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A Very Interesting Video

An interview with Sushil Kedia of K&A securities triggered a few bells and alarms for me. He said that the trading range of the Nifty within the next three months is 3750 to 4750, therefore the downside is three times the upside.

He also says you shouldn’t go short right away, but to wait for a trigger. That point is about 4100 on the Nifty, with an interim break at the 4250 range.

Also, he says, September has been the worst trading month 88% of the time in the S&P in the U.S. And while there is talk of writing straddles and strangles in options, there is tremendous downside because of potential volatility.

For the option writers who aren’t convinced of shorting (and he’s not either), he would write covered calls on the Nifty, reversing at 4400. Meaning, buy a future, write a call (like the 4500 call) and close it out if the future goes below 4400.

A very key thing he mentioned was that Ben Bernanke, the U.S. Fed chief, has made people “write him a free call option”. In that he has said he will “whatever it takes to support the market”. Meaning, if it goes down, he’ll respond on Sep 18 with a rate cut. If it does not, well, it does not.

I think Sushil is a respectable person and chartist but it occurred to me that I need to question the underlying theory here.

Firstly, the US market has had very little correlation with us in the “near” past. The last two weeks have been rapid upmoves for us, while the US markets have faltered. As I speak, the US markets are down 250 points on the DOW, something common for the Sensex but unnatural for the US. But right now that means nothing as we have barely followed any US cues.

Next, the September theory is bunk. I remember 2003 – when I started investing seriously – CNBC would throw these people at you who kept saying things like “December has traditionally been a bearish month as all the US FII fund managers need to book profits to close the year”. Since then, there has been one year with a December downside (2006) and the others were all up. September is not a holy grail for the bears, and if September sounds like a bad month to you, I have 11 more months that sound just as bearish. (Octobear, Novembear …)

Now while he does not recommend going short, he has asked for exits from a large number of stocks. Also he expects the trading range to be very far out, anywhere around 4100 down to 3750. Yet, he recommends writing covered calls.

Honestly, if you don’t hold a position in the market, please don’t write covered calls. Especially not on the Nifty, if you are bearish. Covered calls are not really covered. They have a huge downside. They can hurt you MUCH more than taking a one sided position like a naked call or put. Now a bearish person may want to write calls, and even call spreads to limit risk, but buying the underlying is like crossing a fence and saying, “I know the grass back there is better but I am going to sit here”.

Lastly what he says about Ben Bernanke is important. The Fed will rescue the market on the downside. If you believe that, you should be buying.

And what happens if he doesn’t rescue it? One reason he will NOT, is that the index recovers by September 18. Which means there won’t be much change for India. That leaves us the last remaining option: What if the US indices go SERIOUSLY down, and Ben B. does not rescue it by reducing interest rates? Then the US hits a downturn.

The impact on India will happen then, for sure, as money flees out of equities.

But if he does reduce the interest rate, this will take world indices to new highs, and we *might* follow. The chances of the upside here are far higher than the downside.

On a different note: the put options in India are showing huge interest. Even today the week ended with puts gaining interest – usually around this time there should be strengthening of calls and so on. The way it’s looking right now, the nifty will get pegged between 4500 and 4600, with a bias towards the latter.

  • Anonymous says:

    >Hello Deepak,
    Let’s analyze this a bit more, shall we? Like you said — there r 2 options: a rate cut or rates left unchanged. [I am sure BenB is not even ***thinking*** of a rate hike.] Now if rates are cut, what shall ensue probably might resemble a mild euphoria — mild since the patient is still alive, but only ’cause you didn’t stop the oxygen. This for sure is going to see some buying interest back in BRIC for obvious reasons. However, if rates are left unchanged I fail to understand why money should leave BRIC — the risk premium has not changed, it would have if there was a rate hike, no doubt. ECB too has left rates unchanged, so in the short term I’d probably then look at the $/yen ratio to gauge money supply. I think Fed’s language is what we need to look out for — if there’s a potential hint for rate hike I sense a pretty good downside otherwise its status quo with some choppiness.
    On another note, I made a remark in an alternate post about catches like Indian Bank and Bharat Bijlee available at very decent valuations. I am sure you too have couple of picks you want to share with us mate.

    Regards

  • Deepak Shenoy says:

    >Anon: I agree with you here. If the rates are left unchanged a good amount of capital will leave India, but that is not necessarily bearish. To give you an example, FIIs withdrew more than 2 billion dollars in August, the highest in a month (I think). In spite of this, we had a net GAIN on the Nifty of about one percent. For the last two weeks we are completely away from US and FII cues.

