BSE Sensex PE Resistance

We are cautious on Indian markets and largely staying away but lot of our friends keep asking about what will we do if Sensex crosses 21208 or Nifty crosses 6357. Our reply is Keynes' famous quote "The market can remain irrational longer than you can remain solvent" :-).

We attach latest our favorite 1-year forward Sensex PE chart. We track it daily because we consider Sensex PE chart as best combination of Fundamentals and Technical studies. Last Sensex close was 20,286 there by giving latest Sensex PE at 15.85.

We arrived at above PE chart by dividing daily Sensex values by expected Sensex EPS for that financial year - 1 year forward earning.Notice how Sensex PE has been in de-rating mode from 2008 - so much for money printing hype :-). We feel at 16.5 PE (see blue dot) sensex will face strong resistance - notice how it faced resistance on same falling trend line from 2008 in 2009, 2010 and again 2012. We see no reason for it to cross this same line even in 2013 looking at other factors we mentioned in last post. 

So what could be max target by Sensex in next 3-4 weeks? Our estimate for Sensex EPS for FY14 is 1275 so target for Sensex could be 1275 * 16.5 = 21,037. Some friends think 1300 is correct estimate for FY14 even considering that target for Sensex could be 1300 * 16.5 = 21,450. Both these probable levels are also near 2008 high of 21,208 which tells us it is very difficult to believe Sensex has started new bull run so we remain sidelines and watch the show :-).

Dollex daily chart may 17, 2013

Today, BSE Dollex 30 (Sensex after USDINR adjustment) closed at 3031.64. We attach our BSE Dollex 30 daily chart with out proprietory trend following indicator.

If we see above daily chart we continue to see bullishness in Indian Equity as CCI(44) is still below 200 at value 114 and our own trend following indicator which never show divergence is still suggesting green(up) trend in Sensex/Nifty.

We note that lot of professional traders still continue to short Index/Nifty in future segment:-). However, We also follow multiple fundamental/technical indicators to make a view over and above signal which keeps giving green  or red as per prevailing trend. So, What is our view on Indian Equity now?

We think Sensex/Nifty has potential to make new marginal high over and above Jan 2008 high of 21206 in BSE Sensex and 6357 in NSE Nifty some time around mid June 2013. However, We are not getting complacent and taking cautious view looking at ground realities - Downtrend in GDP, stopped capex cycle, slump in auto demand, slowing consumption, high interest rates, sticky inflation, high CAD, possibility of India's rating downgrade etc. Globally, We feel US Equity is in last leg of rally based on normalized earnings PE. We are looking at strong upward breakout in Dollar Index above level of 84 making all risk assets like Crude/EM Equity/Commodity/EM Currencies vulnerable to risk off trade sometime in next 3-4 weeks.

Finally, Add to above our view that we may see start of depreciation of INR over next 3-4 weeks stoking one more bout of high inflation in India and thereby limiting rate cut by RBI rather Indian Interest rates may go UP not down as suggested by 90% of fund managers and analysts.

We think as and when ongoing rally gets over next round of downward trend will be really scary. 

We could be 100% wrong in above view.

Disc: No derivative position in Sensex/Nifty. Have few personal/firm's stock specific positions which we personally/firm may hold or sell in future.

Balrampur Chini Q4 FY13

We read SPA Securities report on Balrampur Chini's Q4 FY13 results.

Disc: We personally and our clients hold stock. We personally and/or firm and/or clients may buy/sell/trade in the stock.

USDINR NSE Future Continuous Contract Chart

USDINR May 2013 future at NSE closed at 54.89 today. We attach NSE's USDINR continuous contract daily chart (data courtesy of nseindia.com).

If we see above USDINR chart we notice falling trend line connecting last 7 months highs giving resistance to USDINR. We think as and when USDINR gives upward breakout and stays above 55 level we can expect much higher levels.

Brent crude daily chart

In our last post we mentioned about smallcap/bse sensex ratio. Second factor we decide if we are starting durable bull run in Indian Equity is checking Brent Crude price.

As opposed to majority who believe lower crude means higher Indian equity we believe exact opposite - we must see brent going up if Sensex / Nifty has to go up. Reason being both are considered risk assets. 

See attached Brent Crude daily chart below:

Notice how Sensex/Nifty and Brent both moved up from mid April supporting our above logic of risk assets.

If we check above chart currently,  Brent faces resistance around current levels of $104-$105 from falling trendline. If it breaksout on upside Sensex/Nifty may also go up. But looking at other charts like Dollar Index as of now upward breakout looks difficult to us so we continue to believe ongoing rally in Sensex/Nifty as relief rally. We will re-consider this view when Brent crosses $105 and stays above $105 for few days.

Smallcap/BSE Sensex Ratio - Weekly chart

Lot of our friends have been asking us if we can consider ongoing uptrend in BSE as starting of new bull run. We currently continue to believe among several factors without participation of broader market (small and midcap stocks) it is difficult to believe we are starting new bull run in Indian Equity markets. How we can we statistically prove smallcaps and midcaps are indeed participating or out-performing sensex?

We attach weekly chart of ratio of BSE smallcap/sensex.

If we check above chart we can say since Jan 2013 Smallcaps have been under-performing largecaps up to Mar 2013. Since Mar 2013 we see sideways consolidation in Smallcap/BSE Sensex ratio. Notice falling trendline connecting Jan 2013 and Apr 2013. If we see upward breakout from this falling trendline we will take a fresh view on possibility of durability of ongoing uptrend in BSE sensex,

Mody and Walton on INR, Fiscal Deficit and Bank Stress

Our friend Naresh Kumar from Chennai point us to today's Business Standard article written by Ashoka Mody of Princeton University and Michael Walton of Harvard University.

Article argues orderly rupee depreciation, a lower fiscal deficit and credible stress tests for banks are essential to stave off crisis in India. 

We personally, are bullish on Dollar and bearish on India Largecap Equity over next 10-12 months and suggesting accumulation of stocks of export oriented companies.

