Chart Patterns of Housing Finance Companies (an update)

A few days after the Sensex and Nifty peaked in Nov ‘10, news of the housing finance scam dampened investor sentiments further. I had written a post on the chart patterns of housing finance companies at that time - all of them were correcting from their respective peaks.

Multiple interest rate increases since then have taken a toll on interest-rate sensitive industries, including housing finance companies. However, there are always one or two stocks that buck the trend. Those are the ones to put on your buy list. Let us look at the current charts in alphabetical order:

Can Fin Homes

After touching an intra-day high of 172 in Aug ‘10, the stock has been in a long down trend – halving in value when it touched an intra-day low of 86.55 in Feb ‘11. It has been consolidating within a bearish descending triangle pattern. The likely break below the support level of 90 can push the stock deeper into a bear market. On the upside, the 200 day EMA and the blue down trend line will provide strong resistances. Avoid.

Dewan Housing Finance

The stock peaked at 347 in Nov ‘11 before starting a prolonged correction within a downward sloping channel. So far, the stock has corrected 47% from its peak. Today’s high volume spurt was on news of its fund-raising plans. The stock is in a bear market, and such news driven spurts are good selling opportunities. Avoid.

GIC Housing Finance

The stock has been trading within a downward sloping channel, and is in a bear market. The drop from its Nov ‘10 high of 161 to its recent low of 74 has corrected 54% from its top – making it the worst performer among the housing finance stocks. Avoid.

GRUH Finance

This HDFC subsidiary has been a star performer – outperforming even its better known parent. After making a double-bottom (311 in Feb ‘11 and 310 in Mar ‘11) pattern, the stock embarked on a strong bull rally that peaked at 629 in Nov ‘11 – a 100% gain in 8 months. This was one of the two top picks in my previous post, and has certainly lived up to expectations. Add on dips.

HDFC

The stock was the other top pick in my previous post. It has been a favourite of the FIIs. That perhaps led to its relative underperformance, even though the fundamentals remain strong. The FIIs have been net sellers of Indian equity in 2011, and stocks like Infosys and HDFC have borne the brunt of their selling. The stock has been moving sideways – oscillating around its 200 day EMA. Hold.

LIC Housing Finance

This scam-tainted stock had a sharp fall, followed by a 5:1 stock split (marked by light blue bell) that exacerbated the fall as a large number of stocks hit demat accounts. The company had no alternative but to make top-level changes, which led to a decent recovery. The stock has been trading within a rectangular consolidation pattern for the past 8 months. Hold.

Bottomline? The stock chart patterns of housing finance companies clearly show that high interest rates have affected performance – with the sole exception of GRUH Finance. Its business concentration in the state of Gujarat – one of the best administered states in India – has helped its cause.

Stock Chart Pattern - Hero Honda Ltd (An Update)

The previous update of the stock chart pattern of Hero Honda was posted back in Nov ‘09. The stock was a sterling performer during the bear market – moving up from 630 in Jul ‘08 to 1100 in Mar ‘09 – while the Sensex and most other stocks were hitting their 52 week lows.

The strong performance continued for another year - right up to Apr ‘10 – when the stock price crossed the 2000 level and closed at 2057 (marked as T1) in the week ending Apr 9 ‘10. A gain of 225% from its Jul ‘08 low.

Let us look at the two years weekly closing chart pattern of Hero Honda and find out what happened after that excellent up move:

During Jun ‘09, the 1465 level had provided good resistance to the up move. Once the stock broke the resistance in Jul ‘09, it quickly reached a new closing high of 1736 in the week ending Jul 24 ‘09.

The subsequent correction found support from the previous resistance level of 1465 – another instance of a resistance turning into a support. Volumes were quite strong during the resistance and support.

A 7 months long consolidation followed within a bullish ‘ascending triangle’ pattern, from which the expected upward break out occurred in Feb ‘10. Note the volume bars in Feb ‘10 – they should have been substantially higher to technically validate the upward break out. That was the first warning about an impending correction or reversal.

Though the stock price rose sharply to close at 2057 in Apr ‘10, the MACD, ROC and RSI reached lower tops and the slow stochastic just managed to reach its previous top. The combined negative divergences of all four technical indicators was the second warning about a possible correction/reversal.

The stock price corrected down to 1858 in the week ending May 21 ‘10, only to rise to 2050 (marked as T2) in the week ending Jun 25 ‘10 – falling short of the Apr ‘10 top of 2057. The lower volumes during the Jun ‘10 top opened the door for a bearish ‘double-top’ reversal pattern. That was the third warning about a correction/reversal.

