IT Sector stocks – time to change the game plan?

Recently, Sabeer Bhatia (of Hotmail fame) was in Calcutta/Kolkata for a little R&R-cum-business. (December and January are the two most pleasant months in the city, and attracts NRIs by the hordes.) Along with spending quality time with his in-laws and playing golf, Sri Bhatia indulged in promoting his latest venture (JaxtrSMS - free SMS through the Internet), hobnobbing with the Chief Minister and giving press interviews and speeches at IT industry gatherings.

One of the important points he raised was that Indian IT companies are over-dependent on selling services through hiring out consultants to overseas clients. Successful Indian software products are conspicuous by their absence. Apparently, JaxtrSMS has been totally designed and created by Indian software engineers sitting in India. It is time that other companies follow his lead.

Certainly the 10 chart patterns of Indian IT companies attached below indicate that Sabeer Bhatia may be right – it is time to change the game plan from services to products if the Indian IT sector wishes to retain its position in the global pecking order. Already, Philippines and East European countries are taking away IT-enabled service contracts from India.

HCL Tech

HCL Tech formed a double-top reversal pattern during Apr ‘11 to Jul ‘11 and dropped sharply into a bear market. The chart is looking weak and the price can dip to test the Aug ‘11 low. Switch to Wipro.

Infosys

The recent changes in management seem to have robbed Infosys of whatever little aggression it had. The recent attempts at getting back into a bull market have fizzled out. The stock is looking oversold, and can bounce up towards the blue up-trend line. That will be a selling opportunity.

KPIT Cummins

After touching a peak in Jul ‘11, KPIT Cummins is making a bearish pattern of lower tops and lower bottoms, and is in a bear market. The chart is looking weak, and the stock can test and break the Dec ‘11 low. Sell.

Mindtree

Ashok Soota’s departure from the helm of affairs hurt the market sentiment badly. The Mindtree stock is trying to extricate itself from a strong bear grip – with some degree of success. The stock is making a bullish rounding bottom pattern, and can be added on dips (but with strict stop-loss).

MPhasis

Not sure what MPhasis is doing currently, but the chart pattern shows that it is not doing it well. The stock is deep inside a bear market and likely to fall further. Avoid.

Oracle Financials

The stock of Oracle Financials peaked out in Jul ‘11 by making a small double-top reversal pattern, and is in a bear market. The stock is expected to resume its fall soon as both the RSI and the slow stochastic are showing overbought conditions. Sell.

Tata Elxsi

Tata Elxsi seems to have lost its way, and is sliding in a bear market. The current rally has been on falling volumes and both the RSI and the slow stochastic are looking overbought. Avoid.

TCS

Despite its gap-down fall below the blue up-trend line – probably in sympathy with the Infosys stock – TCS is technically in a bull market. Both the RSI and the slow stochastic are looking oversold, and a pullback towards the blue trend line is on the cards. Use the opportunity to book partial profits. Q3 results may not be as bad as some are expecting.

Tech Mahindra

Tech Mahindra is another stock that peaked out in Jul ‘11 and quickly slipped into a bear market. The next leg of the down move may start soon. Get out.

Wipro

Wipro has recovered very smartly after a short spell in a bear market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market. Change of CEO has brought in new direction and aggressiveness that was lacking earlier. Use dips to buy.

Related Post

In which IT Sector stocks should you invest?

Why did the stock market fall despite a good IIP number?

India’s Nov 2011 IIP (Index of Industrial Production) came in at 5.9% – higher than the consensus estimate – raising hopes of a quick return to the growth path. Considering the Oct 2011 IIP of –5.1%, there was a huge 11% swing month-on-month.

The stock market should have celebrated by spiking higher – specially since both the Sensex and Nifty are in the midst of rallies from their recent bottoms. Instead of doing the obvious by rising, both indices lost ground. Not much, but enough to cause consternation among small investors.

What is going on? Is this just the way Mr Market behaves to separate investors from their hard-earned money?

There can be a few logical explanations, which are mentioned below:

1. Both the Sensex and Nifty are in the midst of prolonged bear markets. Good news tend to get ‘discounted’ quickly and bad news causes renewed selling during bear markets.

2. Infosys – which is generally considered to be one of the bellwethers of the Indian stock market – announced better than expected Q3 results, but disappointing Q4 guidance and got hammered. Its high weightage in both indices caused the fall.

3. Oct 2011 IIP number was unusually low – but one must remember that it was a festival month (Navratri and Diwali), which meant lower production days due to the holidays. Nov 2011 IIP was comparatively much better, but some of the new orders may be due to inventory replenishment. Lower growth usually leads to inventory draw-downs (companies tend to let their existing inventory get depleted almost completely before placing new orders).

4. Technically, both indices retreated after facing twin resistances from their 50 day EMAs and DTLs (refer last Sunday’s post on Sensex and Nifty chart patterns).

5. All of the above.

Stock markets don’t necessarily move according to logic. In the short-term, sentiments can, and often do, overrule the fundamentals. So can a rush of buying or selling by the FIIs. What should small investors do?

Remember an old saying: “Buy the rumour; sell on news.” There is no better example of that maxim than today’s price action in the TTK Prestige counter. The company announced impressive Q3 results, but the stock lost more than 7% after the ‘good news’!

The stock market is in a state of flux. After 14 months of down trend, small investors are becoming impatient to buy in the hope of a trend reversal soon. Please be aware that interest rate is still high. So is inflation – though food inflation has turned negative. Stock markets don’t reverse trend till the first few interest rate cuts happen.