Interview of RBI Governor - May 3, 2013

We have argued (since last 2-3 years) using long term interest charts that we are far from a point where we can say Interest Rates in India have peaked. Everyday we read lot of Analysts and Fund Managers suggesting RBI what to do on Credit Policy and Interest Rates :-). With our limited knowledge we think  RBI is NOT FED and Rupee is NOT world's reserve currency so policies of western world can not be applied in EM like India. Also, We should not forget RBI's track record has been great on the face of global crises post 2008.

Today, We read Economic Times interview of RBI governor D. Subbarao. We point to following 2 important points Governor mentioned in this interview relating to currency - INR - Rupee:

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Q: You are not as convinced as other economists about softening global commodity prices being favourable? 

A:No, I don't think so. The global price is subject to a number of demand and supply factors, including the political-economic factors in the Middle East. Then there is the question of how the exchange rate might behave because of the large current account deficit, and large capital flows being vulnerable to sudden stop or reversal. So, I don't think we can be complacent, or take comfort from the recent softening in commodity prices.

Q: Current account deficit is occupying more space in monetary policy. Is it because of the record high number alone? 

A:I don't think it's just a one quarter number. It's the outlook or behaviour of the current account deficit in the last two years. The final quarter numbers are not available yet, but it's anywhere like 5%. This year it might be slightly lower, but it is certainly going to be above the sustainable level of 2.5% of GDP. It has implications for our external vulnerability as well as our monetary policy management. 

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EEM - Emerging Markets Chart

We attach Monthly chart of EEM - ETF which tracks multiple EM in the world. For complete details on EEM check ishares.com.

If we check above chart we can clearly see globalized nature of every market in the world and we can argue local news/event are largely ir-relevant else how can above chart which includes multiple EMs look largely similar with India's BSE/Nifty chart? 

See also that falling trendline from Jan 2013 is not crossed as yet.

Grantham on Renewable Energy

Today we read Barrons article by GMO's Grantham wherein he discusses reducing fertility rate worldwide and more interestingly potential of renewable energy which we think is a good read.

We have always believed next major innovation (like IT/Internet in 1990s) may happen in Energy sector and now when Solar Panel prices are down about 60% at 79 cents/W in last 2 years we are almost at a point where cost of producing solar power equals that of from fossil fuel (coal etc) setting a stage for big boom in renewables sometime in next few years when cost comes down even further and demand continues to grow. But when this renewables boom will happen? We have no idea but we continue to track sector :-).

India Nifty Chart Update

Nifty closed at 5916 today - Apr 25, 2013. We attach Nifty's Daily and BSE Monthly charts:

Nifty Daily Chart:

BSE Sensex Monthly Chart:

 

If we look both the charts we see that though Daily chart suggests bullishness monthly chart says this rally may end in near future (see falling trendline from Jan 2013 high) and Sensex/Nifty may resume its slow downward journey. Note we could be 100% wrong in our view.

Disc: No personal/firm holding in Sensex/Nifty Derivative. Clients may buy/sell/trade in Sensex/Nifty Derivative in future.

Mindtree and Persistent - Q4 FY13

We being a stock picker we buy and recommend companies with reputed management. This is first criteria of selection - ratios come later :-). We also strongly believe in cycle of sector rotation which means during different phases of market different set of sectors do well and funny thing is at the peak of a sector's bubble  no one wants to buy anything else :-) making peak almost a certainty due to over ownership.  In one of the posts we listed how every 4 years starting from 1988 to 2008 sector leadership have been changing.

Current phase of market post 2010 is similar to phase of Indian Equity market was post 1996 wherein Brand/High ROE sectors did well. We had picked stocks like TTK Prestige and Butterfly Gandhimathi with same logic way back in March 2009 but unfortunately we sold them very early against some who bought these stocks by chance and still continue to hold. We have decided to rectify this mistake so whichever sector/stock we buy thinking them as sector leader of 2014-2016 phase we will not sell too fast - Not before Jan 2016 at least :-).

Between 1998-2000 IT/Export Pharma sectors did well due to Rupee depreciation. So, We are hopeful same Export oriented companies will do well between 2014-2016 and give us next set of multi-baggers. We will continue to post important updates on companies we track in export sectors.

Yesterday, Our 2 top picks from Midcap IT sector - Mindtree Consulting and Persistent System declared Q4 FY13 results. We attach last 6 Q results of both companies below:

If we check both companies Q4 Fy13 results we see that sales growth has slowed in Rupee and Dollar terms since last 3 quarters. These companies performance mirror US economy which to us looks stagnant for next 3-4 quarters. So,  With around 10-11 TTM PE We are not looking at major upside in these 2 stocks as of now. Though we will watch them closely.

USFDA approved companies/plants in India

Since Mid 2012 we have believed India's export oriented pharma companies to be probable multi-baggers (mind you we rarely use this term multi-bagger) between 2014-2016. While our personal favorite companies are Ranbaxy and Hikal Limited our friends have been asking complete list of companies doing pharmaceutical exports. We think better way to start our search is look for companies whose plants or facilities are approved by USFDA. Approval of USDFDA suggests higher standards adopted by company in manufacturing and is sometimes pre-requisite for exports to developed markets.

We draw readers' attention to Pharmaceuticals Export Promotion Council of India - Pharmexcil's list of USFDA approved plants/facilities of Indian Pharmaceutical companies as at Mar 11, 2013.

One can first list all BSE/NSE listed companies from the list and then look at percentage of export revenue in company's total revenue and look for other factors like reputation of management, future growth potential, dividend track record, Sales/EPS growth over last few years, ROE (Most favorite ratio of current times) and so on.

Disc: No personal/firm holding in any company mentioned. Clients own Ranbaxy and they may buy/sell/trade in future.

Stock Picks for 2014

We have been getting lots of emails from our readers and friends why we are not posting much about stocks we like. We being more a stock picker they are surprised all our recent posts have been on macro gyan. We try to be consistent on our view and since end Feb 2013 we are bearish on Indian equity markets and Rupee at least for next 1 year - up to next general elections. We may get relief rallies like one going on currently but overall trend looks down to us so we are suggesting investor to cash out Largecap/Sensex stocks by May 2013 - "Sell in May and go away" phenomenon. One who is comfortable can buy Dollars starting May 2013.

About Mid and Smallcap stocks we expect one last downtrend from May to Jun/July 2013. This correction we feel could be once in a 8 year opportunity to buy reputed management stocks at throwaway price because this fall could be last fall of last 8th year under-performance of Mid and Smallcap. 

