Is market leading to consolidation in near term?

This question came to my mind due to various reasons, both technical & fundamental point of view.

Fundamental point of view we can discuss later, coming to technical aspect which is my favorite section we will see how it is spanning!

You might remember my last but one posting about markets (I posted it on 11th July), where in I have given information about market leading to

-->Two months bull run
-->One month bear correction

from last one year.


From August 2009 to October market has moved from 4400 to 5200 which is almost 18% & then almost 11% correction from top 5200 level to 4600.

And then from November 2009 to January 2010 market has moved from 4600 to 5300 which is 15-16%% and from then again it corrected to level of 4700 which is 12-13% from top.

Then from February 2010 to April 2010 market moved from 4700 to 5400 levels which is 15% gain & corrected to 4800 levels which is 13% from top.

And from that level market moved to 5450 level which is again 13% gain.
So now correction is expected? May be, but I am not sure!!!

But couple things you can notice from above details are

1. Bottoms are getting better...
2. But tops are not getting better as compared to bottoms

So I feel tops & bottoms are converging & leading to short to medium term consolidation around 5250-5300 level.

So same thing will reflect in large caps & best example is Reliance which is biggest company by market cap, has not performed from last 3-4 quarters.

So traders & investors can look into some small cap & mid caps.

Updates from the world of business...

20% RETURNS IN 20 DAYS

Surprised! Ya most of the market players surprised by the rally in the global markets including ours. There are various reasons like FED's 1 trillion $ plan, some economic indicators showing positive sign, back in home inflation in line with market expectations, oversold markets leading to cheap bargaining, net buying from FIIs & as usual DIIs like mutual funds & LIC & etc. Whatever may be the reason, as in TECHNICAL ANALYSIS we popularly say "WHAT IS MORE IMPORTANT THAN WHY" market has given the around 20% returns as compared to march first week 8000 odd levels to 10000+ levels.

Now there lot of discussion going on in Dalal street whether this is bear market rally or start of the bull trend. Anyway I am not going to discuss that as I myself naive in this as compared to all those experts. But what I am proposing to traders & investors here is be cautious! As most of the traders/investors lost lot of their money in this crash over the 15 months, everybody will be looking to make some profit at least as and when situation permits. And in addition to that if it is bear market rally then it is going to crash if not now, after another 10% rally as historically bear market rallies have crashed after reaching the range of 30%-40%. So as I frequently say in this kind of bear market there is always "1 STEP PULL BACK WHENEVER 2 STEPS PUSHED AHEAD"

And one more popular discussion is whether markets bottomed out or not? If you see the below graph, you can see that markets have bottomed in the range of 8000-8300 levels. But question is whether is this a intermediate bottom or markets are going test the new level? But I dont think markets test the new lows! Again I may be wrong, since in this kind market nothing can be ruled out as present upside is happening, in the same way downside is also quite possible. If you observe the CIRCLE in the graph, 50 DMA is still below the 100DMA, so you cant conclude this rally is sustainable in the medium term. And there are strong supply regions in 10500 & 11000 odd levels. So traders should be careful while taking long/short positions. Capitalize on the situation & book the profits whenever your intermediate targets are achieved!




NIFTY SHIFTS TO FREE FLOAT

From June 26th Nifty is shifting to free float market methodology to calculate the index. This is the good method of calculating the index as number free float shares differ from total shares of a company. As you might be knowing free float share means number of shares traded in the secondary market in day today trading may be less/more as compared total share which include free float, promoters holdings, government holding & etc.

Presently Nifty is calculated based on full market capitalization which may not depicting the exact trend in the market movements. But this new from the board will be more pragmatic since it is going to be more weighed on daily traded shares.

If you see the below table in which NTPC & ONGC will be major losers as their free floats are around 20% 60% of their total market capitalization respectively. Being Public Sectors Majors government holds the majority of the stake in these companies. While on the gaining side almost all companies are private companies like L&T, ICICI Bank, HDFC & ITC. Since as compared to their full market capitalization to free float market capitalization more number of shares leading to increase their weightage in the index as shown in the below table.

This change will impact more as Nifty is the most traded index it alter all portfolio combination..




Inflation @ 0.27% Vs 0.44%

Indian headline inflation measured by WPI [Wholesale Price Index] fell near zero level of 0.27% for the week ended March 14 as compared to its previous week's 0.44%.

For the week ended on March 14th the WPI index increased by 0.1 basis to reach 227.7 basis points, but because of high base of 226.4 of previous year inflation is heading southward. Last year for the same week means, March 7 2008 to March 14 2008 WPI increased by 0.7 basis points due to which present year increase of 0.1 basis point is not contributing in increasing the WPI headline inflation.

Where as if you see the CPI [Consumer Price Index] numbers couple of them are still in double digits. For example Pulses and cereals, the two most commonly consumed items, are at 9.97% and 10.12%, respectively. The inflation rate for sugar is at 20.97 per cent. But for these numbers there is agricultural reasons like periodic cycles in agricultural outputs. For example in case Sugarcane, there will be bumper crop for 2 consecutive years & next year it will very low crop like that every crop has its cycle of yields. And in addition to that thanks to "OUR WELL DEVELOPED PDS [PUBLIC DISTRIBUTION SYSTEMS]" which contribute to higher inflation particularly in scarce time due to hoarding by agents.

