Mizuho - Madness of Crowds- 23 February 2012

Chris Roberts

[email protected]+852 2685 2412

23 February 2012

India: Bear outsourced Nifty daily: Bullish behaviour

Source: Mizuho research, Updata Professional, Bloomberg

� The bottom line: The Nifty’s (5,505) one-quarter surge from the 2011 low signals the end

of the bear market and most likely the resumption of the secular bull market that started

in 2001.

� The Nifty has clearly and convincingly broken above the multi-touch downtrend line.

The 14-day RSI has been in the overbought zone for most of the past month (this just

does not happen in a bear market).

� Our roadmap views the advance from the December 2011 as wave � of iii – three of

threes are normally powerful, consistent moves – we project an advance to 10,000.

� We’d expect setbacks to find support in the 5,200–5,400 support area, and around the

area of the 40-day WMA. The maximum extent of a correction should be the area of the

rising 200-day WMA (last at 5,073).

…also this week

• Asia: Running with the Bulls. More of our indicators are giving buy signals for the MXASJ (532). We look at resistance levels for some of the region’s key indices.

• Trade Recommendations: BUY HDFC Bank (HDCFB IS – INR531.45), Tata Consultancy (TCS IS – INR1,252) and Weichai Power (2338 HK – HKD45.70) – details inside.

• Last Picture Show. US equities: NDX and SPX. The Nasdaq 100’s (2,580) next resistance zone extends from 2,800–3,000. The S&P500 (1,358) will be capped at approximately 1,500–1,600.

The next edition of Madness of Crowds will be issued 22 March 2012 SALES

Hong Kong

Alan Chen [email protected] +852 2685 2268

Adeline Ma [email protected] +852 2685 2060

Paul Kim [email protected] +852 2685 2058

Ivy Kim [email protected] +852 2685 2062

Singapore

Wong Look Liew [email protected] +65 6603 5868

London

Richard Hoskin [email protected] +44 20 7090 6122

New York

John Bai [email protected] +1 212 209 9354

New York

Dan Shin [email protected] +1 212 205 7619

SALES TRADING Hong Kong David Harris [email protected] +852 2685 2237 Kevin Pereira [email protected] +852 2685 2288 KK Wong [email protected] +852 2685 2055 New York Angelo Iannone [email protected] +1 212 209 9367

Please refer to pages 15 – 16 of this report for important disclosure and analyst certification information.

Open Position

If a speculator is correct

half of the time, he is

hitting a good average. Even

being right 3 or 4 times out

of 10 should yield a person a

fortune if he has the sense

to cut his losses quickly on

the ventures where he is

wrong.

Bernard Baruch

•

•

•

6,339 – Nov 10 (+24%)

5,630

Dec 11 – 4,531

(-29%)

Technical Research | [email protected]

2 23 February 2012

India: Bear outsourced

The Nifty’s (5,505) one-quarter surge from the December 2011 low of 4,531 signals the end

of the 2010–2011 bear market and most likely the resumption of the secular bull market that

started in 2001.

Fig 1 Nifty daily: Bullish behaviour


The 13-month decline from the 2010 peak of 6,339 saw the Nifty fall almost 30%.

The price action since the December 2011 low of 4,531 has been powerful and orderly,

taking the index above the 40- and 200-day weighted moving averages (WMA), both of

which are now advancing.

The Nifty has clearly and convincingly broken above the multi-touch downtrend line.

The featured indicators also support the case for a change in trend. The 14-day RSI has

been in the overbought zone for most of the past month (this just does not happen in a bear

market), and the MACD–Sell version is at the highest level for more than two years and is

well above the zero line (normally bullish). It is also worth noting the positive divergences

that formed at the December 2011 low on both of the indicators.