The stock price crashed through the 20 week EMA in Jul ‘10 and dropped below 1858 (the May ‘10 low), which confirmed the ‘double-top’ reversal pattern. The stock price consolidated sideways till Dec ‘10. There was a sharp drop below the 50 week EMA (equivalent to the 200 day EMA on daily charts) to 1679 on strong volumes, followed by an equally sharp 300 points spike to 1986 on higher volumes.

That seemed to exhaust the bullish fervour. The rumours about Japan’s Honda Motors pulling out of the joint venture with the Munjals of Hero group were confirmed. The stock price fell more than 500 points to the support level of 1465 in Feb ‘11. The 20 week EMA crossed below the 50 week EMA – the dreaded ‘death cross’ that confirmed a bear market.

But you just can’t keep a good stock down for long. A bullish double-bottom pattern (marked as B1 and B2) formed in Mar ‘11, and the stock recovered quickly above both the EMAs in Apr ‘11. It has been trying to move up for the past two months, but without much success. The low volumes haven’t helped. But the 50 week EMA has provided good support, and the 20 week EMA has crossed above the 50 week EMA.

The technical indicators are weakening. The MACD is above the signal line, but the upward momentum is slowing. The ROC is still positive, but has dropped below its 10 week MA and touched a lower top. The RSI has dropped below its overbought zone. The slow stochastic is threatening to do likewise. Another test of support from the 50 week EMA is likely.

The company is fundamentally very strong, with strong operating cash flows, negligible debt, huge reserves, a regular dividend payer and the leader in the two-wheeler segment. The uncertainty about future technology inputs and entry of Honda in the two-wheelers segment are the negative overhangs.

Bottomline? The stock chart pattern of Hero Honda shows that technically the worst may be over. Some fundamental concerns remain. The main competitor, Bajaj Auto, is di’worse’ifying into four wheelers. That could be just the opportunity for Hero Honda to consolidate its leadership position. Investors can use dips to accumulate.

Was it a panic bottom or a capitulation?

Within a matter of a few minutes after opening of trade, the Sensex fell sharply by more than 500 points on Mon. Jun 20 ‘11. The Nifty dropped nearly 200 points. What happened?

Apparently, the selling was triggered off by the news that the Indian government was planning to review the double tax avoidance treaty with Mauritius. The treaty stipulates that taxes on capital gains incurred in India on sale of stocks by Mauritius entities will be payable only in Mauritius (which does not levy any capital gains tax).

It is unlikely that Mauritius will agree, since the tourism paradise has little industry of its own. They attract investors with the lure of their liberal tax regime. Many companies have set up shop in the island nation primarily to invest in the Indian stock markets.

40% of the so-called FII inflows into the Indian markets come from Mauritius. It is an open secret that much of this money is ‘round-tripping’. In other words, black money is sent to Mauritius through ‘hawala’ channels from India. That money comes back into India under the garb of FII inflow, and black money turns into tax-free white money.

It is laudable that the Indian government is trying to plug a loophole through which crores of capital gains tax are slipping through. But it is unlikely to happen any time soon – if at all. Then why the panic?

It was just a ‘negative’ news that seemed to get discounted in haste. Such sharp falls are typical in bear markets. The market has been in a down trend for seven months, without falling even 20% from its Nov ‘10 top (which is one of the definitions of a bear market). Bears tried to force the issue in their favour by using the treaty review news as an excuse to start selling.

Stop-losses got triggered as the indices dropped through known support levels, and added to the panic. Two thing happen in such situations. Weak holders tend to capitulate. Bottom-fishers start buying and lend some stability to the market.

So, was it a capitulation or a panic bottom? We won’t really know till Mr Market tells us in which direction it wants to go. A capitulation usually happens near the end of a bear phase, when investors get weary of waiting for things to improve, and start selling off at any price. It tends to be a slow, grinding down process followed by the start of a new bull phase.

A panic bottom, on the other hand, sets up a temporary bottom before the next down move, because panic bottoms seldom hold. This is another one of those ‘technical rules’ which don’t always work. The interesting point to note is that the Feb ‘11 lows of the Sensex and Nifty were tested but not broken. That keeps the door open for a double-bottom reversal. Possible, but seems unlikely at this stage.

What should small investors do? Maintain a strict stop-loss at the level of the Feb ‘11 lows. If those lows are taken out, another 10-15% correction from current levels will not be surprising.