    There will be some choppiness and we aren’t really in a bull market right now. We’re at the fag end, and nearly where the bear market should start – but that final whiff of euphoria needs to be there to take no prisoners.

    Medium term I am bearish on everything. The problem is I don’t see a downside without a huge upside, and at this point we just haven’t run far enough.

    I haven’t really analysed Indian bank and Bharat Bijlee – should do (thanks for hte heads up there). I am chasing certain momentum stocks at this time – Bartronics for one, NIIT Tech for another.

    Few others that have moved rapidly and are interesting: United Spirits, Reliance Capital, SBI and Praj Industries.

    Defensive picks are Dr. Reddys, HUL below 200, Tata Motors, TCS in the IT pack.

    Longer term I like Kamat Hotels, Finolex Industries, Reliance Petro,

  • Anonymous says:

    >Hello Deepak,
    Thanks for that reply. I agree with you on some counts and disagree on the rest. Generally speaking, I am not sure if we are in the fag end of the bull market. There are 2 reasons why I say this:
    1. Money supply should be adequate if not excessive in Indian markets — local MFs and insurance companies have 1000s of crores in cash piled up. Pension funds have just started picking up.
    2. Job growth should be sustainable in the medium term — things like commonwealth games, retail, real estate should do well and so should infrastructure if the govt. is stable. IT and healthcare should not slow down, and an annual rate of 10-20% while not brilliant is healthy enough.
    In the very short term, I am expecting BenB to cut rate, and with the latest jobloss figures of 4k I think so would you. Note that markets were expecting a 100k non-farm job gains and what you have is a 4k loss. Recession?
    On the agreement side, quite a few stocks you mention are worth their salt, specifically RPL, SBI and Reliance Capital.

    Let’s hope we get to see a top 10 picks kind of post from you in the mid/smallcap space shortly. 🙂

  • Deepak Shenoy says:

    >anon: Thanks again! Will try and post a top 10 small/mid cap space picks soon. Small may still be a Kamat Hotels or a Murudeshwara Ceramics size since I don’t like companies that are way below a 100 cr. market cap.

    From a Money supply point of view, we really have a very limited money supply related market at this point. Still the areas you mentioned – IT, Healthcare, Retail and real estate – are in deep mid-term trouble i.e they will find it tough to deal with a falling dollar, a US recession, High interest rates in India etc.

    Banks which have had a dream run are near the end as well – because credit risks in India are growing and their ability to leverage their capital is suspect in this kind of market overseas. Of course, even consumer lending is slowing, as the banks have recently revealed.

    I think there is no solution to the US recessionary implication other than buckle up and ride it, because this is going to be one rough ride to those directly invested there. The secondary folks – us – may not get such a deep gash, but we’ll suffer a little at least.

    As I said this is not a time for fundamentals; I am bearish on practically everything on the medium term, but only after the great rise of the indices.

    Maybe I’m wrong, but what I see around me is skepticism, and I think this is just not the time when markets fall like crazy.

  • Anonymous says:

    >Hey Deepak,
    How about you doing your top 10 in small/midcap space and me doing something similar as well? Of course, cold logic must dictate the decisions and you are free to delete the post if you don’t agree with the facts. FYI, Bharat Bijlee is ~2700/- now. I insist that you take a look into it soon enough. Was available ~1900/- in mid-Aug crash. Transformers these days are firing on all cylinders 😀

    Anonymous

  • Adheer Pai says:

    “He said that the trading range of the Nifty within the next three months is 3750 to 4750, therefore the downside is three times the upside.”
    Looking back, one can realize how nonsensical these “predictions” are.
    Nifty close as of Sep 6, 2007 (day before the prediction) was 4518.
    After the prediction, the lowest value of Nifty in the next 3 months (upto December 7, 2007) was 4452.95 – formed on the very next day after this bold prediction was made. This is a correction of 1% from his starting point.
    Now, on the high side, Nifty made a high of 6042.10, made on December 7, 2007.
    So, this “expert” Sushil Kedia had it completely wrong.
    After he made this prediction, the market rallied continuously from the next day for the next 3 months giving a return of approx 34% without even going below his starting point
    …. and he was saying his range was 3750 – 4750.
    LOL !!