Nifty 5th Feb 2018

Nifty 5th Feb 2018

Nifty is moving perfectly along expected lines. Many traders and investors are attributing today’s fall to LTCG but we feel LTCG is only one more headwind for India.  Regular readers of this website are well aware that India’s macro situation does not look good and has been getting from bad to worse.

There are many headwinds which are consistently growing for India, few of which I am highlighting here below so that most people do not only attribute this to the LTCG episode.

Sky high valuations has been a problem for some time now but it is not the only problem the real problem is that sky high valuations and almost no earnings growth is the real problem. I am not denying that some specific results in the current ongoing earnings season have been better than what the street was estimating but please keep in mind we cannot compare them because of the simple fact that last time around we had a much lower base which was due to demonetization and hence some of the results do look good optically. The real test for earnings growth will come in the next 2 quarters. The important aspect of watch out is that will earnings grow at 18-20 percent that the street is expecting? We do not feel so and the reason is that there are too many macro headwinds increasing by the day which will impact demand very severely.  Some of the macro headwinds are discussed here today.

Crude Oil for instance has given massive breakout on the INR charts as well as the Nymex and brent charts which simply means that we expect crude oil to head higher in INR terms to the 5900-6400 area which means that from current prices of around 4200 we will see an upside of another 30 percent atleast which means that petrol and diesel prices will also move up significantly from current prices and which in turn means that inflation will be picking up very fast and move higher much more faster than what the street is estimating besides this the next problem as far as inflation is concerned comes from the higher MSP prices assured by the Govt in the budget so as a consequence of this food inflation is also set to rise sharply so the rising inflation which will be on account of food and fuel lead will force the Reserve Bank of India to raise rates much faster than what the street is currently estimating.  Two important aspects happen here. First is that there are lot of companies whose net margins will be impacted due to higher cost of capital and that will hurt the bottom line profits second is that purchasing power reduces due to inflation and that further creates a demand slow down which is already present. Now in this situation where demand is reducing which effectively translates to lower sales and lower growth and higher cost of capital will dent the profits we do not see earnings to pick up. Now assuming that there is minor pick up even in that case the multiples that we are trading at have factored in growth much ahead of time and hence I do not see any rerating on the multiple front.

The bond rally in India and globally is also signaling that inflation is set to come back and it will force central banks to raise rates much more faster than what everyone on the street is estimating. Please keep in mind that one of the reasons for this global rally over the past few years has been cheap capital and rather from an international stand point no other avenue to park money so that capital will be walking out of the world stock markets with the bond yields moving higher and inflation moving higher.

LTCG makes equity investment much lesser attractive at current prices. The risk reward is not much in favor of buying stocks and although gains till 31-1-18 have been grandfathered still keep in mind that all fresh purchases will eventually pay either STCG and LTCG and that does not make India a great market. We do expect that on account of LTCG India’s overall allocations will reduce and most overseas funds will be seen reducing their India overweight.  This too will be seen impacting the near term trend.  

So an combination of historical high valuations with low earnings growth, rising inflation and fiscal deficit, rising interest rates or at least end of the rate cut cycle in India and internationally rising interest rates, crude oil heading higher all these do not argue well for growth. Does that mean Nifty cant rise no I am not suggesting that it is still possible that stocks do not fall immediately or it is still possible for markets to ignore all this headwinds but we do not expect the markets to continue ignoring them for longer duration of time. Eventually for this market to sustain earnings recovery has to take place or else these headwinds will play catch up with the markets.

Part of what we did is enclosed below

29/01/18, 8:47 AM – Glen Drago: Good morning

29/01/18, 8:47 AM – Glen Drago: Will update by 10 am

29/01/18, 8:47 AM – Glen Drago: Wait for msg

29/01/18, 9:48 AM – Glen Drago: Everything has been priced in. Nifty is about to reverse from current prices. Hold positions as told. Multiple indicators like crude oil, usdinr, extreme reading on RSI from a chart perspective are showing reversal anytime.

29/01/18, 10:06 AM – Glen Drago: From an astro indicator mars and mercury have changed houses and we can see that Gold and silver have started giving a pullback. As a rule any market which rallies sharply into the mars and mercury combined change of houses makes a major top in a orbit of 4 trading days so from a astro cycle perspective also we do expect sharp change in trend.