Positive divergence

Positive divergence

•

•

•

6,339 – Nov 10

(+24%)

5,630

Dec 11 – 4,531 (-29%)

Bull market behaviour

Overbought

Oversold


23 February 2012 3

Fig 2 Nifty weekly: Shallow retracement


The decline from the 2010 peak has always been viewed as a partial retracement (a wave

two) of the 2008–2010 bull market. The 2010–2011 decline retraced exactly one-third of the

bull market on a log-scale basis, this is shallow for a wave two correction which normally

retraces between 50–71% of the prior advance.

However, in points terms some 44% of the 2,253–6,339 move was retraced and in terms of

duration, the 13-month decline was more than half of the length of the 24-month advance.

There are two ways to view the shallow correction:

1. Only part of wave � has completed and following the current advance another decline

will result in a more normal retracement of the 2008–2010 bull market.

Or

2. The shallow correction reflects a strong underlying market that will now surge to new all-

time highs as the secular bull market that started in 2001 resumes.

We are voting for option two because such an interpretation fits in well with our view that the

next stage of the secular bull market should be very powerful.

•

•

�

�

• • •

1/

3/

4/

2/

5/

5 6,339 – Nov 10

1/3 retracement 4,531

Dec 11 (-29%)

(+24%)

5,630 6,357 – Jan 08 i

Nov 08 – 2,253 (-65%)

ii

Positive divergence

Trendline broken

1

2

3

4

Overbought

Oversold


4 23 February 2012

Fig 3 Nifty monthly: To 10,000


Our Nifty roadmap views the advance from the December 2011 low of 4,624 (monthly close

basis) as wave � of iii – three of threes are normally powerful, consistent moves that mark a

significant point of trend recognition. On the scale we feature, our projected advance to

10,000 would not be unreasonable.

We have also featured Sedge Coppock’s indicator, the Coppock Guide, which he used to

identify the start of bull markets. When the indicator (a 10-month WMA of a 14-month rate of

change ROC + 11-month ROC) turns up from below zero, a new bull market is signalled.

This month is very unlikely to see a Coppock Guide buy signal because at current index

levels the indicator is still setting new lows.

Fig 4 Coppock Guide – returns for the Nifty Index

Signal date Index level +3 months +6 months +9 months +12 months

Sep 93 827 26.1% 42.3% 51.1% 56.0%

Feb 96 993 9.8% 3.6% -16.4% -2.0%

Jan 99 996 -1.8% 31.5% 33.1% 55.2%

Nov 01 1,067 7.0% -3.6% -5.3% -1.6%

Apr 09 3,474 33.5% 35.6% 40.5% 51.9%

Source: Mizuho research

Looking at previous signals, a new Coppock Guide buy signal would be likely to take the

index to a new monthly closing high. Of the 5 previous signals since 1993, 80% have had

positive returns after both 3 and 6 months. The returns after 12 months are also interesting.

Although only 3 of the 5 signals were still profitable at that stage, the average profit was

54.4% versus an average loss of just -1.8%.

•

•

�

�

�

�

�

• • • • • •

•

•

•

•

6,135

4,624

2,755 Nov 08

ii

i Dec 07 6,139

To

iii

914 Sep 01 – End of a 9.5 years secular bear market

Mar 92 1,262

Sep 93 -20.1 Feb 96 Jan 99

Nov 01 Apr 09


23 February 2012 5

Fig 5 Nifty daily: Where’s support?


The next chart resistance is at last July’s 5,740 high. Although we can’t tell where this

advance will falter, we doubt that the Nifty can sustain a move above 6,000 without some

consolidation.

And with the 14-day RSI coming off a very overbought 80, and the Nifty up almost 25% in

just two months, we have to be concerned about a correction; the steep angle of ascent is

unsustainable.

We’d expect setbacks to find support in the 5,200–5,400 support area, and around the area

of the 40-day WMA. The maximum extent of a correction should be the area of the rising

200-day WMA (last at 5,073).

