2005. Buy this stock on declines for a target price of `600 in the medium term.
Select stocks like Vishnu Chemicals and Pitti Laminations are witnessing good accumulation after the announcement of good third quarter results. Sources indicate that the good performance will be repeated and may even be bettered in fourth quarter. Buy at current valuations for doubling returns.
EPC Industries is engaged in drip irrigation systems and industrial and infrastructure piping. M&M has acquired a controlling stake to complement its farm equipment and agribusiness segments. Turnaround performance, excellent prospects of the user industry. Buy on declines closer to `60-65 band for a target price of `125.