We read lot of Bloggers/Analysts and investors have raised concerns on new "Iliquid scrips trading mechanism" introduced by SEBI for around 2000 stocks. We think barring very few stocks investors are better off ignoring scrips included in this category as majority of stocks in this category are used for price manipulation and investors are not going to make any money anytime. SEBI should just make sure good promoter/dividend paying companies are removed from this category. 

Starting 2014 we are very bullish on companies who derive major revenue from exports and sugar stocks so our top picks are   Ranbaxy and Lupin in Largecap Pharma exports,  Hikal Limited in Midcap pharma exports, AIA Engineering and Igarashi Motors in Engineering Exports, Persistent Systems and Mindtree Limited in Midcap IT exports and Balrampur and Dhampur in Sugar. We think investors can start buying from stocks listed above in parts starting from around Jun/July 2013.

Disc:Personal and Client holding in Balrampur. Client holding in Ranbaxy and Igarashi. Clients may buy/sell/trade in mentioned stocks.

Gold/BSE Sensex ratio

We attach Monthly chart on Gold - Indian Rupees in MCX and Gold/BSE Sensex ratio which helps understand if Gold in Indian prices is out/under performing BSE Sensex.
Gold in Indian Rupees Chart:

Gold/BSE Sensex Ratio Chart:

If we see above monthly chart we note Gold faced resistance at 1.8 times Sensex in 2003, 2009 and again in 2011. Note that currently Gold is near good support on Ratio chart. We may see breakdown from rising trendline connecting 2007 and 2010 lows OR Gold may find support in next few weeks. Best strategy now is investors should wait and watch for few months before buying Gold in India. 

Personally, We think US Gold may go in sideways/range for some months and Indian Rupee may depreciate in next few weeks once ongoing relief rally gets over, If this plays out exactly one can think about buying Gold in India till then probably waiting is best strategy.

Dollar adjusted Sensex PE

We had written post on long term BSE Sensex 1-year forward PE. We also posted long term BSE Sensex 1-year forward PBV (Price/Book Value). 

Today, We post one more long term chart - Dollar adjusted PE of BSE Sensex. This chart help us understand India Sensex valuation in Dollar currency NOT Indian Rupees.

Methodology we used:

1. Take Sensex values from 1992-2013.

2. Divide Sensex values by prevailing USDINR, which gives Dollar adjusted Sensex values.

3. Take Sensex 1-year forward EPS from 1992-2013.

4. Divide Sensex 1-year forward EPS by prevailing USDINR which gives Dollar adjusted 1-year forward    EPS.

5. Divide values arrived in 2 by values arrived in 4 = Dollar PE for Sensex.

Surprisingly,  Below chart arrived from above calculation is roughly similar to nominal 1-year Sensex PE. 

BSE Sensex and Crude correlation

Moment commodities fall analysts start arguing about possible reversal of downfall of equity as they say India being consumer of commodities benefit from fall in commodities. We disagree. We think BSE Sensex and Crude both being risk assets both most times move together.

We attach monthly chart and statistical indicator to support our view:

If we see BSE Sensex and Brent together with Rank correlation (10) on 8-years chart, except for few months in 2007(Indian Equity Euphoria), 2008 (Lehman crises) and 2011 BSE sensex has largely remained positively correlated with Crude. So when someone says Crude fall will mean Equity going up we want to ignore.
Note: We had predicted in Sep/Oct 2012 rally in Commodities/Crude in whole of 2013 but we were wrong in this view and has changed our view to bearish from Feb 2013.

India Equity towards Revulsion

We read in Business-Standard article written by Akash Prakash of Amansa Capital who argues the hardest thing to do now is to interest an investor in Indian equities.

We fully agree with this view but also hoping for bottom in mid and small cap stocks sometime in next 2-3 months. We may start investing in India's Export Oriented Companies slowly before Q1 CY2014 as we think biggest gains in Mid and Smallcap stocks will come in first 18-21 months of starting of uptrend.

Ethanol prices up

We read in Moneycontrol.com about 30% increase made by OMCs in the rates of Ethanol sugar companies sell to OMCs. This is another positive for the sector after freeing industry from quantitative restriction and abolishing levy quota by government few days back.

Very few analysts talk about sugar companies now and investors have almost forgotten that most sugar stocks are down 75%+ since 2006 peak. Sugar mills are making more money from sale of by-products - Power & Ethanol than from Sugar itself as current Sugar prices are below production cost. Imagine profitability of a companies if sugar prices starts going up from current Rs. 34/Kg (ex. Kanpur). Market price below production cost of commodity suggests we are at OR not far from the worst times of the sector. Cyclical nature of industry means cycle will turn at some point specially in foreseeable future (1-2 years) when we have spent almost 7 years from peak.

We personally find stocks like Balrampur Chini a steal with 2-3 years view. Profitability of company will rise sharply if Sugar prices starts going up because every rise of Re. 1 in Sugar can add about 80 Cr of OP for the company. Company has capacity to crush 76,500 TCD of Sugarcane, Distillery of 320 KLPD and Co-gen power of 223.6 MW and low debt on books so best candidate to capitalize on recovery. Some of our friends believe renewable energy to be key theme in the world equity in 2014-2016 similar to IT was in 1998-2000.If this proves correct company has huge hidden value in Co-gen bagasse based power plant.

Note that lot of mainstream analysts and our friends avoid Cyclical commodity sector for investment. They disagree with us on Sugar sector and rather suggest investing in "Brand/High ROE" sector for long term but we firmly believe every industry/sector moves in cycle NOT just what is termed as cyclical. We personally do think investors who are holding "Brand/High ROE" stocks may do well up to end 2015 but from hereon "Brand/High ROE" can not become 4-5 baggers like Sugar/Export Pharma. Can any Analyst explain why current favorites "Brand/High ROE" stocks which are now recommended as ultra long term investment bets remained under-performer when Infra/Capex sector stocks were dominating stock markets in 2004-2008? but same "Brand/High ROE" stocks did phenomenally when between 1996-2000. Come 2014 and same analysts may recommend our current favorites - Sugar and Export sectors because very few people read history to figure out sector cycles. 

