'Heavyweights poised for gains now'

Dr CK Narayan of ICICI Securities believes that there is significant amount of money waiting on the sidelines now, people are waiting for a pullback to pump in money into the markets.

Dr Narayan further says that Indian market valuations are significantly ahead of other emerging markets and that the heavyweights in the market are posied for gains.

He has revised his target for the Index over the medium term, Sensex target is at 14875 and Nifty target is at 4325. He believes that capital goods and autos look good as sectors to lead the rally going forward. He says he will put money in capital goods, auto, cement and will retain holdings in the construction sector.

Excerpts from CNBC-TV18's exclusive interview with Dr CK Narayan:

We do have a high on the Sensex after all?

Yes, we do, and I have mud on my face.

Where do we go from here now?

As I have always maintained, I work with some set of cycles and allow me to explain the change in view. Somewhere along the end of August to the early part of September, we found that the set of cycles, which we were working with for the short and medium-term were getting overwhelmed.

For instance, if you have a short-term cycle, which you expect will try and produce the decline in the market and it does not and if in its place, one actually gets an acceleration then this means that the medium-term cycles are sort of exerting their influence.

And I was looking for a confluence of cycles to produce the decline sometime around August end to early September. These did not happen and the set of cycles got overwhelmed by longer-term cycles. So it was clear that the largest cycles were at play, which is what has led now to a new high on the Sensex and we await now a new high on the Nifty.

At this point though, are either of the charts looking overstretched to you and what would you set out as a medium-term target for the Sensex then?

I think stretching is a function of the state of the market and the flow of funds. One may think that the valuations are stretched but if you have a surge in the flow of funds right now, then these stretched valuations could become even more stretched and that would not be a surprise at all. We do have significant amount of money waiting on the sidelines, so I do not think that fund flows are an issue. I think people are all waiting for a pullback in the market to actually put those funds to work.

So I think given the situation that fund flow is waiting in the wings and all mutual funds are actually facing inflows but no outflows, foreign funds are fairly excited about the markets despite the fact that Indian market valuations are significantly ahead of the other emerging markets, therefore I think fund flows are very much intact, valuations will change and what looks to be stretched now can get even further stretched. 

So I think if you are looking across the medium-term then the Sensex is at a new high, the clip at which it has arrived at a new high, seems to be very robust and it has sufficient amount of momentum on the upside to keep up this particular move.

I am looking at the Nifty also playing catch-up with the Sensex sooner or later, we have all the leader stocks placed in very good positions, you take Reliance, ONGC or ITC, you have got Satyam, TCS just to name a few of the heavyweights. All of them are poised pretty well and I see absolutely no inclination among the funds or other holders to lighten up whatever their positions are.

The bit of lightening up was in the bank stocks because they had really run up quite a bit but even there if one looks at it over the last two-three days, we had a selling but then on Friday I think bank stocks have more or less ended the decline and tried to rally up again. So we have this situation where all the major set of sectors, which influenced the Index are on an upswing. Over the medium-term, I have fresh revised targets of 14,875 for Sensex and 4235 for the Nifty.    

What would you expect to see by the end of this year then if that can be called a shortage kind of target by the time this year is out?

The way the cycles are poised at the moment, we could have a sharp acceleration, which could probably produce this whole thing in a hurry. That would be a party if it does happen, but then let's not look at the party side, let us look at a more conservative outlook.

I think we will either have it in November or we will have it in January, so I am not really looking for a high to be in place in December because significant cycle changes or clustering has not been seen for December. But they are seen towards November end or around the first or second week of may be January. So net-to-net up till the end of the year.

As a technical analyst though, how concerned are you about how narrow the breadth has been and how low the turnover when compared to the levels we had in May?

A: I think this point about narrow breadth and the low volumes has been discussed all through this rise and despite that the market has kept moving up. We do not have big volumes or very outstanding breadth, the principal reason I think is because people have been afraid to commit, waiting for a reaction.

They still are waiting for a reaction and therefore as the levels go higher and higher, they find it more and more difficult to commit to the current levels. This is a situation in which people are caught and it is one of their own making.

This will finally result in buying panic, which will emerge perhaps with some kind of a trigger and we have trigger on hand at the moment in the form of quarterly results, the flow of which at the outside atleast seems to be pretty solid, and if this goes on, one will see very quick and definite change in the breadth and volume sequence.

So I think it is only a great deal of skepticism, which has actually kept the volume and the breadth figures low and as long as there is continued skepticism, the market will keep moving higher until we reach a kind of buying panic situation.

You spoke about a few of the largecaps, which looks the most promising to you, if you had to bet on a relative basis, which clusters would you wait on now?

I think stocks in capital goods and the auto sector look to be extremely well placed to make the next surge. You already have maybe construction, IT as few of the sectors, which have made new highs compared to May, you also have banks and cement is almost up there.

So I think those, which are outperforming the Index would be the ones, which would lead this rally also. So I would put my money into capital goods, in auto, auto majors, as well as stocks from cement sector. I will also retain my holding in all the construction companies. I think these are the ones to focus on.