This week we recommend buying HDFC Bank (HDFCIB IS – INR531) and Tata Consultancy

(TCS IS – INR1,252), two stocks that have set new all-time highs this week – a powerful

message so early in the bull market cycle (see Trade Recommendations on pages 11–12 for

details).

Overbought

Oversold

200-day WMA

40-day WMA 5,200–5,400 support

(+24%) 5,630

Very overbought

•

• • 5,740 – Jul 11

Dec 11 – 4,531


6 23 February 2012

Asia: Running with the Bulls

More of our indicators are giving buy signals for the MXASJ (532), increasing the odds that

the advance from the 2011 low is the beginning of a new cyclical bull market and not a bear

market rally.

Fig 6 MSCI Asia Free ex-Japan: New 52-week highs and Buy Thrust

New 52-week highs Buy thrust

Buy signals: When the % of new highs shrinks below 3% then rises above 5%, and the index is above its 40-week WMA.

Buy signals: When the % of overbought stocks shrinks below 5% and then moves back above 10% and the index is above its 40-week WMA.


Both the indicators featured above gave buy signals as at the close of business Friday, 10

February.

The New 52-week highs indicator gives a buy signal when the percentage of new 52-week

highs in the MXASJ (on a 4-week simple moving average basis) shrinks below 3% and then

rises above 5%. The MXASJ also has to be above its 40-week WMA.

The Buy Thrust gives a buy signal when the percentage of overbought stocks in the MXASJ

(9-week RSI above 70) shrinks below 5% and then rises above 10%. The MXASJ also has to

be above its 40-week WMA.

It is worth noting that both indicators are well below levels where we would consider them

overbought (see the guidance lines on the charts above).

•

22.7

• 6.2

+ +

+

+

+ +

+

+

+

+ +

+ + +


23 February 2012 7

Fig 7 MXASJ: Wave 3 to new highs underway


Our preferred view is that the MXASJ has resumed its secular bull market and is on its way

to a new all-time high above 2007’s 689 peak. The weekly chart shows our preferred wave

count; the 2011 decline was a wave 2 correction that partially retraced the 2008–2011

(wave 1) advance. The wave 3 underway from October’s 416 low should eventually take the

index up to the 1,500 area.

The 40-week WMA has started to climb supporting the idea of a bull market, also note the

14-week RSI’s break above a 14-month downtrend line. Further encouragement would be

taken from the MACD–Sell version moving back above the zero line.

Early stages of wave 3

Overbought

Oversold

Break of 14-month trendline

• •

•

•

•

• • 1/

3/

4/

2/

425 May 10

689 – Nov 07

Oct 08 – 224

1

5/

B 599 – Apr 11

416 Oct 11

C

2

A

440

577


8 23 February 2012

Fig 8 MXASJ daily: 550 pivotal level and potential resistance


The steep, persistent advance is forcing investors to participate in the uptrend, but when and

where will this steep move exhaust itself and a partial correction of the gains from

December’s 440 low start.

There are a number of targets clustered just below the area of the 2011 top:

� 550 – a pivotal level (resistance during advances and support during declines) during 2010–2011

� 550 – a 25% (one-quarter) advance from the December 2011 low of 440

� 555 – a 33% (one-third) advance from the October 2011 bear market low of 416

The targets are some 3–4% above current levels, if exceeded a move to the 560–580 zone

could occur before the index takes a rest. The maximum extent of any correction should be

the area of the rising 200-day WMA (last at 489). The first chart support is at 517 then at the

pivotal 500 level. The area of the rising 40-day WMA also often acts as support during

technical corrections.

The charts that follow show areas of potential resistance for some of the region’s leading

indices. In all cases when setbacks do occur the maximum extent will be the area of the

rising 200-day WMAs.

