Don't see a 3K-4K mkt bounceback said by Vibhav Kapoor

Vibhav Kapoor of IL&FS said if the Nifty goes below 3,850 and starts to stay below that for a day or two, then one could see much more downside. "The technical level on the Sensex would come to about 11,400-11,500."

According to Kapoor, chances of a complete reversal or sharp bounceback of 3,000-4,000 points looks difficult because the fundamental situation -- boiling oil, high inflation, rising current account and budgetary deficit -- are not all that great.

Investors should increase their cash holding to 50%, he said. "Preservation of capital is the most important thing in this sort of situation. Therefore, use every rally to increase your cash."
Sudarshan Sukhani of Technical Trends said that if 3,600 Nifty breaks, then the markets could fall all the way to 2,600. "There is no support after that. Let's hope that 3,600-3,700-3,800 Nifty will provide some support. This will happen only if international markets suddenly turn bullish, political scenario becomes better, and sentiment improves."

Excerpts from CNBC-TV18’s exclusive interview with Vibhav Kapoor and Sudarshan Sukhani:

Q: Are you surprised by the ferocity of the selling seen in the past 72 hours?

Kapoor: Not entirely. When you have a bear market like this, you get into a stage of panic very soon, which is what the markets are getting into. Nothing counts at that time and it is only the fear that counts. That is exactly what is beginning to happen over the last 2-3 days. It has been compounded by the fact that you potentially have so much of bad news. It is more a political problem.

One does not know what will happen to the government. There is the global problem and rumors of hedge funds in problems. There are rumours of Israel attacking Iran. So there are so many negatives that may or may not happen. But when people are losing money and you have been in a downtrend for such a long time, it is very natural for people to get into that panic stage and that is actually what is happening.

Q: Does it look like it is getting into some kind of a climatic stage? Do you think that the market may have to see a lot more price damage?

Kapoor: It is very difficult to tell at this time because in such situations nothing is rational. So, when there is irrationality of some kind, it is very difficult to say where that will stop and to what levels the market can go. In December-January, we were really worried about that irrationality on the upper side. The same is the situation on the downside.

So, in a situation of this type, when you are looking for very short-term answers, technical analysis is much better than fundamental analysis. Valuations in many stocks are very cheap right now, but that is not stopping the downfall.

Technically, this 3,900 is a level everybody is banking on. Below that, at around 3,850 is another level. So, if the market goes below 3,850 and starts to stay below that for a day or two, you could have much more of a downside.

That technical level for the Sensex would come to about 11,400-11,500. I am not saying that it is going to happen but could happen if some bad news comes or if irrationality continues. In a situation of this sort, it is really difficult to determine a level by fundamental analysis.

Q: There have been fears that by the close of this quarter there was a kick-in of redemption pressures for some of those country-specific and hedge funds. Is that what might be playing out on the liquidity front? Are you sensing that some of that is beginning to happen on the domestic side as well?

Kapoor: On the offshore side, there has been an outflow of funds for the last 3-4 weeks from emerging market funds as well as from global equity funds. There is a lot of money in the so-called BRIC funds as well as in the India-dedicated funds. Huge amounts of money had come in over the last three-four years. So, there is a substantial amount that can go away. If a panic situation arises, then some of this money can go away.

There have been some redemption in the market but I cannot vouch for it. These are only rumors and you cannot substantiate them. But the fact is that in a situation of this sort it can happen. This time the reasons for which the markets are going down are compounded by the fact that we have poor fundamentals.

We have high oil prices, high inflation, current deficit and a budgetary deficit. Therefore, the chances of a complete reversal or a very sharp bounceback of 3,000-4,000 points looks very difficult because the fundamental situation itself is not all that great.
Q: What do you do with the whole rate sensitive space now? Real estate stocks are down almost 75-80% from their erstwhile highs. For the banking universe, do you see a lot more pressure?