Lastly, We must point risks to our bullish call on sugar. We still expect one last phase of fall/hammering in smallcap stocks and sugar with other sector may go down 20-30% from current levels. We will personally rely on our technical models to suggest appropriate time for sell and buy so investors who wants to play safe can wait for small cap index to bottom over next few months before buying.

Disc: Personal/Clients holding in Balrampur Chini. We Personally/clients/firm may Buy/Sell/Trade in Balrampur Chini.

USDINR - Weekly Chart

USDINR today closed at 54.50.
We attach weekly chart of USDINR:

Looking at above USDINR chart, CAD, Slowing Indian Exports, Political uncertainty, Trend of Foreign Fund flow in Indian Equity and different world currency pairs Dollar may give upward break out from falling trendline drawn above and go to new all time high against Rupee once pullback/relief rally/dead cat bounce started in Indian Equity gets over sometime in next 1-2 weeks. We are suggesting investors to buy Dollars.

S & P 500 has made new all time high and we see strong possibility of it going down in next 1-2 weeks due to "Sell in May in go away" phenomenon which may also bring in risk-off trade in risk assets world wide starting end April 2013. We suggest investors to position themselves for such times. 

Nikkei update

On Jan 2, 2013 we posted Nikkei chart when Nikkei was 10,395 and suggested that because of upcoming devaluation of Yen Nikkei could see strong up move in 2013 among world indexes and has potential of going to 14,000 and see that Nikkei has already crossed 13000 and today closed at 13,192 which means up 26.90%. Readers will note only recently main stream analysts have started talking about Nikkei  :-). Though lot of analysts don't agree with our view that slow devaluation of currency brings in growth in economy through inflation and exports Nikkei's jump validates our point. 

Since Mid 2012 we have been predicting new high in Dow (see post1 and post2) when every analyst was talking about Europe issues. Now when we feel rally in Dow is in last leg (at least level wise) before good correction lot of analysts are predicting higher levels :-).

We are able to make different views (even after considering our failed calls) because we have no pre-conceived notions about anything and we post a view based on what history/chart/data suggests us NOT based on what media/experts tell us. We hardly read/listen news for more than few minutes in a day and not active on social media etc so our view remains independent and never gets influenced by external sources. Good amount of time we spend to discuss charts,patterns and indicators with some of our smartest friends and we seriously talk to/read just 2-3 great low-profile analysts to learn continuously.

Sugar partial de-control

We read latest news in Economic Times which says Indian Govt has cleared 2 proposals relating to India's sugar sector- Dismantling Release Mechanism and 10% levy quota.

Disc: We have vested interest in sugar stock Balrampur Chini. We personally and clients own the stock as on day of writing and we personally and/or clients may buy/sell/trade in stock in future.

Smallcap Index Monthly Chart

Since budget day of 28-Feb-2013 we have become bearish on Indian markets. However, We always look for positives in the gloom. The positive thing is we personally feel sometime in next 2-3 months Mid and Smallcap stocks may stop falling even when large Sensex may continue to decline for more time. We think Mid and Smallcap Index may bottom around June 2013 and Sensex may continue steady decline which will mean Smallcap/BSE ratio will start going up from that time. Once bottom is made we usually see sideways/range bound movement for some months and this may happen with Mid and small caps as well.

We attach latest monthly chart for Smallcap Index:

If our reading of above chart is correct we notice that CCI(10) on monthly chart is -139 and is still away from oversold levels -150 to -200. Our proprietory indicator has also turned red (down) since Feb 2013 :-(. If we draw trendline on monthly chart connecting May 2003 and Mar 2009 lows we get very strong support in Smallcap Index around 4600??.. Oops. 

We will be happy if we prove wrong and smallcap starts uptrend from now onward but all indicators we track are suggesting we are still 2-3 months away from bottom so we want to prepare ourselves for such times. We strongly feel if someone survives in 2013 mid and smallcap hammering one will see multiple returns in mid and smallcaps by 2016.

Different Methods of market valuation

Today, We read good post on different market valuation methods in schwab.com by Liz Ann Sonders. She lists CAPE, 1-year forward PE, Trailing 12-months PE, 5-years Normalized PE and Earnings yield. We think this is a good read.

We have recently made posts on methods of valuation we use for whole market/Index. We have posted our views on 1-year forward PE, 1-year forward BV and using BSE/DJIA ratio and will continue to post other methods we find good.

Dollex Pattern 1997 with 2013

We again attach our most favorite chart - Dollex 30 of 1992-1997 with current 2008-2013. After budget day which also co-coincidentally broke rising monthly trendline from July 2012 we have become bearish on Largecap Sensex and advising our clients to be cautious and position for slow decline in Sensex over next 1 year. We do not see major reason to be bullish for next year - up to general election so even holding cash is not a bad idea. 

If history repeats Dollex may touch 2008 low which happened in Oct 1998. This means though Sensex may not touch Oct 2008 lows we may see corresponding decline in Rupee. This will open biggest opportunity for exporters but we are at least 1 year away from big rally in markets so why not remain sidelines and just wait and watch?

Note: We could be 100% wrong in our view so do not take any decision based on what we have written above.

BOAML expects Sensex EPS to downgrade for FY14

We follow multiple indicators and historical charts to make a view on India Equity which incl. BSE/DJIA Ratio, Smallcap/BSE ratio, Sensex EPS revisions, Sensex Book Value, PLR - Interest Rate trend since 1970, USDINR, Crude price trend, Dollex/Defty and so on.

Today we read in Moneycontrol BoAML expects Sensex EPS to go down for FY14. "We expect FY14 Sensex EPS to be downgraded below Rs 1300, for growth of under 10 percent," said the Merrill Lynch note to clients.

We had posted historical chart of 1-year forward PE of BSE Sensex and suggested that Index bottoms only when it reaches 10 times PE of that financial year's Sensex EPS. This happened in 1996, 1998, 2003 and 2008. So, If we are expecting history to repeat, with FY14 sensex eps of 1300 sensex can go down all the way up to 13000 over next 1 year. oops.

Note that we could be 100% wrong in above view and please do not make any decision based on what we wrote here.

