Prashanth Krish | Portfolio Yoga

Stock of the Day – Gujarat Gas Company

Recently while writing on GMDC, I had written about how companies that have a stake in Gujarat were seeing some action in the wake of Modi being projected as the next Prime Minister.

The trigger for the recent rise though maybe in the company getting a licence to distribute and supply gas in Bhavnagar and Botad. This bodes well for the company in the long term. With the public holding in the company being 8.5% (73.70% is held by the Promoter and the rest split between FII’s and DII’s), any accumulation by strong hands may result in sharp price movements.

The weekly chart of the stock is not an attractive one to say the least as the floating lower from mid 2011 onwards but as all things should come to an end, so seems the case here too.

The trend-line is yet to be broken, but the stock has made a higher high in the weekly charts indicating that the worst maybe over for now. A close above 290 though would be the final confirmation that the stock is well and truly out of the bearish period.

What next for CNX IT

2013 was a dream year for CNX IT as it left every other sector in the dust as it logged in gains of 58% for the year. The out-performance has to be seen in the context of the fact that the next best sector index was CNX Pharma with gains of 26.51% or less than 50% of what IT had done.

This year seemed to be no different as the Index cruised higher with gains of 4.6% and 3.8% in January and February respectively. And just when it seemed that nothing could go wrong, NRN came out with a warning. This shook the confidence of the markets and the immediate reaction was a fall in the stock price of Infy (which having more than 50% weight in CNX IT pulled that down as well).

Today, it was the turn of TCS to give out a similar warning and IT stocks once again were hard hit. The two warnings have meant that the Index itself has seen a cut of 11.4% in this month alone. Now, while 11.4% fall in a Index is not definitely something good, the overall chart suggests that even after this fall, we are no closer to being in risk of the rally petering out.

Remember, CNX IT broke out at from 7600 levels and even after its current rout, the stock is still 20% from the breakout point. The previous biggest monthly fall in CNX IT was in April of last year after which the markets rebounded to new highs. This in a way gives us hope that all in not lost.

Since we do not have any past high’s to seek support, for the chart, I am using a mix of Fibonacci and Moving Averages to guage the levels where we may seek some support if the broader trend is to remain bullish. Technically speaking, if CNX IT drops below 8320, we will enter a bear market though for me, bear market will be seen only on a break of 5900 which speaking is pretty far away to even consider for now.

The first major support level would be around the 8750 levels. This is the 38.2% fibonacci retracement of the current rally as well as the 200 day EMA of the Index. If this breaks, the next major level comes only at 7625 which is the 61.8% retracement level as well as the breakout zone and something that should hold fort for now.

If one looks at the chart of the major IT companies, Infosys looks weaker compared to the rest since the breakout it saw a few days back is now as good as failed. Today’s close is at the 200 day EMA, break of which can result in Infy testing the 3000 levels before the results of the company are out.

HCL Tech on the other hand is still extremely strong and can be bought on test of major supports. TCS is also pretty near to its 200 day EMA though the weekly charts shows it in much better hands than Infy. Even Wipro seems better placed compared to TCS and Infy for now though this could change if sentiments go from bad to worse.

Another stock that may be worth pursuing during this weakness would be Tech Mahindra which has seen a tremendously good year in 2013 and any set-back to it would still mean its a buying opportunity than one to sell and exit.

Overall, I would say that CNX IT still has some way to go down before we can start considering a bounce. With Infosys being the first IT company to declare its results in April, that may be the period of either a bottoming out getting formed or the start of a new bear run.

Stock of the day – KSB Pumps

Big Bang breakouts seem to be the order of the day as every other day we see stocks rocketing past previous highs even as the Nifty remains more or less muted.

Today, it was KSB Pumps that broke out of a multi-year resistance with the only barrier remaining being the all time high which is around 30 Rupees away from today’s closing level. Its amazing how some stocks suddenly start moving higher as if some invisible force is lending its hand.

While the stock has seen its share of up and down’s, this month has been a whopper (last time we saw a similar monthly move was in Feb 2012) with the stock having already gained 23.7% as we speak.

The markets are currently pretty bullish and this is aiding the momentum for many of these stocks though I do suspect that even a reversal (other than a major reversal) in Nifty will not push many of the stocks I have been covering back to bearish territory and instead shall find strong supports at the very place they broke out.

For KSB Pumps, the next target is 345 which is the all time high of the stock and if the momentum we are seeing continues, that should not be much of a hurdle to pass.

Stock of the Day – Cummins India

The whole Capital Goods sector has been on a steady rise in recent times. A few days ago, I covered Crompton Greaves & Siemens out here and today its Cummins India which has broken above a multi year resistance and today made a all time high before declining a bit from the intra-day highs.

The move from mid 2011 can also be seen as a move within a Ascending Triangle pattern which helps us in getting a target price (since with the stock being at the all time high, no prior resistances can be found). Based on the pattern, the target in the short to medium term can be found at 730.

