7% Inflation makes our markets fall like 9 pins!

Our markets opened slightly positive and were looking nervously at the inflation numbers to be released at 12 noon, where markets expected flat to slightly lower numbers in view of the measures initiated by the government, but when the numbers touched 7%,a three year high, there was dumping of all stocks and index futures, continuously till the end of the session, since RBI intervention also is being felt to tackle the situation before it goes to worse from bad. While US markets have posted substantial gains week on week, our indices have posted 6% losses on week on week basis, shows the disconnect between the markets. Thus, the domestic issues are playing major sentiment drivers to both foreign investors and domestic investors at the current juncture. The resumption of bull market cannot be foreeseen till indices close above 200DSMA for at least few weeks successively.

 

Investors need to understand that we are already in "bear market" and preservation of capital should be the top priority, as many analysts suggest picking of beaten down stocks, for good returns over period of 2 to 3 years;

 

I refer to our indication in the posting dated: 03.03.2008 cautioning investors about onset of bear market, while everyone thinks it is correction "

 

A word of caution: Bull markets end while everyone is thinking that the weakness is a correction, and on set of bear markets is realised by everyone, when enough damage is already done. Every one should hedge the portfolios with proper hedge depending on one's own risk perception"

 

It is currently sideways distribution phase which is in place, any portfolio is to be duly hedged with in the money put options of individual stocks in the portfolio or with put options on nifty. Any relief rallies should be used to lighten the weak stocks in the portfolio even at loss and increasing cash levels, trading would be a good strategy, from now on. The Telugu New Year Ugadi begins today(same is called Gudi Padava in Maharashtra); and this new year readings from astrologers indicate turmoil in politics, financial markets, raise in prices, and possible early elections to Parliament, will keep markets guessing on the direction, ignoring postiive developments.

 

Infosys Technologies informed the stock exchanges that it would announce its results and dividend for the year on 15.04.2008, generally before market hours, would set the tone for the stock, an index heavyweight and the sector too, based on its guidance for the year gone by, and the guidance for the next year. BHEL results spooked the markets, and stock crashed due to higher valuations, and still the capital goods stocks would correct more, as the average price earnings multiple of most of index heavy weights under this category far above index P.E. or other sectors. No doubt that the infrastructure sector is important for our country, and the current order book is very strong, but how the operating margins affect, due to raising input costs, inflation which does not allow reduction in interest rates by RBI and banks, should not be overlooked while looking at the correction of these stocks from their January' 2008 peaks.

 

Range for the Week: Nifty might trade between 4450 to 4850 during the week.

 

Strategy for the Day: Buy 4500 calls on weakness and 4800 puts on rallies for intra day trading.