Sensex 1-year forward P/BV chart

We posted BSE Sensex's long term 1-year forward PE chart and some friends asked us if we can also post similar chart for PBV (Price to Book Value). 

So, We went to bseindia.com and listed Book Value of Sensex as at 1st Apr 1991 to 2013 and divided each day's Sensex values with forward BV for that financial year. This means say Sensex book value as at 1st Apr 1991 is 391.94 we divided Sensex values from 1-Apr-1990 to 31-Mar-1991 with 391.94 and came out with P/BV ratio. We went on up to 1-Apr-2013 (means today) and came out with following quarterly (3-months) long term chart. Remember this is 1-year forward PBV chart not historical.

If we see above chart we note Sensex PBV never went below around 2 in last 20 years. Before start of  EM bull phase of 2004-2008 PBV was still around 2. Also, see that even at the time of Lehman Bros Oct-2008 recession it was above 2. In euphoric phases like Jan 2008 it went up to 7 :-). 

Currently, Sensex Book Value as at 31-Mar-2013 is Rs. 6,495 and If we see falling trend-line from 2011 we note PBV is facing strong resistance around 3 times.

We are bearish on Sensex and expect it go down slowly up to first quarter of 2014 with minor pull back rallies in between. We must also note that Sensex Book Value will inch up for 1-Apr-2014 so this ratio will continue its downtrend in coming months and eventually may touch 2 to touch level of June 2003 and Oct 2008 lows (does this mean sensex may make double bottom with Dec 2011 lows??) where base formation may happen in first quarter of 2014 then onward we can expect strong uptrend for 18-21 months.

Sakthi Siva Mar 20, 2013 interview

We consider Sakthi Siva of CS among top 2 analysts for EMs and we take her view seriously. Today we read her ET Now interview.

Comparing small cap index with past

Few days back we made a post on smallcap/Sensex Index ratio arguing that we are in last - 8th year of under-performance of mid and smallcap stocks and we may see bottom and base formation in 2013 before they start massive out-performance vis-a-vis Sensex from 2014. We had lot of emails and discussions going on about ongoing hammering in mid and smallcap index stocks which seems supporting our view of bottom and base formation in 2013 because last phase is most brutal and drives away 90% of existing investors. 

Lot of our friends ask us how long can we expect small and midcap index stocks to fall before sideways consolidation and basing period begins. Obviously, It is difficult to exactly know in advance when bottom will happen but as usual we try to look at history and understand roughly about possible trend in future. We also use trend following indicators which can confirm that view.But beware prediction is after all prediction so we can go horribly wrong so take below exercise more as an academic argument.

We attach chart which compares 1992-1997 BSE200 Index with 2008-2013 BSE smallcap index.

If we accept that pattern made by BSE200 in past (1997) is roughly similar to pattern Smallcap Index is making now (2013) we can expect intermediate bottom in Mid and Smallcap Stocks around June 2013 (see vertical line we connected between 2 charts). We will see if that low in June 2013 is lower than Dec 2011 low to decide if that scenario is playing out and our future course of action OR we are horribly wrong. We will continue to also watch trend indicators which are currently suggesting downtrend.

Let us again clarify this is very rough way of predicting trend so we suggest not to take this view seriously but take it just for academic purposes.

India NCDEX Sugar Monthly Chart

We attach India NCDEX - Spot Sugar Prices Ex kanpur per GM monthly chart since starting of exchange - 2006. 

If we read above chart we think we are at very imp juncture in indian sugar and sugar stocks. Current price Rs. 33.80/Kg has 3 supports:

1. From rising trend line on monthly chart

2. 61.8% support of most recent uptrend and

3. support of previous minor top.

Will sugar breakdown or take support?

Disc: We personally and clients are invested in Indian sugar stocks .

DXY and Dow - positive correlation

Lot of Analysts think DXY - Dollar Index and Dow move opposite. But actually, we have lot of examples in history which suggests DXY and Dow can have strong positive correlation. Fundamental reason being capital flowing from everywhere else to US Equity and making Dollar stronger. 

Current phase in Dow of 2011-2015 can be compared with 1996-2000 phase wherein Dollar Index and Dow both moved together fueled by IT- Dotcom revolution. 

We attach Dollar Index, Dow Jones and Rank Correlation Indicator in below chart to prove above point.

Are we getting ready for cheap shale gas revolution in near future which could be reason for strong Dow performance? 

Market View, Sugar

1. We have become bearish on Indian Equity after budget on Feb 28, 2013. We continue to hold this view even today. This is because we see downward trend in BSE/Dow ratio which suggests investor preference in US markets vis-a-vis Indian Sensex, Downtrend in Smallcap/BSE ratio which suggests weak breadth, Possible strong resistance in Sensex/Nifty around 1-year forward PE of 16 based on its monthly chart, Continued weakness in risk assets like Crude impacting EM and India equity, Possibility of strong upward break out in US Dollar Index Futures chart etc.

We think we should NOT see Sensex/Nifty to make a view on whole Indian Equity because of extremely narrow number of stocks making moves against majority of listed stocks going down. However, We also think we may see bottom in Small and Midcap stocks in next 3-4 months. We plan to buy stocks of few sectors we feel probable stars of next bull run. Currently, We think next bull run to start some time in first half of 2014 and may last for 18-24 months. We are closely watching SUGAR, EXPORT ORIENTED PHARMA and RENEWABLE ENERGY companies for buying in once we see bottom in midcap and smallcap stocks.

2. We read Wall Street Journal report which says the U.S. Department of Agriculture is considering buying 400,000 tons of sugar in US.

This may support US Sugar prices which is down almost 50% from 2011 highs. In fact, We may see US raw sugar prices going up strongly over next 12-15 months from current $18.82. This may support even Indian Sugar prices ruling around Rs. 34/KG Ex. Kanpur and thus Sugar Equity stocks which are holding strongly even in market correction due to possible de-control.

Disc: We have personal and client holding in Sugar Stocks.

Dollar Index chart

We attach Dollar Index monthly chart (last close as on Mar 08, 2013).


If we see above chart we see possibility of DXY giving breakout on upside. If this breakout happens in near future it will threaten to halt rally on all risk assets incl. Dow which has recently seen positive correlation with DXY. We will continue to watch.

