Disclaimer
Nothing you read here, should be construed as investment advice. I do not know your circumstance and so please treat the below as nothing more than what my thoughts are, which are subject to change without notice. Please do your own work and consult your own financial advisor. You will very likely lose money if you use any information in this post without your own due-diligence.
Indian Markets.
Let’s start with our markets first. After a sustained period of multi month out-performance to the global markets, India finally went into an under-performance mode over the last couple of months. But not by much and nothing alarming really.
While part of the reason for our markets remaining subdued can be assigned to the Adani group fiasco, mostly it has been a story of capital rotation out of what was out-performing earlier i.e. India into what was under-performing i.e. China, Europe and US tech.
Let us look at some data which should help us make sense of where we may be headed in the next few weeks:
Both Nifty and Midcap 100 are just 7-9% away from all time highs while the real story has been Next 50 and Small Cap 100 which are 15-25% below their all time highs. Next 50 has been hit disproportionately due to its exposure to Adani group.
Before yesterday’s positive closing, Nifty had been in a ~9 day continuous negative closing spree.
The VIX has cooled down to 12-14% range which suggests that the market is not anticipating any major movement on either side.
FIIs have been on a selling spree and in the futures are close to 85 % short.
The overall market breadth has been very weak with just about 15% of the stocks above 50 EMA and 85% below it.
What does all of this data suggest?
It suggests that, we have been in a bearish phase and the indicators are all going towards one extreme. This suggests that there is big likely-hood of a short term rally starting anytime.
In fact, i feel it has already started yesterday and we may be in for atleast a couple of weeks of better market environment that what we saw over the last one month.
What about the medium term i.e. over the next 2-3 months?
This is where we have to head to the global markets.
Global markets.
Global markets after being beaten down have had a mean reversion rally like we have been expecting in this newsletter. The European markets are in-fact closer to all time highs than most other markets which is ironic as Europe has been at the centre of all the media narrative since last several months. This again shows and tells us that the market is always two steps ahead of the present. The european markets rallied much before the gas prices started to fall and while the war was still very much in progress.
But as far as India is concerned the key market remains the US. I have said it before, it remains the mother market for the rest of the globe as most of the global liquidity for equity markets emanates from there.
There are two key variables driving the US market now which need to be tracked.
Dollar Index
10Y yield
A stronger dollar and higher yield is bad for equities and signals risks off, while a weaker dollar and a falling yield will suggest a risk on.
Both of these variables are dependent on one other variable i.e. inflation.
Like i said last time, the way inflation is calculated i.e. as a % of previous year base, it looks obvious that we should be seeing lower inflation prints over the next few months.
The market as usual is likely to pre-empt the same and rally hard as we get closer to that situation. The biggest beneficiaries of the lower inflation and consequently a drop if the yield and dollar will be US tech and Emerging markets.
I remain short and medium term bullish on India absent any new surprise.
Adani.
When we are talking about the Indian market, we can’t not talk about Adani group especially in the current back-drop.
A lot of investors are trying to bottom fish in Adani group stocks. As long as it is a short term trade that’s ok but if one is expecting the stocks to go back to their ATH, going by history, i don’t think that’s happening any time soon.
The problem with the Adani group was never their business. Their leverage also was quite manageable and we’ve seen worse in terms of leverage in our own market. The problem really was the low float and an obnoxious rise in price which defied all logic and had no connection really to the reported numbers, which lead to the obnoxious valuation. Essentially it was a perfect story stock which was also an amazing trading vehicle given it’s persistent momentum across many years.
The stocks after the 50-80% falls will definitely have a natural mean reversion where they will bounce 20-50% but like they show that table a 50% fall requires a 100% gain to break-even while an 80% fall requires a 600% to break even. This needs to be understood.
The next biggest trigger for Adani stocks, if any, will likely be the 2024 general elections.
Stocks.
I would like to first of all apologize for two things. I had said that:
I will do an earnings digest this season
Do a zoom call on how to play the earnings
I was unable to do both - honestly only due to procrastination.
I will make up for it.
Disclaimer
Nothing you read here, should be construed as investment advice. I do not know your circumstance and so please treat the below as nothing more than what my thoughts are, which are subject to change without notice. Please do your own work and consult your own financial advisor. You will very likely lose money if you use any information in this post without your own due-diligence.
This was a brilliant earnings season. There were several opportunities and some great earnings. Let me list of out a partial list which looked great to me and provided/provides opportunities in the medium term:
Apar Industries
Zen Technologies
Bharat Bijli
Nucleas Software
Elgi Equipments
Voltamp Transformers
Chamanlal Setia
Kirloskar Brothers
PayTM
Foseco
Cummins
ABB
ZF Commercial
Most of the banks which reported good numbers in Q2 repeated them in Q3 - with the prices having gone no where in last three months these banks have the potential to make a move this quarter.
Disclaimer
Nothing you read here, should be construed as investment advice. I do not know your circumstance and so please treat the below as nothing more than what my thoughts are, which are subject to change without notice. Please do your own work and consult your own financial advisor. You will very likely lose money if you use any information in this post without your own due-diligence.
There have been other names also but some of them are very illiquid and hence have refrained from them. Even some of the above are quite illiquid so one need to be careful while dealing in these names.
Also please remember the earnings trades are not a buy and hold for long term candidates. The idea here is to hold them for 2-3 quarters while they are enjoying an earnings tailwind and till the market prices the earnings momentum.
That’s all for this edition.
Thank you for reading.
Extremely logical and simply put words, requesting you to write more often. Thank You for writing and helping us learn more Prabhakar