What to expect from markets on D-Day and in near term???
As we all already know, markets have rallied close to 20%
from the lows of 4th February on the expectation of a strong, stable
government of NDA under the leadership of Mr. Narendra Modi.
By looking at the market response even after the declaration
of Exit Polls, it looks like bulls are very eager, but unfortunately without
any strong reason.
Few things which should be looked at on a conservative side,
No crackdown in the dollar to match the mammoth up-move in equities, not a significant
uptick on the earnings by Indian corporate, Inflation & IIP data still not
at expected levels, global pressures in terms of Russia – Ukraine tension,
Continued QE tapering by the US, bearish signals from Chinese PMI and real
estate, etc
What can happen? –
Scenario 1 (High probability)–
In the case of NDA having clear majority, markets may not go
up substantially (may be by only 2%-4%) in the near future as the same is
already discounted in the markets. In the same case BJP’s seats might also play
a big role, anything above 200-220 would be cheered from markets. Even after
this scenario after posting short term gains, markets may follow Buy on Rumour
Sell on Fact terminology
Scenario 2 – (Moderate probability)
However if NDA just fails short of a clear majority with
near about 240-250 seats, a sell off can be witnessed as BJP would have to take
time then, in order to stitch the post poll alliance, which might be
challenging to an extent. Also BJP on its own gets anything below 210-200 seats
markets may take it negatively from the stability perspective. However, after
the sell off, markets will offer a good Buying Opportunity for traders as well
as investors.
Scenario 3 – (Low probability)
If on the higher side NDA manages to get more than 300-310
seats markets may give a short term jump, which can take markets to 5-10%.
Scenario 4 – (Lowest probability)
In a lowest probable scenario NDA getting less than 200,
though I personally don’t believe in the same, the doors might be opened for a
huge panic and sell off, a possibility of a down circuit can’t be ruled out.
Advice for the traders -
16th May 2014 is not the only day
available for making profits, stay cautious and conservative, preferably
without trades or otherwise with STRICT stop losses, please remember though the
leads will start coming in from 1100 hrs, the final tally will come post
markets, so not advisable to take overnight trades tomorrow.
Advice for Investors –
Be happy as your investments have grown close to 20% in one
quarter, however, big portfolios should ideally be hedged with Puts of 6300 /
6200 or max till 6000 for safeguarding your portfolio if Scenario 2 / 4 becomes
reality, this just going to be an insurance premium for your portfolio and not
a money making avenue. And needless to say, if markets plummet because of
Scenario 2 / 4, it should be used to accumulate some quality stocks for your
portfolio…
For Option traders -
The IVs are at sky high levels near 40%, though it had
cooled off a bit post the exit polls, have come back to the levels of last
week. Due to such a high IV buying of options should be avoided, very risky
traders can think of writing deep out of the money calls above 8000 levels /
puts below 6000 levels for making those limited profits (mot more than Rs.
500-100 per lot) with an element of unlimited risk, hence not advisable.
However, strategies which will support IV cooling off effect like Butterfly,
etc can be looked at.
Cheers
Hrishikesh
Prabhavalkar