Dow Makes new all time high

Today we see Dow at 14257. It has crossed Oct 2007 high of 14198 and made a new all time high. We read Bloomberg report for the same.

Solar Cycle 24 - Twin Peaks?

We are great fan of cycles. Mother of all cycles in the world is Sunspot or Solar Cycle. Some people predict  Commodity and Stock market trend based on Solar Cycle.

We read NASA's latest update on current Solar Cycle - 24 which suggests possibility of 2 peaks this time - in 2013 AND in 2015.

BSE Sensex Forward PE Monthly Chart - Feb 2013

We attach latest India's Sensex 1 year forward PE chart.

If we see above chart we can notice similar "BEARISH" pattern like Dollex30/Defty and BSE/Dow Jones Ratio wherein we see rising trend line which started from June 2012 being broken in Feb 2013 on Monthly chart suggesting end of rally. Please note we have assumed FY13 Sensex EPS at 1200 which translates PE of 15.77 at the close of March 01, 2013 Sensex level of 18918. We think market will start discounting FY14 Sensex EPS only from Apr 2013 so not considered FY14 EPS in to calculation of PE in above chart. Due to this same reason we think market will give strong pull back may be after Apr 2013 to discount FY14 EPS even with current PE trend  which is down.

Lot of our friends ask why we are suddenly sounding so bearish on Indian Markets but for us Price is God (Bhav Bhagwan) and can not go against what price (market) is indicating us.

Smallcap / BSE Sensex Ratio - historical comparison

Few days back we posted chart of India BSE's Smallcap Index/Sensex Ratio and suggested that we are in last leg of under-performance of smallcap index. 

Why we said this. We attach one historical chart comparing ratio of BSE200/Sensex of 1991-1997 with Smallcap/Sensex of 2005-2013. 

If we think a bit we notice there is 8-year alternating cycle of out-performance of smallcap and large sensex even with post 1991 data instead of more accurate 1989-1997. We can see between 1991-1997 smallcap under-performed. From 1997-2005 smallcap out-performed. Now from 2005-2013 we are seeing smallcap under-performance. So, Starting from 2014 we may see 8 year out-performance from smallcaps and more importantly biggest gains will come between 2014-2016. Lets watch.

USDINR Monthy Chart Update

USDINR today closed at 54.90. We attach latest Monthly chart of USDINR.

If we see above chart here again Dollar has shown strength and has broken falling trendline connecting June 2012 and December 2012 highs. This reading we think is not positive for Rupee.Are we heading for new high in USDINR in near future?

BSE/Dow Jones - Ratio Update

We attach one more monthly chart which we track closely. 

See below BSE Sensex / Dow Jones Ratio which indicates out/under performance of Sensex vis-a-vis DJIA.

Like yesterday's Dollex/Defty chart this chart also shows Ratio has broken its rising trendline from June 2012. So, We may see new high in Dow Jones but may NOT see new high in Sensex/Nifty in near future looking at possible under-performance. We suggest investors to be prepared and position for such under-performance.

Dollex & Defty breaks support

Today 28-Feb-2013 is the last day of month so it is time to do our regular chart checks. We attach 2 important monthly charts which we track very closely.

India Dollex 30 comparing Jan 2013 month with July 1997:

India Defty Chart as on 28 Feb 2013.

Unfortunately, Both above charts suggests Sensex/Nifty has most likely made peak in Jan 2013 and we may see another 12 months (Up to Mar 2014??) of slow decline if Dollex pattern of 1997 (see above) is guide. We suggest any pullback to reduce holdings based on risk profile and fundamentals of stock held. 

We must accept we did not expect Sensex/Nifty to top out before July 2013 but breaking of trendline has made us change view. We may still see new all time high in Dow in next few weeks but we change our view from bullish to bearish on Indian Markets. We will change/revisit this bearish view once we feel market has bottomed which we expect in next 1 year OR if Dollex/Defty starts uptrend and crosses Jan 2013 highs in near future.

Hang Seng Index Monthly chart Feb 2013

We daily track multiple Equity indices (Sensex, Nifty, Defty, Smallcap, Midcap, Dow, S & P, Dax, FTSE, CAC, Nikkei, Shanghai, Hang Seng, Bovespa, MSCI EM Index, MSCI World Index etc), Ratios (BSE/DJIA, Smallcap/Sensex etc.) Commodities (Energy, Industrial, Agri, PM etc) and Currencies (EURUSD, USDJPY, USDINR etc) We mentioned we will post lot of charts which would give readers clear trend of global risk appetite. 

Currently over medium term we feel we are going through RISK-ON but in the short term we are seeing correction NOT trend reversal as suggested by lot of analysts in India. Today we post Long term Monthly chart of Hang Seng Index.

If we see above chart we can see how world markets are correlated. See how from June 2012 even Hang Seng has been going up slowly and steadily like India's Sensex/Nifty. It is facing strong resistance around 24000 levels and if our reading is correct it is consolidating for some weeks before going up and give upward breakout.However, note that breaking of rising trendline will means our bullish view is incorrect.

Note: All Indices trademarks are acknowledged. We could be 100% wrong in above view. Do not make your investment decision based on what we have written above.

Smallcap/BSE Sensex Ratio monthly chart

Over last few weeks we have seen almost bloodbath like scenario in India BSE's small cap/midcap index stocks. We have seen Sensex or Nifty maintaining high levels with broader markets getting huge selling. No wonder analysts and Technical experts have suggested this phenomenon as 'distribution' which we personally disagree with. We think market is not that easy to understand. We feel currently market is in correction mode but over next few weeks (may be from next week itself) we may see another round of rally of about 6 months which will be broad based and across indices - Not just sensex/nifty. We totally agree that world risk assets may go for strong correction but may be NOT NOW, We think we may see much higher optimism and want to hear sensex/nifty targets of 28000/9000 before start of correction sometime after Jun/July 2013.

Today we post long term monthly chart of Smallcap/Sensex. This ratio helps us understand if small cap index is out-performing large sensex OR under-performing sensex. 

