Deploy Long Straddle on Nifty; smart money moving towards Smallcap IT: Anand James

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“It would be prudent to enter into long strangles/straddles in the 18500 neighborhood with a fortnight’s holding period, and with modest profit expectations,” says Anand James, Chief Market Strategist at Geojit Financial Services.

In an interview with ETMarkets, James, said: “All the gainers this week in the BSE IT index belonged to Smallcap segment suggesting that a rotation is in place within the segment” Edited excerpts:

Sensex and Nifty50 trade flat with a negative bias for the week ending 9 December. What led to the price action – is it profit-taking or global cues?

Gujarat and Himachal Pradesh elections did bring about some distraction, but the key drivers were obviously the twin interest rate decisions.

Once MPC voted on expected lines, the focus shifted to the US producer price inflation data which was the last event of note ahead of the Federal Reserve interest rate decision.

Since the US Fed dot plot was already pointing towards a 50bps hike, the odds of a negative surprise rode high, keeping risk appetite low as the week progressed.

Moreover, we entered this key week on high base and low VIX, leaving little room for unilateral upsides. It also did not help that the US markets witnessed selling on most days of the week.

Which is your take on the market for the coming week? Important levels to watch out for Nifty and Nifty Bank?

A morning star candlestick pattern in the hourly time frame sets up a slightly positive opening for the Nifty50 on Monday. However, if such positivity is unable to clear 18560, expect Friday’s fall to resume, aiming 18320-18100.

A similar pattern is also visible in Bank Nifty, but even better formed, setting up a dash towards 44000. However, the inability to float above 43400 might signal rejection trades weighing in, calling for a potential drop to 42600 initially.

Directional trades appear more feasible in Bank Nifty than in Nifty.

Any particular strategy that traders can deploy for the week?

VIX has continued to slip, and last week was dominated by swings on either side. This sets up conditions for a moderate expansion in premium, and with the Federal Reserve decision falling on the 15th night, it would be prudent to enter into long strangles/straddles in the 18500 neighborhood with a fortnight’s holding period, and with modest profit expectations.

In terms of sectors, Capital Goods emerged as winners while IT took a hit – what led to the price action?

To a point in the last month, when IT stocks looked to be on the recovery path, it was the SmallCaps that led the charge, accounting for 47% of the gainers in BSE IT.

And when the turn lower came, the major contribution also came in from the smallcap segment which formed 70% of the IT index losers.

However, Smallcaps may not have lost ground yet. The average returns from Largecaps in the losers pack was around 7% while that of Smallcap was 4%. Also, all the gainers this week in the BSE IT index belonged to Smallcap segment suggesting that a rotation is in place within the segment.

Incidentally, the FPI investment in the last fortnight of November was significantly lower at Rs.854 Cr., when compared to the previous two fortnights which attracted 3005cr and 2610cr respectively.

In the Capital Goods sector, Defence stocks were the major contributors to the upsides. 89% of the move seen in the Capital goods sector was contributed by Defence stocks in the last one month.

Last week’s move was majorly led by Largecap stocks like L&T and Siemens while midcaps and smallcaps saw profit booking.

FPIs have remained net buyers to the tune of Rs.12907 Cr. since the second half of May 2022. In November alone, they pumped in around Rs.2700 cr into Capital goods stocks.

PSU banks led the rally in the week gone by. Punjab & Sind Bank was up over 40% in a week followed by Central Bank of India which rose over 30%. What should investors do – buy, sell or hold?

Among PSU banks, 84% are overbought with a 14-day RSI above 70 and at least 61% of the stocks in PSU Bank Index have the 14-day RSI above 80.

However, the PSU banks are in a directional phase and the oscillator’s overbought sign may not be effective in catching the top.

Big gains came in from Smallcap stocks with an average ret% of 32% this week compared to 5% ret from Largecap stocks, suggesting that there is indeed some froth that requires deft handling if one were to look for an entry into the free run.

We would prefer to wait and buy into a 5 to 7 percent correction as most are at the upper extremity of the 2 standard deviation band. But yes, those holding may continue to stay put.

Any 3-4 trading ideas for the next 1 month?

Here are few trading ideas:

Jubilant Phamova: Buy| LTP Rs 407| Buy on dips to 398-395| Target Rs 424 – 445| Stop loss Rs 384| Upside 4%

The stock has been moving within a parallel trading range since November 2022 and today saw the range being broken on the upside backed by strong volumes on Friday.

The daily MACD has broken above the signal line hinting at more upside for the stock in the medium term. Also, a Psar breakout in the monthly time frame adds more flavor to the medium-term outlook of the stock.

We expect the stock to move towards 424 to 445 in the next two to three months. Longs may be protected with a stop loss placed below 386.

JMC Projects: Buy| LTP Rs 133| Target Rs 148 – 160| Stop Loss Rs 124| Upside 11%

MACDF has shown initial signs of recovery along with strong volume buildup. In the monthly time frame, the stock has broken above the July 2021 high of 130 and Psar value of 124, and similar signals are visible on the daily time frame as well.

All this is favoring a move aiming at 148 to 160 levels in the next two to three months. All longs may be protected with a stop loss placed below 124.

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