There is a clamour for a CRR rate cut from all corners. If the Nov 2011 IIP figure is the reality, i.e. economic growth is back on track instead of what has been mentioned in point 3 above, then there is no reason for the RBI to cut the CRR – let alone cut the interest rate. A rate cut may stoke the inflation fire.

In other words, there is no need to turn bullish yet. Await Q3 results of the big guns and RBI’s policy announcement on Jan 24. You may miss the absolute bottom by being conservative, but in a bear market it is better to be safe than sorry.

How to use Covered Calls – a guest post

Last month, Nishit wrote about the Short Strangle strategy to make money in a sideways market. Not too much has changed since then. The Nifty is still trading within a range - not giving a clear direction.

Individual stocks in your portfolio may be going nowhere also. Can you generate some profits without selling your stocks and losing out on dividends or bonus issues? Covered Call writing may be just the strategy for you, suggests Nishit.

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We continue with our series of F&O with an article on Covered Calls. Covered Calls basically mean we already own an underlying asset and sell Calls.

The Wikipedia definition is:

A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If the trader buys the underlying instrument at the same time as he sells the call, the strategy is often called a "buy-write" strategy. In equilibrium, the strategy has the same payoffs as writing a put option.

Let us take an example of Infosys. Infy has been rallying from 2700 to 2950 from the June Series. That’s roughly a rise of 10% for the past past 3-4 weeks. Logic states that if a stock rallies before results, then any good news is discounted in its price. Same logic if it falls before results. This is based on the principle that markets discount all news in advance.

Assuming I have Infy shares constituting 1 lot in F&O, which is 125 shares. If I had written 1 lot Rs 3000 strike price Option of Infy on Tuesday, then I would have got Tuesday’s price of 52. This would entail a premium inflow of Rs 6500 (=125x52).

I have 125 shares of Infy in my account. Now, if my trade goes right and Infy falls, then I get to keep the shares as well as pocket the premium of Rs 6500.

Now if Infy rises, till Rs 3000, I don’t pay anything. This is because Option strike price is Rs 3000. At Rs 3050, I have to pay Rs 50. My inflow is Rs 50 from writing, so no loss no profit.

Above Rs 3050, I start having to pay up. This also means that when market price was Rs 2950, I was covered till Rs 3050 for losses and above that, I sell my shares which I hold and pocket the money. Suppose, Infy hits Rs 3100, then I sell off at a rally of Rs 350 from the bottom which translates to 13% gain in a span of 4 weeks.

A stock like Infy moves max 20% in a year in a range. Like from Aug ’10 to Jan ’11, Infy moved from Rs 2700 to Rs 3500. Not a bad deal.

This strategy is recommended for Long Term Investors who have shares in their demat accounts and want to earn some money on the side, without losing out on dividends or bonus.

Before entering any trade, one should have a clear idea of reward, risk and max loss and max profit.

Note: The figures at some times may be indicative or rounded off for example’s sake. The idea of this article is to try and explain the fundamental principle. True students of Option Strategies should try and grasp the basic principle. The strategy works best for stocks in which you are long-term bullish, but which may not be moving much in the near term.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Why Japan’s calamity can hurt the global economy and stock markets

There is an English proverb: Misfortune never comes alone. In Japan’s case, misfortune seems to be coming in droves. Before the stoic and resilient people from the island country could recover from the horrendous calamity of the massive earthquake and devastating tsunami, the explosions and radiation leaks from the ageing Fukushima nuclear power plant has sent shock waves through the entire global economy.

Oil prices dipped on the assumption that demand from Japan will diminish as the economic growth may stall while the nation reconstructs the severe damage to life and property. Japan is the third largest oil consumer in the world, and there may be a drop in demand in the near term.

But global demand for oil may increase. Many countries, including the USA, depend on oil for their energy requirements – unlike India where coal-fired power generation is the norm. The US-India civilian nuclear treaty was supposed to be a win-win agreement for both. New nuclear power plants built with US technology was supposed to alleviate India’s perennial power shortage, and boost the demand for US-made equipment and consultancy services. The crisis in Japan’s nuclear power plant, built with equipment and technology from the US giant General Electric, will now put nuclear power as an alternative energy source on the back burner.

Japan also happens to be a large market for luxury goods, with more than 10% of world sales. Any further slowdown of an already slowing Japanese economy will seriously affect the businesses of luxury goods makers the world over. Many of these luxury goods – whether Gucci bags or parts for BMW cars – are actually manufactured in Asian countries.

With the Japanese Nikkei index taking a beating, investors are likely to pull out of Japanese funds that invest in global stock markets to cover their losses. As per a CNBC report, more than US $7 Billion has been invested by Japanese funds in Indian markets – and that is less than 20% of their total investments in emerging markets as a whole. The Sensex dropped 18% when FIIs recently pulled out US $2 Billion. Any Japanese withdrawal can cause a much bigger correction. Already, European indices have felt the heat.

Many Indian companies have built up their Japanese bases over a long period of time. Infosys and TCS are among them. There is talk of repatriation of Indian employees. It remains to be seen what effect that may have on the bottom lines of Indian companies.

Unlike the rise in oil prices, which every one expects to moderate in the near term as the unrest in North Africa and the Middle East gets quelled with firm hands, the crisis in Japan isn’t going to end soon. A melt-down in a nuclear reactor in a populated area can have serious long-term repercussions. Operations of many global companies will be disrupted because of damaged roads and ports, and shutdown of manufacturing facilities.

Indian investors need not sell in a panic. Corrections due to ‘black swan’ events, like the one in Japan, provide buying opportunities. Be patient and stay prepared for a deeper correction.