Look before you leap
August is the month for policies, decisions and reviews
Just recently, we saw a major sell-off in the equity markets due to a weak monsoon, high inflation, poor quarterly numbers, July futures, option expiry and weak global cues. Last Thursday, we saw Nifty closing below its crucial support level at 5100 (200 Day Moving Average). But on the first day of August series, surprisingly, the market opened with a firm note on global cues and hit its major resistance at 5150.
The rally is said to short-lived, as the investor will be cautious on macro economic reasons and weak technicals, finally closed at 5099.85. The short-term technicals are suggesting 5150 and 5190, as major resistance levels and 5050 and 4978 are the support levels.
Stocks like HCL-Tech, ACC, Ambuja Cement, ICICI Bank, Sun Pharma are firm while looking at the technical parameters. These stocks came with a moderately good set of numbers. One saw a drastic sell off in a number of small and midcap stocks in the exchange last week, this was partly because of margin calls. After SEBI tightened the criteria for retaining and including stocks in derivative segments to improve market integrity, NSE has decided to remove 51 stocks from the F&O segment. This includes big names like ABAN, Hindustan Oil exploration and Educomp; stocks, which are excluded from the F&O segment, witnessed heavy sell-off. The other reason for the decline of the mid-cap and small stocks was due to poor set of numbers, which is mainly because of high borrowing costs, higher input costs and lower demand, etcetera.
The government will discuss proposals to review the double taxation avoidance treaty between India and Mauritius on August 22 to 24 in Mauritius. They may also discuss to make the treaty similar to the Singapore tax treaty with India, to ensure only genuine Mauritius-based companies are benefited. The group of ministers on the Coal Regulatory Bill held a meeting to discuss proposed legislations such as ensuring transparency in coal blocks. As per the draft bill, the regulator’s functions include granting authorization to any person for undertaking mining, monitoring and enforcing closure of mines and determining price of raw and washed coal.
On Friday, we saw heavy selling off in the public sector banking space after PNB and Union Bank posted a sharp rise in non-performing assets. Investors who are cautious about the asset quality of PSU Banks sold stocks of other PSUs banking stocks including SBI, Bank of Baroda, and Canara Bank. On the other hand private sector banking stocks like ICICI Bank, HDFC Bank, Indusind Bank etc were in good demand. The monsoon session of the parliament will begin on August 8, a day after vice-president elections. The agenda may include long pending legislations like Direct Tax Code and the insurance, pension and banking bills.
The better results that came out last week were Hindunilever, Tata Global and Lupin. On the global front, the markets witnessed the downgrade of Germany, The Netherlands and Luxembourg to negative from stable by the Moody’s investors’service. A composite index for the Euro area’s manufacturing and services industries came out last week, which held at 46.4 in July, which was in line with the estimates. China’s flash factory purchasing managers index rose in July to its highest level since February, boosted by the new export orders, but the country's industrial companies profit fell for a third month in June showing a decelerating growth. Also the Markit's Eurozone Composite Purchasing managers ' Index (PMI), a combination of the services and manufacturing sectors and seen as a guide to growth, held at 46.4 at this month, missing the expectations of 46.5 showing a widening crisis. The unexpected decline in the Japanese consumer prices spurred speculation the Bank of Japan will add stimulus.
The Federal Open market Committee will hold a two-day policy meeting on US interest rates on July 31 and August 1, 2012. In India, the major trigger is the policy meet by the RBI which is going to be scheduled on Tuesday 31, 2012.
Investors who are likely to trade on the option segment have to adopt a spread strategy than a plain vanilla strategy, because of long maturity of August futures. Writing of options on Nifty 5300 call 4900 put options is advisable for a short-term perspective. As the direction of the market is still unclear, it is advisable not to create a directional call on the market.
Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at email@example.com. Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
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