Crude Oil is heading towards 82 in dollar terms and in rupee terms is heading towards 5900-6400 range. Once again keep in mind that this rise in crude oil which has been passed on till now we see creating major issues for inflation. Price of both petrol and diesel have been constantly moving up and as per our calculations part of the hike in crude oil has been absorbed by the Govt but the real issue is that how long will the Govt keep passing on rates. I do not think they will be able to pass on much from current prices looking at the upcoming state elections so fiscal deficit will also be taking a hit.

Combination of extremely high valuations, rising fiscal deficit, rising inflation, extreme euphoria are a extremely dangerous combination. I do not see any upside sustaining and a collapse is imminent.

29/01/18, 10:06 AM – Glen Drago: Hold positions as told

29/01/18, 10:06 AM – Glen Drago: Will keep updating

29/01/18, 2:31 PM – Glen Drago: Hold positions as told

29/01/18, 2:32 PM – Glen Drago: Nifty continue holding 4 parts shorts as told

29/01/18, 2:32 PM – Glen Drago: will keep updating if anything has to be done

30/01/18, 9:11 AM – Glen Drago: Gm

30/01/18, 9:11 AM – Glen Drago: Hold positions as told

30/01/18, 9:11 AM – Glen Drago: Will update if anything has to be done

30/01/18, 9:11 AM – Glen Drago: Silver wait for msg to buy

30/01/18, 10:06 AM – Glen Drago: Budget is expected to be rural focused. Much of the projects and initiatives will be for rural development. From a market perspective we see LTCG to be extended to 3 years instead of current 1 year, also we expect no hike in STT.

30/01/18, 10:06 AM – Glen Drago: Nifty hold 4 parts shorts as told

30/01/18, 10:07 AM – Glen Drago: Will keep updating of anything has to be done

31/01/18, 9:47 AM – Glen Drago: Gm

31/01/18, 9:47 AM – Glen Drago: Hold positions as told

31/01/18, 1:47 PM – Glen Drago: If anything else to do will update

31/01/18, 1:47 PM – Glen Drago: Hold Nifty 4 parts shorts as told

31/01/18, 1:47 PM – Glen Drago: Will keep updating if anything else to do

01/02/18, 9:09 AM – Glen Drago: Gm

01/02/18, 9:09 AM – Glen Drago: Hold positions as told

01/02/18, 9:09 AM – Glen Drago: Will update if anything else to do

01/02/18, 9:54 AM – Anurag Chavan removed from the list

01/02/18, 9:55 AM – Yadu Pratap Singh removed from the list

01/02/18, 10:22 AM – Glen Drago: Any intraday spike if comes will not sustain as per my analysis. If anything to do will update

01/02/18, 12:38 PM – Glen Drago: Expect bond yields to move to 7.55-7.60

01/02/18, 12:42 PM – Glen Drago: Hold positions as told

01/02/18, 12:42 PM – Glen Drago: Will update if anything else to do

02/02/18, 9:06 AM – Glen Drago: Good morning

02/02/18, 9:06 AM – Glen Drago: Hold Nifty 4 parts shorts as told

02/02/18, 9:06 AM – Glen Drago: Will update

02/02/18, 9:06 AM – Glen Drago: Ltcg will put significant pressure on Markets

02/02/18, 9:06 AM – Glen Drago: Crude oil heading for 82 will also put lot of pressure on Markets

02/02/18, 9:07 AM – Glen Drago: Bond yields how they behave today very important

02/02/18, 9:07 AM – Glen Drago: RBI policy on 7th Feb will be extremely hawkish

02/02/18, 9:08 AM – Glen Drago: Indian bonds if trading anything above 7.55  expect rate hike in 4 month’s

02/02/18, 9:08 AM – Glen Drago: So another headwind for the market will be rising interest rates

02/02/18, 9:08 AM – Glen Drago: Fed also has guided for much faster rising inflation

