Avoid stocks that ran up 20-50% in last few weeks

Gautam Shah, Technical Analyst, JM Financial Services said, the markets may see 5-7% correction in the near-term as the technical indicators were showing that the markets were overbought. He said he would avoid stocks that ran up 20-50% in the last few weeks. He advised to book part profits now. However, he quickly added that the markets would see 20-25% upside after the short-term pullback. The Sensex trading base was at 16000 levels, he said. His medium-term target for the Sensex was at 18300 and for the Nifty was at 5550.

He didn’t see too much upside in autos and technology stocks. However, he was positive on oil, power, banking, capital goods and realty stocks.

Commenting on the global markets, he said, the charts of global markets were still looking strong. The Dow Jones, he said, could touch 11,000 levels over the next 6 months.

Here is a verbatim transcript of the exclusive interview with Gautam Shah on CNBC-TV18. Also watch the accompanying video.

Q: How would you approach trade from 5,000 for the Nifty?

A: The move in the markets in the last two to two and a half weeks has been quick. From that level of 15,300 you almost tested 17,000 in no time. We have now once again come to a point where the market requires a pause or a breather. Infact 5,050 to 5,150 on the Nifty according to us is an important supply zone and I would not be surprised if we were to see a 5-7% kind of a drop from around this zone. Also not to forget we are approaching the month of October which does not have a great track record whether it is a bull market or a bear market, you have always seen some volatility or retracement coming in, in the month of October and given the kind of move that our markets have seen in the last few months, I am forced to believe that we will actually stop and consolidate once again in a broad range without damaging the overall trend. So, there is a possibility of a 5% pullback coming in from around current levels after which we actually move higher to our medium-term targets.

Q: Your report says, “Overall short sharp out of the blue correction is in the offing and hence longs should be avoided” but on a sectoral basis, you seem to be very positive about all sectors except midcaps. So, what is your suggestion, is it that get out of midcap and smallcaps, the argument though maybe that that is where the maximum money is been made, so you are actually making 10-20-30% over one-two days?

A: The idea is to not run after the stocks that have already run up 20-50% over the last few weeks and the reason we are a bit cautious at this point is because we have been talking about targets of 5,100 on the Nifty, 16,700 on the Sensex and because our short-term targets are done and because on a number of technical studies the markets are overbought with multiple legs of divergence, we believe that there could be a short sharp knee-jerk reaction coming in. In the last couple of months we have had these 5-10% kind of corrections coming in many times but while they have happened, the market has continued to make higher tops and higher bottoms. So, I am not saying that this is an opportunity to go short because it is a very high momentum market wherein you have to be very careful on the short side but all we are trying to say is that it is important to be careful on the long side and whatever returns people would have made over the last few weeks or few months, I think it is time to protect them, maybe book part profits at this point of time with a view to buyback around 5-7% lower.

Q: A 5-6% slide would indicate that you expect the market to settle at about 4,700? What would you set out right now as the range for the Nifty to move in?

A: I think firstly the market continues to make higher tops and higher bottoms. Therefore I don’t see the markets breaking the previous bottom. I think 16,000 on the Sensex was a very important resistance level for many months and therefore this level now becomes an important support for the market going forward.

So, at worse, we could see a correction down to 16,000 levels, which is about 4,750-4,800 on the Nifty and if that were to happen, it would also act as a pullback to a large bullish inverse head and shoulder pattern which I am spotting on the charts and this pattern has a target way beyond the highs of 2008. So, I think a pullback would act as a good tool for some of the other technical studies. I think 16,000 now becomes a trading base for the market while 15,300 is the all important support level from an investor’s perspective.

Q: There is a global synchronicity as well to these moves we have seen in the market. What is it that you see when you look at the charts of the S&P?

A: That is a bit of a disconnect because the Indian market charts have developed negative triggers starting today whereas some of the other global market charts are still looking quite good. If you look at the US markets, I think for S&P 500 our short-term target is about 1,090 when we are still about 20 points away. On the Dow we are talking of levels of 10,200. So, there is a possibility that the US markets rally to these levels in the next few trading sessions and then the Indian markets get into their act and then we see a global pullback because like India you have most other Asian markets rallying very well in the last two-three weeks and even other markets are overbought. So, I think it has to be a synchronised kind of a pullback that could take place over the next couple of weeks. It would be termed as a consolidation for an investor. I think it is just not tradable but for a trader who is looking at day-to-day moves or week-to-week moves, I think it is an opportunity to cash out and then buyback once we test support levels once again.

Q: How much should we read into US markets? This market has gone from 8,000 points to 9,000 perhaps to 10,000. We have gone from 8,000 points around the same level to 17,000 points. Some would say there almost seems to be zero correlation and if European and US market starts picking up, you could see money flows go back into the markets where it seems like they are making the bounce then?

A: I don’t think it is right to look at percentage moves because US market has a different kind of a behaviour, China has a very different kind of a behaviour in terms of its movement while some of the other Asian markets – they are very high beta markets. So, it is quite understandable that if the Dow were to rally 100 points or a percent, you will have Indian markets open 1.5-2%. That is quite reasonable and I think starting March this year, you have had the US markets rallying gradually, you have not seen even knee-jerk reactions in the US markets and that is very healthy for the medium-term and for the long-term uptrend. Our view is that the Dow should test the level of 11,000 over the next three-six months and if that were to happen, Indian markets can move to our target of 18,300 on the Sensex and we have targets of about 5550 on the Nifty from a medium-term perspective.
Q: I wanted to ask you two-three sectors, just to give you some comparative data from September 2007 when we were at 17,000, the Bombay Stock Exchange (BSE) auto index is up 26%. When we touched 17,000 again in May 2008, it is up 42%. So, should you go with the auto part of the market which has got momentum or should you go with the BSE realty index which is down 51% from our last 17,000 level or 42% from the last May 2008 level; should we go with the momentum or should we go with the laggards?

A: I think we should be going with the laggards and the reason for that is that this market has seen sector rotation in the last six-seven months. It started off with technology because that was the index that actually led the rally then you had the metal stocks doing well and in the last two weeks banking has taken over with the index moving about 15% in a matter of couple of weeks. I think autos and technology are the two sectors that have already had its run and therefore from a risk reward perspective, I don’t see too much upside in both these sectors. We are favouring sectors like oil and gas that have just not participated in the last couple of months. Power looks like a very interesting pick and I think it could appreciate 20-25% over the next three-four months, banking still has about 10-15% in the near-term, capital goods has a very interesting set up and realty which you pointed out is a space that moves with the market. It is a high beta space. I think some of the realty stocks can move up 20-25% even from current levels. So, I would stick to the laggards and I think some of the other sectors like autos and technology have had their run and therefore the move is now going to be in some of the other sectors.

Q: So if your call is that the market looks primed for a scaleback, what kind of positional trade would you take on the Nifty for the next series?

A: October, I would be a bit careful. It does not have a great track record and I think you could see some consolidation coming in, in the month of October, maybe not a big fall but a 500-700 kind of a decline is absolutely within the framework of an uptrend. So, I think the idea is to book profits in the next one to one and a half weeks, wait out for a pullback and I still don’t think this is a great market to short because these short corrections are very sharp and very quick and therefore it is not very easy to cash upon them. So, the idea is to be a bit cautious with long positions at this point, play out the month of October and then I think November-December-January is typically a good period for the markets and with the medium-term set up for the market staying strong, I think there is another 20-25% upside but after a short pullback.