• •

• •

•

Overbought

Oversold

Constantly overbought, bull market behaviour

Constantly oversold, bear market behaviour

Apr 11 – 599 582

550 pivotal level

500 pivotal level

Oct 11 – 416 440 Dec 11

517 1st support 200-day WMA

40-day WMA


23 February 2012 9

Fig 9 Kospi 200: Potential resistance at 273–284


The Kospi 200 (267) has resistance at 273–280. At 284 the index would have advanced by

one-quarter from December 2011 low of 227 and one-third from the September 2011 bear

market low of 213.

Fig 10 HSI: Potential resistance at 22,000–23,480


The Hang Seng Index (21,549) has some chart resistance just above the recent high around

the 22,000 area. Trendline and channel resistance converge around the 23,000 area. At

22,350, the index would have advanced a Fibonacci 38% from the October 2011 bear market

low of 16,170. A one-quarter advance from the November low of 17,613 would result in a

move to just above 22,000, whilst a one-third gain would see 23,480.

•

•

•

•

296 – May 11

280 resistance

Measured move

Sep 11 – 213

227 Dec 11

269 (+26%)

Channel resistance

•

•

•

•

Channel resistance Trendline resistance

24,989 – Nov 10

Resistance and measured move

objective around 22,000

21,760

17,613 Nov 11

Oct 11 – 16,170


10 23 February 2012

Fig 11 HSCEI: Potential resistance at 12,000–13,000


The China H-share Index (11,824) has chart resistance just above the recent high at 12,000

and a measured move objective around the 12,800 level – close to trendline resistance. At

12,088 the index would have advanced 50% from the bear market low and a Fibonacci 62%

advance would lead to approximately 13,000. A one-third advance from November’s 9,369

low would take the index up to around 12,500.

Fig 12 TWSE: Potential resistance 8,250–8,800


The Taiex (8002) should be able to move away from resistance at 8,000, the next chart

resistance is around 8,500. There is trendline resistance at 8,600–8,700. A one-quarter

advance from the December 2011 low would see the index reach 8,250, while a one-third

move would see the Taiex trade at 8,800.

•

•

•

•

14,219 – Nov 10

11,916

9,369

Nov 11

Oct 11 – 8,059

Chart resistance

around 12,000

Trendline resistance

Measured move objective

•

•

Trendline resistance

Chart resistance around 8,500

9,207 – Feb 11

Dec 11 – 6,609


23 February 2012 11

Trade Recommendations: BUY HDFC Bank, Tata Consultancy and Weichai Power

Fig 13 HDFC Bank (HDFCB IS)


HDFC Bank (HDCFB IS – INR531.45) – following 16 months of ranging the stock has

broken out to a new all-time high, a strong message so early in a new bull market cycle.

The old range provides an initial measured move objective of INR600–625.

Go 100% long at market, using a daily close below INR473 as a stop loss (approximate risk

11%). Average 30-day volume: USD32.7m.

•

• • •

396

Feb 11

473

Old resistance 497–519

154.80 – Mar 09

539


12 23 February 2012

Fig 14 Tata Consultancy (TCS IS)


Tata Consultancy (TCS IS – INR1,252) – after some 13 months of failing to move away

from the INR1,200 area, the stock set a new all-time high of INR1,267 yesterday.

Next resistance is at INR1,350, a 50% advance from the 2011 low.

Go 50% long at market and 50% long at INR1,208, using a daily close below INR1,045 as a

stop loss (approximate risk if fully executed 15%). Average 30-day volume: USD42.3m.

Fig 15 Weichai Power (2338 HK)


Weichai Power (2338 HK – HKD45.70) – the stock halved during 2010–2011, bottoming at

HKD30.60 last October. The recent break above HKD44.20 has put Weichai into a new

uptrend.

The next resistance level is at July’s HKD49.00 high. Longer term, if our bull market view

plays out, we’d be expecting new all-time highs.

Go 100% long at market, using a daily close below HKD40.00 as a stop loss (approximate

risk 13%). Average 30-day volume: USD17.3m.