02/02/18, 9:09 AM – Glen Drago: Will keep updating

02/02/18, 9:19 AM – Glen Drago: 7.65 bond yield

02/02/18, 10:30 AM – Glen Drago: Nifty Hold 4 Parts shorts as told

02/02/18, 10:30 AM – Glen Drago: will keep updating if anything has to be done

02/02/18, 10:31 AM – Glen Drago: we see sharp fall to continue

02/02/18, 10:31 AM – Glen Drago: break below 10807 spot Nifty before 11.30 am will take Nifty to 10703 today

02/02/18, 10:34 AM – Glen Drago: As we have said that High valuations, Rising bond yields which indicate sharp rise in interest rates, Rising crude oil prices which do put massive pressure both on inflation and fiscal deficit in such an environment we don’t expect markets to keep rising. Expect fall to continue and head lower much lower from current prices. Whats going on in the mid cap front is not even the tip of the iceburg

02/02/18, 11:12 AM – Glen Drago: Margin calls will be triggered in second half of trade today

02/02/18, 11:12 AM – Glen Drago: If any intraday trade will update

02/02/18, 2:06 PM – Glen Drago: Margin calls begin

02/02/18, 2:22 PM – Glen Drago: Price must be stable below 10807 spot for the next 15 min if that criteria is done then 10722 spot Nifty today will come

02/02/18, 2:22 PM – Glen Drago: Lot of long exposure is having massive margin short fall hence selling pressure could intensify in coming last hour

02/02/18, 2:24 PM – Glen Drago: Nifty hold 4 parts shorts as told

02/02/18, 2:26 PM – Glen Drago: Nifty breaks 10800 must remain below 10807 spot for 15 to see 10722

02/02/18, 2:26 PM – Glen Drago: For 15 min

02/02/18, 2:30 PM – Glen Drago: Just hold 4 parts shorts and watch the screen

02/02/18, 2:30 PM – Glen Drago: If we have to sell more will update

02/02/18, 3:01 PM – Glen Drago: 10722 lavvvvvvvv

02/02/18, 3:01 PM – Glen Drago: Just hold positions don’t add shorts now

02/02/18, 3:29 PM – Glen Drago: 1 min 20 points

02/02/18, 3:39 PM – Glen Drago: Enjoy your weekend

02/02/18, 3:56 PM – Glen Drago: Nifty is moving perfectly along expected lines. Many traders and investors are attributing today’s fall to LTCG but we feel LTCG is only one more headwind for India.  Regular readers of this website are well aware that India’s macro situation does not look good and has been getting from bad to worse.

There are many headwinds which are consistently growing for India, few of which I am highlighting here below so that most people do not only attribute this to the LTCG episode.

Crude Oil for instance has been consistently making higher tops and higher bottoms and is heading in INR terms to 5900-6400 area and in Nymex is heading towards the 77-82$/bbl mark.Please keep in mind that even at current prices crude oil is a major problem and has been a problem for some time and this does not make India attractive at all when we compare it to other Emerging markets and on the contrary creates massive pressure on the inflation front and on the fiscal deficit front. We have been saying that fiscal deficit will be higher than most people are anticipating and in yesterday’s budget we did see that the fiscal deficit is much higher than what was being estimated for current year and also that next year’s estimated fiscal deficit will also be higher than what the street was estimating which in turn has created massive pressure on bonds yields which have moved higher than 7.60 and we estimate bonds to move higher towards 7.85 and settle between 7.55-7.85 range for the time being but the bottom line is that bond yields have gone up much faster than what everyone has been estimating and we expect that as a result of this Reserve Bank of India in the upcoming policy will have a extremely hawkish tone.

Besides these headwinds we have multiple other headwinds like extremely high valuations with literally no earnings growth. Yes I agree that some companies have shown some recovery in earnings in this present earnings season but I personally attribute that to the base effect of the last year which was due to the demonetization. I do not see overall pick up in growth on the ground nor do I see any significant earnings growth to take place that could justify the high valuations which are present in fact we have already priced in high level growth for the next 3 years and that is a dangerous situation.

In short and simple words pullbacks can come and volatility can be present and from a trading perspective one will have to be nimble footed but overall we do not see India as a great investment destination as of now with multiple headwinds.

Good Trading to You!