Most stocks that breakout do tend to re-test the breakout levels though once in a while one does see a run-away rally. The volumes so far seem to suggest that a re-test may happen though end of the day, market knows best 🙂

Stock of the Day – GMDC

Gujarat Mineral Development Corporation is the latest stock that seems to be trying to ride the Modi wave. The stock which for a long time was a pretty good market performer took a serious plunge in 2013 with the stock falling by 65% in a matter of months. The stock has since slowly crept higher and today made a fresh breakout from its recent range.

While the stock continues to remain weak on the longer time frame, the breakout coming in at the 200 EMA level does provide for a low risk entry with the initial target being at the very least 24% above the current price.

A weekly close below the 200 day EMA would on the other hand communicate the failure of the breakout and would be a good stop loss to consider.

Stock of the Day – Infosys

Since last April, Nifty has appreciated by around 10% while CNX IT in the same time frame has gone up by 57% (this after taking into account the loss of 4.2% in one day – today). IT stocks have been one of the key performers in Nifty until banking stocks started to perform better in recent times (though Bank Nifty is well below its all time high owing to the lacklusture performaces of Public Sector Banks).

A correction in IT stocks was hence well over-due and the initial trigger over the last few days has been the concern about the appreciation of the Rupee vs. the Dollar (never mind that Rupee is a long way from where we started the current depreciation journey).

Today though, IT stocks fell pretty strongly on opening bell itself owing to yesterday’s comments by Narayana Murthy where he forecast weak revenue growth in the March quarter at an investors meeting organized by Barclays. This was a pretty strong surprise owing to companies generally not commenting on the performance well before declaration of results and in recent times, the surprise has come when results were released rather than times like this.

While Infosys was hard hit today with the stock falling by 8.5% at close, its not as if heavens have broken loose. The long term trend of Infosys is still pretty strong and even after the fall, the stock is under no risk of getting into bearish territory.

Old timers may well recall that during the time when Murthy was leading Infosys, the company used to Under promise only to finally end up beating both its own and Analysts estimations. So used to this phenomeon were the markets that when during the results declared in April 2003, he cut down on the Guidance substantially, the markets were so taken aback that the stock collapsed by around 26% during the day (the single largest percentage fall the stock had seen in its history). In hindsight though, that was the most opportune time to buy the stock as it has never looked back.

Today’s fall though comes with a very different context in the sense that the stock is pretty bullish and this is the first major fall we have seen in the year. If Rupee continues to appreciate, profit booking may be seen in IT stocks owing to they being directly affected as well as the tremendous gains investors have seen and hence while the stock still is a screaming buy according to charts, the margin of safety if one were to put it is on the lower side.

The accompanying chart shows what I believe will be the major support zones if the stock continues to drop. For the stock to be seen as bullish, I would like it not to break the 2990 levels which is a very major support zone.

Nifty – Are we in a bubble / nearing a peak?

While we are once again testing multiple year highs, a question that was raised by a friend on twitter is whether stocks were up (rather participating) across the board or was this due to a few select stocks moving up the Index.

While there are various ways to check, I have chosen the easiest way. Using the list of stocks that composed Nifty as on 8-11-2010 (the last major high for Nifty before this series of tests), I calculated the moves of each of them till 11-03-2014 (recent day when the Nifty made its all time high).

An Index is just an Index of multiple stocks and hence there is no way that all of them will be outperforming Nifty. What would be interesting to note is how many outperformed Nifty (more the healthier) compared to those that under-performed.

The difference of Nifty btw the above dates comes to 3.80% (amount of gains since its last major high). Of the 50 stocks that comprise Nifty, we saw 21 stocks outperforming that with average gains coming in at 47.50%. 1 Stock was positive though it under-performed Nifty. 27 stocks gave negative returns with average return being -37.40%

Nifty is calculated on basis of Free Float. If one had instead invested unformly in Nifty Index as on 8-11-2010, as on date the gains would have been 0.82%. The difference of 3% in returns would be due to 2 factors

1. We would have given more weight to under-performer as compared to weight in Nifty and same would have held true for out-performer as well.

2. The Nifty value (end value) I am using is that of of Nifty which consists of 5 stocks which were included into the Nifty after November 2010. They being better performers would have contributed in a small measure as well.

Despite markets at all time highs, this is not a bubble as is evident from most people denying that markets are bullish as well as there being no euphoria in the retail investor arena.

Finally a couple of charts

Here is the performance (relative) of CNX Nifty vs CNX MidCap vs CNX SmallCap. See how Mid Caps and Small caps are strongly under-performing the main index

Here is the same comparison between 2008 (low) and 2010 high

and finally performance between 2005 (July) to 2008 peak

Notice how small caps were performing prior to the peak. Comparatively, this time around we are far from any such performance. While my own thought process is that we are unlikely to see a multi year bull run from here, that would not stop Nifty from moving to 7000+ or even 8K levels before turning around.

As long as the markets are bullish, I believe one should be biased towards long rather than trying to pick the top and missing the whole rally. To me, there is only one way to approach the markets. Be long with a plan B of where one would get off if the trend starts to reverse. Prediction is Impossible and attempting that is a fools errand.

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