So what is the solution to minimize this "BASE EFFECT", because all our "MONETARY POLICIES" will be dependent on Inflation numbers measured by WPI. Since base effect is going trouble us next year also since this year we will face negative inflation for the for the couple of months April & May and most probably for June also due to high base of 10%-13% of inflation last year in these months. And in addition to that if this DISINFLATION LEADS TO DEFLATION PRAGMATICALLY due to job losses/salary cuts & other forms of economic problems negative inflation may extend also. And this is going increase inflation substantially in next year as it is in negative this year.

So government should think of adopting to CPI that too with the SEASONAL ADJUSTMENTS so that all the changes are adjusted in inflation numbers. So all the policies taken on these numbers will lead accurate results.

Market Capitalization of IBanks

Since many people are having some problem viewing the picture of the market capitalization of the banks. So I am posting that picture for the sake you my readers...

Market Capitalization of Investment Banks

Today, my friend Mr. Udit Mehra sent me a link about the comparison between Market Capitalization of the investment banks before the financial crisis & after. The way of representation is really nice. Particularly observe the Market Capitalization of the Citi Group, RBS, Barclays & etc. See how investors have hammered the ibanks which caused the turmoil...

News Paper Articles

Today I read some very good articles in Financial Express & Mint.

In Financial Express, Ajay Shah has analyzed
-->The amount of capital flows to India in last 2 years
-->With respect to capital flow, how RBI has controlled the exchange rate
-->Impact of crude oil prices fall &
-->Opportunity for India in this crisis.

With respect to Ajay Shah's writings there is an editorial in the Financial Express.

And in Mint there is a very good article regarding
--> Top 50 Indian Companies (Considering the facts of MVA (Market Value Added), EVA(Economic Value Added), WACC (Weighted Average Cost of Capital), NOPAT, Cash Operating Taxes & etc.
--> Crash of Indian Stock Market to 2005 levels
--> Low interest rate policy of 2003 which helped in boosting the GDP
--> GDP percentages & Total growth in the GDP
--> Flow of money(M3)
--> Indian Companies' Fundamentals
--> There is interesting fact that the author is pointing out is only 15% of the companies out of 500, have created the value rather than size, where as rest of them concentrated for the size.
--> Managing trade offs between the P&L account and Balance sheet
--> Importance of sustained EVA growth & value creation to shareholders.

Market Capitalization of Top Ten PSU & Private Companies (Source : Mint)

Maintenance of SENSEX

One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values.

The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee. The Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The Index Committee of the Exchange comprises of experts on capital markets from all major market segments. They include Academicians, Fund-managers from leading Mutual Funds, Finance-Journalists, Market Participants, Independent Governing Board members, and Exchange administration.

Adjustment for Bonus, Rights and Newly issued Capital:

The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the Index Cell of the Exchange, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the SENSEX value.

The Index Cell of the Exchange keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 14 Indices.

• Adjustments for Rights Issues:
  When a company, included in the compilation of the index, issues right shares, the free-float market capitalisation of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market Capitalisation (see 'Base Market Capitalisation Adjustment' below).

• Adjustments for Bonus Issue:
  When a company, included in the compilation of the index, issues bonus shares, the market capitalisation of that company does not undergo any change. Therefore, there is no change in the Base Market Capitalisation, only the 'number of shares' in the formula is updated.

• Other Issues:
  Base Market Capitalisation Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.

• Base Market Capitalisation Adjustment:

  The formula for adjusting the Base Market Capitalisation is as follows:

  				New Market Capitalisation
  New Base Market Capitalisation	=	Old Base Market Capitalisation	x	---------------------------------------
  				Old Market Capitalisation

Major advantages of Free-float Methodology

• A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market.

• Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index. For example, the concentration of top five companies in SENSEX has fallen under the free-float scenario thereby making the SENSEX more diversified and broad-based.

• A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-à-vis an investable index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.

• Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely held companies in the index while at the same time preventing their undue influence on the index movement.

• Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.

Definition of Free-float

Share holdings held by investors that would not, in the normal course come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. In specific, the following categories of holding are generally excluded from the definition of Free-float:

• Holdings by founders/directors/ acquirers which has control element
• Holdings by persons/ bodies with "Controlling Interest"
• Government holding as promoter/acquirer
• Holdings through the FDI Route
• Strategic stakes by private corporate bodies/ individuals
• Equity held by associate/group companies (cross-holdings)
• Equity held by Employee Welfare Trusts
• Locked-in shares and shares which would not be sold in the open market in normal course

Understanding Free-float Methodology

Concept:

Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.

In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and BANKEX in June 2003. While BSE TECk Index is a TMT benchmark, BANKEX is positioned as a benchmark for the banking sector stocks. SENSEX becomes the third index in India to be based on the globally accepted Free-float Methodology

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.