INDIAN BANKING

One of the sector which has provided most support to NIFTY and markets in general is banking. It clearly looks like the bull run in banking is on and can continue further with many large sized PSU banks making life highs. I accept the point that banks have a lot to grow from here if the economy has to grow at above 8% CAGR and am bullish on banks from a long term perspective. But in the short term i think the banks can now start to underperform and we may see a small correction in the banks. I think this would be because most of the other big stocks have seen a decent correction from thier highs and the banks are one of the groups where this correction has not happened. For instance while NIFTY is about 1% below 20 dma some of these banks are still above thier 9 dma let alone 20 dmas. I think good opportunity will come in second tier PSU banks like dena, canara, idbi etc. Of course i have an implied assumption that markets will also see some correction from here.

A Billion Dollar Stimulus

The Indian markets have been rallying for the past 2 weeks without any particular reason. Some say its the trough in negative news worldwide, some attribute it to strength being shown by Indian economy especially auto, cement and steel sector, some also point to the technicals like not breaking earlier support levels and then there are theories of pre election rallies too. I think all of them are right to a certain extent but the bigger question now is of how long and how much more.
I think the answer to this question is once again based on the weightage one attributes to the above reasons, the negative news in US and elsewhere is still too weak to support a rally and we have been consistently seeing a resisitance at 826 levels for S&P. The support of 804 is now crucial because negative data can't go unnoticed for a very long time. Something's gotta give, either data will turn positive or the rally in US is petering out.
Technicals are finally only indicators and aid in timing and suitability of trade they are no reason for rally by themselves and therefore i don't attribute much weight to them. I would only say that for every support there is a resistance and for every right pattern there are many wrong patterns too.
The indian econpmy has shown good strength but i doubt the sustainance of it due to seasonal factors and pre election expenditure. Even the industry experts are surprised by the strength in data and i would have waited for atleast one more month before believing in the strength. This time though as elections are also around in April i think the strength can sustain itself because of the "Billion Dollar stimulus" provided by the Election themselves. A back of the envelope calculation shows that if 2 leading candidates spend around Rs. 5 crores each in every constituency. This would generate an expenditure of around Rs. 5400 crores or a billion dollar. This itself can give a lot of stimulus to the economy and provide sustainance to the economy.If that is so then markets can still trade higher till next month.
Pre-election rallies can also meet post election busts so i would be careful myself before i buy that argument, even if whole of the market goes insane and buys the lows made in march, i think the zeal to get to not to be the last to sell will ensure markets don't go too high and a sell-off could be very near.
All said and done, the only reason i think markets can go up from here is the billion dollar stimulus being provided to economy during March and April. Lets hope that the strenght continues but i would resist buying at these levels.
On the contrary some stocks looking attractive to sell include shipping stocks and a few midcaps.

Contango Conundrum

An intersting contango has been developed in WTI crude oil futures market. The Futures for Feb delivery can be traded at around $36-37 while if you want to buy same crude oil for delivery in March you have to shell out $42-44/ per barrel. I am not too experinced in oil trading so its really amazing for me to see that one can earn around 20% returns buying oil in February and selling it again in march. After reading a bit more i realise that it truly is the case but its not all that easy as it sounds. First the contract requires delivery at a particular place and that too of a specific grade. In addition to this the contract size is around 1000 barrels and guys who normally deliver trade in thousands of barrel so 1 or 2 contracts are virtually undeliverable, the costs could actually be very high. In addition to this there are storage costs involved as Cushing where it has to be delivered has a limited capacity and is already storing lots of crude oil.
On speaking to an oil trader i realised that since storage costs are high there is some forced selling happening in spot markets or may be to put it other way unless one has huge incentive to store the oil ( i.e. high prices in future) nobody would like to buy oil unless ofcourse one is a refiner.
Herein lies the issue however, theoretically after a week March deivery contract will become front month contract and should very soon start reflecting spot prices. This means either the spot prices should rise to $42-$44 or the futures price should come down to reflect current spot level. Thus there exists an opportunity of atleast +$7 to -$7. A very crude analysis and research but I think the better odds are for the seller of the contract as the economy in USA might not improve in a month leading to price rise of around 20%.But then Oil has developed a good positive correlation with stock markets off late. If Obama effect works on stocks may be we might see some action in oil prices too. The only problem is this, can refiners pass on the higher costs of purchases to consumers. I think not.