Kapoor: There is a lot of value, which has emerged particularly in the banking sector and in public sector banks. A lot of them are trading at 0.4-0.5 times adjusted book value. But in the short-term or the very short-term, valuations are really no criteria. They can go down to really absurd levels but for very long-term investors. Obviously, some of these public sector banks are good buys because if one is getting a bank at 0.4 times or 0.5 times book value, it is something which one can bank upon. Over the next year or two, one will make some money out of that.

As far as the other rate sensitives are concerned, something like autos for example is definitely a conceptual sort of short sell. It may be not at these levels but on every rally because these are the sectors, which are going to be the last to emerge out of a bear market as and when that happens. As long as interest rates remain high and there is potential for interest rates to go up further, these are the sectors to look for even for a short-term bounce.

Q: What do you watch for support for the market?

Sukhani: 4,000 was not significant for me. Once 4,400 was broken, I am looking at a freefall. That is what is happening unfortunately. This market finds support somewhere around 3,600, which is the lower part of a small trading range.

I am assuming that that number will give support. If 3,600 is broken, then there is another freefall. There is no support after that. Let us all hope that 3,600-3,800 for the Nifty will provide some support. This will happen only if international markets suddenly turn bullish or the political scenario becomes better and sentiment improves. It is a long call.

Q: From a trader’s perspective, do you just step back and watch the market find its feet? Is it still clearly a short-term trend that one should ride and milk for what you can?

Sukhani: Both the trends are down. The intermediate trend is down which is what the traders should be aiming to go with. The short-term trend is down which helps the trader in capitalizing on the intermediate trend. I have to keep a stop loss. I ensure that if the market suddenly makes a V reversal, I get out. As the market keeps on sliding, there will come a point at which some support will come in.

With every new low made in the market, short positions in terms of volumes should get adjusted. If I was trading in 100, then one should trade in 80 now or in 60.

Q: How much of a sell off is still interlocked with the way crude has been moving globally?

Kapoor: To some extent yes. But over the last three days, the market has fallen by about 1,500 points which is more than 10%. So, crude has really moved up that much and it was at USD 138 per barrel. So, there are other factors that are now beginning to play. Earlier, most of it was linked to crude. But crude is not playing the only role at this point of time. There could be fears internationally that there might be some attack on Iran, in which case crude would really spike up. So, that is also being taken in to account and there are other factors which the political instability is also causing.

Q: What are the heavyweights suggesting right now? What do you see on some of the charts of key leadership stocks on the Nifty?

Sukhani: IT stocks are still holding out broadly. But I am seeing a lot of distribution on the charts giving me the impression that they will just tumble down sooner or later. That is very scary. The capital goods sector, which was the largest component in the markets rally in the last three years, have all broken down from the support levels. There is nothing to hold then and the impression is that much lower levels are likely in this large segment.

Banks have been contributing to the decline. There is hope that banks will find support. They are in a freefall but banking by the very nature of its business will find support later.

ONGC has the best chart comparatively and relatively Reliance gives the impression that it is ready for a substantial breakdown.

Q: If the market does not manage to hold on to 3,900 or defend it, would you say the next level of support might come very fast?

Sukhani: That is possible given the downside momentum that we are seeing. I am not so worried about 3,900. Let it break 3,900 as we are breaking these levels every day. The last support comes at 3,600. If 3,600 breaks, then my mind boggles to think what the markets could do because the next support is at 2,600. So, 3,900 is not a big issue for me.

Q: We have been hearing a lot of talk about valuations and how they are looking more appealing. But candidly, in an environment like now, what kind of cash levels would you keep, if you had a portfolio in the equity market?

Kapoor: It depends on whether you had sold at higher levels or not. Typically, after March and April, we were advocating 30-40% cash. So, if you were at 30-40% cash at that time, then you could increase that to 50% now. But if you are 100% invested at this point, then it is better to wait for a rally and for things to improve a little bit or a pullback at least, and then get into 30-40% cash. At some point, there is going to be a decent pullback rally. But the question is whether we are going to get back to a bull market scenario or is there a lot of downside going ahead over the next six months.