Did you enjoy the rally in private banks? The last time when I spoke about Nifty levels, I had clearly mentioned that 5600 is going to go away as the structure of the markets had weakened and we may get to see lower levels of 5500 or even 5400. Nifty touched a low of 5477 and rebounded sharply. The markets recovered faster than it was anticipated because of the unexpected crash of commodities and the benefit it would have on the current account deficit. Even the inflation numbers came in better than expected which lead to rising expectations of more aggressive easing by RBI. Another big factor was the earnings that was due this month and there was no kidding that private banks will boast better than expected results which is always the case.
Even though I was confident of nifty breaking below 5600, my suggestion was to not go and sell in this down tick but to use it as an opportunity to go long. I had suggested to utilise the panic among naive sellers to go long in private banks. It is a known fact that if nifty has to crack, private banks/financials will be a major contributor due to it’s heavy weight on the index and being one of the only ones (except defensives) where people are sitting on good profits. There is no problem in putting money into companies at lower valuations that are growing at 25-35% year on year. People who used the dips to go long are sitting in decent profits and people who missed out in hopes to get even lower levels got greedy and made nothing. If companies growing at 25-35% and always giving above expectations results will not rally post a huge correction then what will?
The rally really caught us all in surprise as it started all of a sudden and gained momentum, but this is what always happens and can happen from any level. Instead of 5477 as a low on nifty, it could also have been 5200, but can you catch the bottom? No, you cannot catch the bottom and thus you should not attempt to also. Keep buying as you see the fall coming off and hold patiently for a good opportune time to liquidate your holdings in profits. Anyway, let’s try and understand what might happen in the future.
Where are things headed now?
Honestly speaking, a lot depends on the RBI policy. If market is factoring in a 25bps cut, then market may get what they want and since this rally has already factored that kind of cut, we may get to see a technical correction in the markets. If markets have rallied on expectations of 50bps cut, then I guess there may be a room for a bigger disappointment and correction may widen. I heard some people on TV talking about 50bps rate cuts being expected, which I really doubt will happen.
Just last monetary policy, RBI Guv was talking about limited scope for rate cuts and suddenly in next policy, a cut of 50 bps? I am not saying that there is a zero percent chance, but chances are limited that there will be such a deep cut. The last time RBI cut 50bps was last year in April and because of that RBI didn’t cut for the whole year and even said so that he won’t. If RBI cuts 50bps and says that he won’t cut now, even that will not go down well with the market.
I don’t think even gold or crude fall can bring about a 50bps cut because RBI Guv’s thinking is not on the same lines as a stock market trader that gold has fallen 20% and crude has fallen 10% for a few days, so immediately a big cut is deserved. RBI would question that what if commodities rally again by next policy? Why not cut only 25bps and wait and watch how commodities behave till next policy to decide on further cuts? Honestly, now with Crude already inched up to 103.50$ from 97$ and Gold inching to 1466$ from 1320$, I think RBI would really want to wait before getting aggressive with cuts. RBI would find more comfort in cutting 25bps at once than 50bps at once and feel disappointed by next policy, they are just so conservative. Even markets have conveniently ignored the recent upside in commodities and traders continue to chase the momentum as they feel the rally is here to continue.
Most banks have shot up like 20% from the lows, even bank nifty is up 18% or so from the recent lows and all of this happened in last 10 trading sessions with no consolidation or correction. We have seen 10 days of continuous shooting in stock prices of banks and some other rate sensitives, I think if not a deeper correction, atleast a technical correction of 3-5% is definitely warranted. If I look at daily charts of all of these bank stocks and the bank index, they are highly overbought and a correction is standing at the doorstep ringing the bell.
For Investors or Traders who are looking to book profits in short term should really think about booking out now before you see a correction and book profits in panic at lower levels. For Investors who have a longer term horizon, they can remain patient and continue to hold. By March 2014, I am looking at no less than 20% more kind of returns in private banks from current levels. However, for fresh investments, wait for some kind of 5-10% dip and only then go and buy. Don’t hurry up and buy into a rally only to be disappointed with a correction. Play safe and nice and mint money by investing your money in private sector banks!!