The last couple of weeks has seen a strong revival in the Indian market.
The Sensex has climbed from 3183 points to 3707 points in the last six
sessions which is an amazing rise of 16 per cent. Even more
surprisingly, the rise hasn't been fuelled by the usual suspects in the
pharma, IT and FMCG sectors. The rise has come on the back of
large-scale contrarian buying by Foreign Institutional Investors (FIIs)
who finally decided that cyclical stocks were trading at attractive
valuations because of political uncertainty and a sluggish economy.
The FIIs, in fact, went bottom-fishing. They decided that there was
little downside left in MTNL, or BPCL, or Hindalco, to name a few of
their picks, and their big purchases swung the market up. The concept of
bottom-fishing isn't always very fashionable. It involves investing
against a trend. Benjamin Graham once compared it to a `smoked
cigar-butt style' of investing. The reasoning being that the market has
discarded the bottoming stock just like a smoked butt which an investor
can pick up for free. This is the obvious advantage to bottom-fishing -
the downside risk is not likely to be very high since scrips are so
cheap.
While the FII purchases have pulled the market back to some semblance of
respectability, there are still many stocks which are trading close to
their recent bottoms. A technical look at some of their patterns
suggests that they will move up in the next wave of investment buying.
Many of these scrips are not in fashionable industries and some have had
poor results. However, they have been hammered down to attractive levels
where the poor prospects have been fully discounted. The technical
pattern we sought was that of scrips which have recently hit lows and
found support signalled by strong volume action. In most of the
instances, a double-bottom formation has been created but the scrip has
not moved up appreciably. The upside in each of these cases appears to
be considerable but do not expect instant gains. In the time span of six
months to one year, these scrips should produce excellent capital gains.
A look at the scrips.
ABB
Since September 1998, ABB has traded sideways in a range between Rs
480-520. In early April 1999, the stock dropped out of that Dow Line and
plummeted to a low of Rs 271 on April 28. This is a retraction of around
45 per cent in less than a month. Volumes increased as ABB dropped out
of the trading zone which is a signal of disinvestment. At Rs 271, it
was at a six-year low.
However trading volumes increased sharply at the bottom of Rs 271 and
the scrip has pulled back to the Rs 300 mark in just a few sessions.
This indicates that investment buying has occurred at the Rs 270 mark
and since volumes in the stock are still high, we can assume that
accumulation is still in process. The steep downtrend in the stock seems
to have reversed. The interesting thing is that there is no resistance
to speak of until around the Rs 400 mark and there is a possibility that
a bounce-back could take the stock all the way upto Rs 460 before
selling pressure halts a Northward journey. The scrip has entered a zone
of historic support between Rs 270-300. It has a huge upside potential
and little risk.
Asian Paints
