MOSt Quantitative Outlook

Monthly

October 2014

INDEX

S&P CNX Nifty

Sensex

:

:

7965

26630

Sector discipline to pay off…

Nifty ended the month of September with a gain of 10 points. Even though the

Nifty remained flat MoM, sectors had an isolated movement with Defensives

and IT outperforming Cyclical. Auto was an exception and saw absolute perfor-

mance of 2.8% whereas, major losers were Realty & Metals.

Within the inter-market structure, currency was the only segment in action and

Dollar Index climbed above 86. The emerging market currencies remained un-

der-pressure and continuation of this trend may hamper the sentiment. All other

inter-market indicators were muted and indicate extended consolidation in re-

maining asset classes.

Nifty held the medium term support of 7840 and saw a re-bound from the same.

The monthly chart of Nifty saw a pause but still continued its higher top higher

bottom structure. Post this development, a minor adjustment to the trailing

support has to be made and can now be brought to 7800 which is coinciding with

option positions and the monthly chart setup. While Nifty futures have been in

Long-Long Unwinding cycle supporting the bullish argument, there are no signs

of over exuberance either with aggregate OIPCR way below the over optimistic

threshold of 1.5.

On the daily chart, RSI has moved back to the level of 45 which is historically

seen as a level of swing offering high reward to risk. Unless the RSI falls below

38, the consolidation/pullback in Nifty is expected to be temporary in nature

and hence, can be used to accumulate with the said stop for a target of 8200. In

the case of a breach below the support, Nifty will be at a threat of a temporary

reversal.

Among Sectors, the defensives pack along with IT continues to lead and higher

allocation shall be maintained in portfolio. Auto turned positive from the neu-

tral zone and is expected to outperform. Banks saw a pause in the downtrend

and shifted to the neutral zone. All other cyclical sectors remain negatively placed

and are expected to witness relative weakness.

NIFTY

Support

Resistance

:

:

7800

8200 / 8400

Strategy

Nifty is placed around an important me-

dium term support of 7800 and reward

to risk remains high for longs with an

expectation of 8200. Even though the

index may lack momentum, proper sec-

tor allocation should yield positive re-

turns. We recommend being over-weight

on the defensives, IT & the Auto space.

Sector Outlook

SECTOR

NAME

Shubham Agarwal, CMT, CFA

Head - Technical Research

Sacchitanand Uttekar

Technical Analyst

Bhavin Desai

Equity Derivatives Analyst

Dipesh Mehta

Equity Derivatives Analyst

Pharma

IT

FMCG

Auto

Mid-Cap

Bank

Infra

Metals

Realty

10,847.15

11,302.70

19,876.05

7,899.35

11,418.30

15,392.25

3,020.90

2,865.50

202.80

CMP

MOM

(%)

7.59

5.83

2.94

2.81

2.74

-2.21

-2.97

-6.98

-7.94

OUTLOOK

FOR THE MONTH

Positive

Positive

Positive

Positive

Neutral

Neutral

Negative

Negative

Negative

POTENTIAL

MOVERS & SHAKERS

Divislab, Biocon

HCL Tech, Infy

Marico

Maruti, JK Tyre

Berger Paints

SBI, UCO Bank

BHEL

Tata Steel

DLF

1

MOSt Quantitative Outlook - Monthly

October 2014

INTER MARKET

DOLLAR INDEX

JP MORGAN EMERGING MKT CURRENCIES

Dollar Index saw a sharp up-move, alarming the glo-

bal currencies for a depreciation against the same.

The move seems to be an impluse and continuation

above 88 could trigger a major shift of flows from the

emerging markets.

The JP Morgan Emerging Market Currency Index broke

down from a temporary support and continued its

downtrend. Depreciating currency will erode absolute

returns made by FII’s which may lead to change of sen-

timent.

USDINR

GLOBAL VIX

USDINR could not remain isolated from the trend of

depreciation among emerging market currencies and

unless the pair moves below 60, concern for the

change in sentiment will exist.

Global Volatility Index does not signify any major re-

versal in trend and continues to be within its oscillat-

ing band. Unless the level of 21 is broken out, the cur-

rency movement is not in sync with the other inter-

market indicators.

2

2

MOSt Quantitative Outlook - Monthly

October 2014

NIFTY

NIFTY MONTHLY

NIFTY RSI

Even though the monthly chart of Nifty has been able

to maintain its higher top higher bottom structure,

there seems to be a pause in the trend. A confirma-

tion of pullback shall only come on a breach below

7820, unless this happens, the up trend is expected to

sustain.

The level of 45 on RSI has been a good indicator to

spot interim pullbacks. This is the fourth time in the

recent up-trend that RSI has approached this level and

indicates favorable reward to risk for long trades. How-

ever, a stop on the indicator should be maintained

below 38.

INDIA VIX

NIFTY VS. OIPCR

India VIX has been constantly quoting around the all

time low and indicates positive sentiment. Any strong

counter move on the VIX is not evident so far and this

indicates that Nifty may continue its oscillation.

Nifty aggregate Open Interest Put Call Ratio, which is

an ideal indicator of over optimism has been evidently

over 1.5, preceding many major drops. This time

around the OIPCR is way too lower to suggest any over

exuberance. This suggests possibility to fall-apart in

case of any downtick remain very thin.