To give an example, Ratio of 1 suggests that smallcap is at equal level of sensex. So, say small cap index is 8000 and sensex is also at 8000. Now if sensex goes to 12000 but smallcap goes just to 10000 we get new ratio which is 10000/12000 = 0.83 which is lower than original ratio of 1 and effectively suggesting under-performance of Smallcap Index vis-a-vis sensex which went up 50% against smallcap's gain of just 25%. Simply speaking when ratio is going up we get out-performance of smallcap which is what we want when we invest in smallcap index stocks. But what has been performance of this ratio over last 10 years?

We attach monthly chart from 2003:

If we see above chart we note that actually smallcap is under-performing large Sensex for 7 years since 2006. But fortunately, smallcap is currently 0.33 times sensex (6540/19468) and could be in last phase of under-performance - see strong support of 2003, 2004 and 2009 at 0.32 times.

Last phase could extend 12-18 more months of basing period because we expect new major uptrend in Indian markets starting post election of 2014 means sometime in Q4 CY2014 (we expect world markets to go in consolidation or correction mode up to Q4 CY2014 once ongoing rally in risk assets gets over sometime in next 6 months). We are willing to bet this uptrend from Q4 CY2014 will be lead by smallcap index stocks but market is brutal and 90% of current investors in smallcap index stocks may not remain invested for riding new rally from end 2014 :-(.

Note: We could be 100% wrong in above view. Do not make any decisions based on what we have written above.

BSE Smallcap Index Weekly Chart

BSE Small cap Index closed at 6794.
We attach latest BSE small cap index weekly chart from our system:

When every Technical Analysts are talking about Distribution in small cap stocks in Jan 2013 we do NOT see it as of now. We think when CCI 44 value goes above 200 and stays there for some weeks - which implies 2+ standard deviation from mean average of last 44 weeks of small cap index we can make a case of overbought situation in small cap stocks.This hasn't happened. Also, Our proprietory trend indicators is still in Green suggesting continuation of uptrend as of now. When CCI 44 goes above 200+ AND after that if our second indicator turns Red we will agree with distribution argument. For now we remain bullish and will update as and when we realize this view is wrong.

Note: We could be 100% wrong in above view. Please do not make any decision based on what we have written above.

Balrampur Chini - Q3 FY13 - Report

We read Q3 FY13 SPA Securities research report on Balrampur Chini.

Disc: We have vested interest in Sugar stocks. We personally and our clients own Balrampur Chini on the day of writing. We personally/clients may buy and/or sell and/or trade in stock in future.

Defty and Nifty weekly charts as at 8 Feb 2013

Every one we talk to and hear tells breaking of rising trendline from Jun 2012 in Nifty chart.

We disagree. However, We give more importance to rising trendline of Defty (Nifty adjusted with USDINR value) being more important for Foreign Investors. 80-90% of Technical Analysts we read and hear are bearish. But we see good uptrend in Indian Equity markets once Fiscal Cliff issue is settled in US sometime in Feb/Mar 2013. We could be wrong so we will change our view only when rising trendline breaks in Defty/Dollex 30 on Monthly chart as similar breaking trend line in 1997 suggested end of uptrend.

We attach Defty weekly chart with trendline:

Nifty Weeky chart:

Note: Above view could be 100% wrong. Please do not take any decisions based on what we think or write.

India Interest Rate Historical Chart

Since last 2 years every guru and analyst have been telling us Interest rates in India have peaked and we have been arguing exact opposite - we are far from a point of Interest Rate peak. Against emotional reasons or gut feel by others we are supporting our logic of 'far from peak' theory by giving historical chart of SBI's Prime Landing Rate (PLR) since 1970 :-).

We attach latest SBI's PLR historical chart:

If we see above chart we can say even after recent minor cut in PLR (currently at 14.45%) there are hardly any signs of top, on the contrary we may actually see another wave of RISING rates in coming months (post Q3 CY13?) which could make final peak. See how peak was made in 1993.

BSE Sensex 1 year forward PE Chart

While discussing with our friends about possible resistance level for Sensex in 2013 our friends suggested to make a chart of BSE's Sensex PE relative to 1 year forward earnings of Sensex. 

So, We listed last 20 years Sensex EPS and we also noted down Sensex value each day and expected Sensex EPS for that financial year. We derived PE by dividing each day's Sensex value with Sensex EPS for that year so on. We assumed Sensex EPS for FY13 at 1200 so today's forward PE is 16.24.

We created long term Quarterly chart since 1992 which we attach below:

If we see above chart we can see Sensex may face strong resistance when forward PE reaches around 16-16.5 from falling trend line connecting 2008-2010 PEs. If we assume Sensex EPS of FY14 at 1400 this translates in to target Sensex level of 22400-23100 some time in first half of 2013. If we assume Nifty EPS of FY14 at 425 it will mean possible Nifty target level of 6800-7012. We may see correction post this level and we will look at it afresh then.

Note: This is our view based on assumptions and reasons given and we could be 100% wrong. Please do not make any decision based on what we have written above.

Indian Sugar Sector - Bloomberg Report

We made a post on Indian Sugar stocks few days a go. We argued if an investor has long term view of about 3 years Sugar stocks may turn out to be multi-baggers given cyclical nature of sector having history of average 11 years peak to peak duration. Last peak of sugar stocks was in 2006 so we have already passed about 7 years and we may expect bottom in sugar stocks sometime in 2013 or 2014 before we see massive uptrend lasting 2-3 years. We also suggested investor who wants to make sure about starting of sector uptrend may wait and see if Indian Sugar prices go up above Rs. 44/kg which are around Rs. 34/kg.

Today we read Bloomberg report on Indian sugar companies which suggests Sugar mills in India are set to lose about 60 billion rupees ($1.1 billion) this year as record cane prices and surging imports prompt them to sell below production cost.

Disc: We personally and our clients own Balrampur Chini as on day of writing.

Cairn India - Q3 FY13 Result Analysis

Cairn India which is an indirect play on global crude prices remains our top pick for 2013 in Indian Equity. We read Business Standard's Q3 FY13 result analysis for Cairn India.

Indian Sugar Prices Monthly Chart

We like cyclical nature of any industry because being once you understand duration of up and down turn of that industry's cycle and figure out when to buy it you can make 5-10 baggar type of returns. When times are bad every Analyst/Fund Manager ignore the sector but cycle always turns and same Analysts and Fund Managers want to jump when they see that they have missed big opportunity. 

