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.