2

3

MOSt Quantitative Outlook - Monthly

October 2014

...NIFTY

NIFTY OI

OPTION OI

Bias for Nifty futures remain bullish as indicated by

futures open interest action, where every uptick is

associate with rise in OI indicating long, while down

tick is coupled with drop in OI instead of incremental

shorts. This cycle of Long(L) - Long Unwinding(LU) has

been evident since last couple of expiries, which sup-

ports the up trend

Nifty October OIPCR remains tilted towards bulls with

more Puts than Calls in open interest. The immediate

bounds for the index indicated by options are at 8200-

7800. With bounds being relatively close, any soft-

ness in the index could be Buying opportunity with

favorable risk reward.

NIFTY STRATEGY

Nifty

Bull Call Spread

3

BUY

Buy 8050 CE

Sell 8250 CE

Futures in Long-Long Unwinding cycle keep the

bias bullish

Open Interest Put Call Ratio nowhere close to the

upper band indicates headroom left for the up

move

Bull Spread is deployed to take advantage of up

move without bothering about time value decay.

Stop loss : INR2000

3

3

Target Profit : INR5000

4

MOSt Quantitative Outlook - Monthly

October 2014

SECTOR OI

Positive OI activity

Auto :

Longs in Tyre stocks, Maruti & Bajaj- Auto

IT:

Longs seen getting rolled into October ex-

piry

Neutral with Positive Bias

FMCG:

Drop in OI seen as many large caps (HUL/

ITC) saw shorts saw covering

Pharma:

Longs in CIPLA & Short covering in

BIOCON, AUROPHARMA and DRREDDY

Neutral

Metals, Power & Realty:

Long Unwinding in the

Sector.

Neutral with Negative Bias

Banking:

Long Unwinding across Sector (PSU

Stock Futures

+PVT), Shorts in select Large Caps Banks

From September series futures contracts rolled over at 83% which

Capital Goods:

Mix of Long Unwinding & Shorts

was at par with average.

(LT)

One notable out of it was drop in OI Expiry over Expiry of 5%. Biggest

Oil & Gas:

Long Unwinding in OMCs, Shorts in

drop in open interest was seen in the midcap space.

Refiners (Cairn, RIL)

SECTOR ROTATION

Defensives and IT continues its outperformance and long positions can be held on to

Auto is deviating from the Neutral zone, indicating outperformance

Banking has moved to the neutral zone

All other cyclical continue their under-performance with expectation of further downside

5

4

MOSt Quantitative Outlook - Monthly

October 2014

SECTORS

IT

Secular uptrend on the long term scale & consistent outperformance vis-a-vis Nifty augur well for a continuation of

leadership position within all sectors. The index has registered yet another strong close on the monthly scale indicat-

ing further momentum in days ahead which could push the index higher than 12000. Hence, we recommend higher

allocation to be maintained in portfolio. Top picks- HCL Tech, Infosys & Tech M.

AUTO

Auto has been one of the leading sectors in this ongoing uptrend. On the daily scale a pullback towards the support

with a positive price action is re-confirming the support & the ongoing uptrend. Tyre stocks could have a lion share in

the upcoming momentum hence we expect the sector to continue its outperformance. Top Picks - Maruti, Bajaj Auto &

JK Tyre.

6

MOSt Quantitative Outlook - Monthly

October 2014

STOCKS IDEAS

HCL Tech

3

BUY

CMP : INR1715

Target: INR1880

Positive sector outlook & a continuation pattern

formation augur well for the uptrend to continue

We expect HCLT to accelerate growth on the back

of continued traction in deal wins and thereby grow

its USD revenues at a CAGR of 15% over FY14-16E

and EPS at a CAGR of 13% during this period

We expect outperformance within the sector

Accumulate the stock for an initial upside upto 1880

3

3

3

JK Tyre

3

BUY

CMP : INR489

Target: INR560

Rise in volumes at significant price junctures along

with the recent breakout from continuation pattern

could drive further momentum

Multiyear low natural rubber price & a fall in crude

oil price will be positive for tyre stocks as 40-50%

of its raw material constitute of natural rubber and

oil

We expect tyre stocks could lead the momentum

within the auto sector

Accumulate the stock for an initial upside upto 560

CMP : INR1800

Target: INR1930

3

3

3

Divis Lab

3

BUY

On the long term scale the stock has been in a

strong uptrend

On the daily scale the stock has broken out of a tem-

porary consolidation

3

3

Divi's has a robust business model with significant

barriers to entry

We believe Divi's estimate may surprise positively

over the next two quarters as it is likely to be a key

player in the generic supply of Diovan in US

3

7

MOSt Quantitative Outlook - Monthly

October 2014

OPTION STRATEGIES

SBI

BUY

Buy 1 Lot 2500 CE

Buy 1 Lot 2700 CE

Sell 2 Lots 2650 CE

Mod. Call Butterfly

3

The stock is already short heavy and longs after a steep

fall indicates short covering rally in the offering.

Since we are trading reversal of short cycle it makes sense

to be a deploy slightly cash rich strategy like Butterfly

Modification to butterfly is done to take advantage of the

premium from short options at the same time keeping

strategy tilted towards the uptrend

Stop loss : INR1800

3

3

Target Profit : INR4000

Infy

Bull Call Spread

3

BUY

Buy 3800 CE

Sell 3900 CE

The stock added longs in last expiry and rolled it forward

with over 40% increment in open interest MoM, with price

action still to take place.

With event of quarterly result it makes sense to trade the

long view with out of the money Bull spread.

3

3

The ongoing consolidation on the daily scale is about to

mature indicating momentum in the offing

Target Profit : INR8000 Stop loss : INR4000

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