Over last few months we have been trying to understand Indian Sugar Stocks when we saw majority of promoters buying from market and increasing their stake. Remember sugar stocks peaked in beginning of 2006 and now even leading sugar companies - Bajaj Hind, Balrampur Chini, Dhampur Sugar etc. are available at 70-80% discount to 2006 peaks that too after 7 years :-). Currently, Sugar sector is not fancied because of Govt. restrictions like 10% PDS levy, Release mechanism, High Sugar Can pricing policy of Center/States etc. However, When we look at sugar stocks all the negatives are currently priced in and once sugar prices start up trend we will see every issue getting resolved. So, our next task is to figure out when can we expect sugar prices to rise.

We checked Indian sugar stocks data over last 25-30 years.  Last peak stock prices were in Apr 2006 and before that peak stock prices were in Dec 1994 so we see that they took 10-11 years from peak to peak. . We note bottom happens at the end of 7-8 years and next 3 years stock rise. If this trend repeats we may see bottom in Sugar stocks this year in 2013 or next year 2014 and major peak in 2016 or 2017.

We also checked US sugar prices over last 100 years. We note that US Sugar prices have risen every 5 years - Last Feb 2011 before that in Feb 2006 before that in Oct 2000 before that in Jan 1995 before that in Mar 1990 and so on. So most likely they will go up by 2016. This data also suggest we may see rise in Sugar stocks by 2016.

We finally went through NCDEX Indian spot prices of Sugar ex. Kanpur and we attach monthly chart for the same. (Data courtsey of ncdex.com)

If we see above historical chart of Indian Sugar prices we can see Indian Sugar prices started rising from July 2008 prices of 15-16/kg to a level of Rs. 44/kg in Jan 2010. They are consolidating now and if we draw trend line connecting July 2008 and March 2012 lows we see that Prices may stabilize around 33-34/kg in near future for some months. 2 indicators we follow CCI and Trend Indicator suggest prices may go down but because rising trend line support they may NOT fall in major way so looks like we may see short ranged prices for few months before starting fresh uptrend once it touch trend line. 

Safest strategy could be buying sugar sector stocks once sugar prices cross 44/k.g. Moment 44/kg is crossed we will be sure of new uptrend in Sugar stocks. We expect that to happen sometime in second half of 2013.  Lets keep tracking.

Capital First Limited

Crude and Cotton yarn commodities remains our sector pick for 2013 in Indian Equity. Lot of our friends missed first and start of rally in export oriented pharma companies in 2012. Currently, export oriented pharma companies are in correction mode but we remain super bullish on export oriented pharma stocks at least for next 3 years. Similarly, We remain bullish on Agriculture and Consumer related stocks for next 2 years.So, our current portfolio consists majorly of these sectors. Not to mention we buy companies where promoter reputation is of top quality.

When we talk about consumerism we should also check NBFCs engaged in consumer related financing. NBFC is different from normal Banks in the sense that they lend largely to Retail against normal Banks lending largely to Industrial side (term loans) for larger amount and tenure. This is the reason NBFC sector catch market fancy along with consumer stocks. 

Recently, Capital First Limited (previously Future Capital Holding) saw change of promoters wherein we saw the most reputed PE firm Warburg Pincus becoming new promoter (68.93% stake) in company in place of Kishore Biyani's Future group. Company is in to Retail and Wholesale lending where India provides large opportunity  This stock can become most blue chip stock over next 3 years when consumerism booms further. Lets check last 6 Q results.

If we check latest consolidated Q2 FY13 result we see Total Income went up by 12.19% to 190.50 Cr. OP going down by 16.92% to 68.31 Cr. Provisions and other expenses increased by 61.33% and we see one time EO income at 22.36 Cr. EPS is down 35.93% at 2.80. Book Value as at 30-Sep-2012 is 140.

Above results doesn't look great and may be Q3 FY13 could show similar trend but we should note that new promoter who came in Q2 FY13 has implemented conservative accounting norms for recognizing Income which is why numbers don't look great even when underlying business momentum remains strong. Once base effect starts ticking we will see improvement in results and set a stage for re-rating of this stock with top quality promoter currently available (CMP 196) at just 1.4 times BV against most NBFCs quoting at 3-4 times BV. One can check Dec 2012's company presentation for more details.

Note: We personally/our firm do NOT hold any share in CFL but continue to track them and may buy at some point. Our clients hold the stock as on day of writing and clients may Buy/Sell/Trade in this stock in future.

Defty Monthly Chart - Jan 2013

We have been reading some Elliott Wave (EW) Experts suggesting top in Nifty/Sensex been made or to be made in near term. We personally do not understand EW much as all our study and work has been around conventional indicators and development of indicators but we think rather than jumping to conclusion of top one must wait and see if downtrend is strong enough to break rising trend line on monthly/weekly chart of Defty/Dollex 30. We are watching local currency denominated Nifty/Sensex chart as well but because we think foreign investors decide fate of every market in the world Defty/Dollex 30 which also considers USDINR value for calculation of Index are benchmark to make a view.

We attach our monthly chart of Defty as on Jan 18, 2013.

If we read above chart CCI(10) and our trend following indicators none of them suggest change of trend from up to down at least as of now and as we mentioned our focus is on:

1. Rising trend line from June 2012 lows. As and when it breaks then only we will be convinced about downtrend being started and decide selling our stocks and 

2. Falling trend line connecting Jan 2008 and Oct 2010 highs. It is difficult to believe Defty will make top without touching this falling trend line. 

None of the above 2 conditions have been satisfied.

About near term top our wild guess:  It possible that Defty may give intermediate peak in Jan 2013 and may correct for some weeks given debt ceiling related news flow expected in end Feb/Mar 2013 but it is also possible that post end Feb/Mar 2013 we may see start of fresh up trend which may finally make peak sometime in the first half. We also guess this uptrend post end Feb/Mar 2013 to be more powerful and broad based across sectors which will convince every Fund Manager and Investor who is skeptical currently setting a stage for panic buying and peak before MAJOR correction for next few months.

Disc: We could be 100% wrong in above view. Please do not make any decision based on what we have written here.