Sunday, November 14, 2010

India NIFTY SENSEX short thesis - 10% Correction by 20-Dec-10

Ok here is my NSE INDIA NIFTY \ Sensex short thesis .All criticism welcome.

(Also please feel to circulate among all the bulls so that they get scared and start selling and the negative feedback loop leads to further fall in NIFTY and my puts go up.. haha.)

NIFTY cmp 6070. (down 4% or 240 points last week from highs of 6312.)
my next 1 week to 1 month target of NIFTY is 5700-5800 ( target 1), target 2 is 5400.

For the above trades , we will need two big confirmations and if any of these dont hold good then the this short trade should be closed.
  • Confirmation 1 - NIFTY falls and closes below 50 DMA of 6000 to 6020. and this level or max of 6070 , should prove to be as a big resistance level in case of  any subsequent rise/ rebound in NIFTY.
  • Confirmation 2- AUD - USD should continue its fall from its parity to target 0.95 and then later 0.92 by the next month. ( cmp AUD/USD 0.985)
Background - NIFTY SENSEX has risen 2.6x from Mar`09 lows.and in this rally the worst correction we have seen was three 10% corrections . These corrections happened within a month and lasted for just 1 to 3 weeks. ( got 2 of those corrections and made money on puts.Last time I shorted in May`10 and made money but I again continued my shorts in Jun`10 and it went wrong. So after Jun`10 , I didnt short a single time. But now finally I believe finally time is ripe for another at least 10% correction by mid of next Month ( 10-20th Dec`10)

ok now lets start with the points that favours the bulls.
  • QE 2 , zero interest rate policy ZIRP in developed world to continue for next 1 -2 years at least that should lead to inflows in EM`s.( Emerging Markets).   ( my take - true but with zero ZIRP and QE2 , this only  shows the underlying weakness in the economy and artificial propping of markets by central bankers. interest rate is 0% and US GDP is growing by 2% , so what ?? it is just like pass marks in an exam is 1 /100 and the child says to parents " papa i passed the exam" hehe..).
  • IPO Primary markets are robust.  EM`s IPO have broken world record. listings MTM gains are great for most. the should attract more to the party. most recently Malaysia largest IPO of $4 Bn  and even GM $10 Bn IPO were both over subs 10x. ( my take - yes. even in dot com boom / 2007 boom people money in shitty stocks like DLF.  this year the EM`s top 3 IPO`s have raised $113 Bn that is more than what US raised in 1998 /1999 - dot com boom!!  the Largest $ 70 Bn IPO PETROBRAS  is down 30% YTD and is now at issue price of 26 reals i.e 0% MTM since issue price. This can be a leading indicator for what lies ahead of the markets. EM`s Guru Mark Mobius says Petrobras shows global IPO is a bubble. interview here )
  • US data ( ISM , employment, retails sales , consumer confidence) in the  past 1 months are all above expectations and good. ( my take - true but this could mean from now onwards US market could outperform EM`s. as US market is at 13x PE vs 19x PE for Sensex. Even gol`man sachs says close EM trade . News here ) 
Now here are the points that favour the bears ( in addition to my above points)
  • on wednesday - CISCO fell 16% on weak guidance ( biggest fall since 1994). CISCO had an excellent lead indicator of the health of the IT and global economy. Impact - IT pack in NIFTY that comprise highest weightages should be weak.
  • SBI results were quite shitty . stock tanked 13% last week.( and most NIFTY stocks. with PE of 20-24 , Q1 earnings growth and even Q2 earnings growth is in single digit if you take only domestic earnings.over 60% of Sensex earnings growth is due to non domestic growth such as Novelis for Hindalco, JLR and Corus and Tata Mo and Tata St). Impact - Banking sector that provided sector leadership (alongwith IT) will also get hit
  • on wednesday  - Korean Market fell 3% on huge FII selling. Next day Shanghai fell 5%. same day later, Sugar Futures fell 10%. these are all mini black swans..early indicators that should  instill some fear. and as we all know it , just like greed , fear can be infectious but it can spread much faster with much higher potency. now Sugar futures fell as the exchange ICE hiked margins by 65% due to sharp rally from 15 cents to 30 year high of 33 cents. next day sugar fell another 10%. thus 20% fall in 2 days.
  • Shanghai also fell as against expected CPI of 4% ,actual was 4.4%. thus people said this means more hikes in store and Shanghai fell 5%. well India CPI has been above 10% since last 10 months. So how much should India fall ?
  • India - everyone seems puzzled by slowing IIP data. But as per Economics 101 and CFA Level 1, rising inflationary expectations suppresses/delays any planned capex plans. very logical indeed. If my existing business margins are getting squeezed because of inflation then why should I increase my capex aggressively ??
  • sovereign debt issues -  yes in the past the dubai and greece scare proved to be excellent buying opportunities. but lot of people have become too complacent. IRISH bonds owned by  global banking system is $750 bn. total debt owned by global banking system of PIIGS country is over $ 2 trillion !! and as we have seen in sub-prime , here is how bulls discard it. arey subprime is just 2% of total US real estate market. just like madu kela  ( reliance MF) says arey ireland $50 bn  is just a drop , not even 1% of global GDP. Irish bonds were falling for 13th consecutive day also due to the exchange hiked margins by 25%. world developed economies need to raise $ 10 trillion in 2011. chart here  Even if Ireland is bailed out , everyone will be asking which one will be the next shoe to drop. There is never one cockroach , similarly sovereign debt will be a hydra headed monster that will raise it ugly head every now and then.
  • also the ideal solution for PIIGs should be to default because anyway even if they take IMF aid, they will have to continue with severe cost cutting measures that will further weak the economy. also how come media didnt report how PIIGS sent a parcel bomb to Germany ?? my take here
  • QE2 is best time for traders to take advantage of the recent 18-20% rally in most assets S&P ( 1040 to 12250),NIFTY ( 5300 to 6300) and even gold and sell the news now. profit booking now will be very prudent if one is wants to have a peaceful year end holiday.
  • last week was very ugly even in US bond markets as even AAA municipal bonds and even US treasuries fell. chart here when AAA rating is falling then just extrapolate how should risky asset classes such as stocks , commodities should behave.
  • the only thing that was in green last week was US Dollar even thing fell, gold,crude, stocks, AAA bonds. AUD USD below parity. EUR/USD fell from 1.42 to 1.37. this looks a good start of dollar carry trade unwinding , at least in the short term. again short dollar ,long everything else was a very crowded trade.
  • it is difficult to make abnormal returns in a crowded trade. and being bullish /long was a very crowded trade last week. and last week shock will even act as a slap on the face of bulls who were drunk on the highs from QE2. this will trigger further selling and stop losses trigger. margin increase , if any by stock exchanges will again further increase downward momentum. already call rates is 1 year high in the indian banking system. chart here  
  • Keylocal political news of India - the great Scam Nation. ( similar to US being worlds biggest Bailout Nation). Raja -the Telecom Minster`s $ 35 Bn scam nailed again by ex-employee (very similar to Satyam scam where the scam was only known when an ex-employee sent a mail to the directors).News here
  • Quantitative / Technical analysis of past 10% corrections in NIFTY shows strong evidence that this could be at least a 10% correction from the top. - this is a mean reversion bet. I went back till 2003 and saw whenever NIFTY rose to ~20% above 50 DMA then how much did NIFTY correct ? here are the findings
Disclosure - holding 6200 NIFTY puts. Plan to double up short position at market open tomorrow.

1 comment:

Anonymous said...

it seems you are on target :P