•

•

• •

• Apr 11 – 1,247 1,267

1,045 support 902

Aug 11

(-28%)

208 – Oct 08

• •

•

• •

3.73 – Oct 08

Dec 10 – 60.45 49.00 – Jul 11

30.60 Oct 11

(-49%)

40.10

support


23 February 2012 13

The Last Picture Show

US equities: NDX and SPX

� The Nasdaq 100 (2,580) has traded up to 2,602 this month taking the index to the highest level for 11 years. The new highs have confirmed the break above the 2007 high of 2,239.

� The next resistance zone extends from 2,800–3,000, this includes the level where the advance from the 2008 low would be equal in percentage terms to the 2002–2007 cyclical bull market.

� The S&P500 (1,358) has been tracing out a typical secular bear market pattern since 1999. This should mean that gains here will be capped at approximately 1,500–1,600 (upside of 10–18% from current levels).

� Having successfully negotiated resistance around the 1,300 area, we do not think last year’s peak of 1,371 is going to be that much of an issue. Two levels to consider: 1,516 – a 50% advance from the 2010 low and 1,612 – a 50% advance from the 2011 low.

Fig 16 US equities: NDX and SPX


•

•

•

• •

•

•

•

•

•

• •

Mar 00 1,553

Oct 07 1,576

769 Oct 02

1,371 – May 11

1,075 Oct 11

1,011 Jul 10

667 – Mar 09

Top of the secular bear market range

(+155%) 2,602

4,816 – Mar 00

Retracements of 2000–2002 collapse:

71%

62%

795 – Oct 02 (-83.5%)

1,019 – Nov 08

(-54%)

(+182%) Oct 07 2,239


14 23 February 2012

Scorecard 2012

Recommendations highlighted in Madness of Crowds

Open positions

Open positions Bloomberg Entry date Position Long/ Short

Country Entry price

Last price

% Gain/(loss) since trade date

Stop loss (close only)

3

Other instructions/comments

Acer 2353 TT 10 Feb 12 50% L TW 42.89 43.15 0.3

2 36.45 Buy another 50% @41.50

AIA Group 1299 HK 10 Feb 12 100% L HK 26.25 27.75 5.7

23.55

Beijing Enterprises 392 HK 10 Feb 12 100% L HK 46.71 48.75 4.4

40.00

CNOOC 883 HK 10 Feb 12 50% L HK 17.33 17.60 0.8

2 14.74 Buy another 50% @16.56

Pegatron 4938 TT 10 Feb 12 100% L TW 39.11 36.75 (6.0)

34.00

Avg return (%) 1.0

Closed out positions

Stock name Bloomberg Date recommended

Position L/S Country Entry price

Exit Price % Gain/(loss)4 Other instructions/comments

Hong Kong HSI HSI 18 Nov 11 100% S HK 18,785 1 20,484 (9.3)

Bought on 27 Jan @20,484 against a stop of a close above 20,273

Korea Kospi 200 KOSPI2 18 Nov 11 150% S KO 247.13 1 256.20 (6.3)

Bought on 30 Jan @256.2022 against a stop of a close above 258.00

Taiwan Taiex TWSE 18 Nov 11 50% S TW 7,274 1 7,707 (3.8)

Bought on 7 Feb @7,706.67against a stop of a close above 7,744

Avg return (%) (7.8) 1 Average price

2 Gain/Loss adjusted for position size

3 A close below this level will result in the position being removed at the next day’s VWAP

4 Includes 1% per completed trade for slippage and commissions


23 February 2012 15

Fundamental Ratings for Companies in This Report

Company name (Bloomberg code) Date of recommendation Recommendation Relevant disclosure 1

Acer (2353 TT) 28-Nov-2011 BUY

AIA Group (1299 HK) 25-Nov-2011 BUY

CNOOC (883 HK) 18-Aug-2011 BUY

Beijing Enterprises (392 HK) NR

HDFC Bank (HDFCB IS) NR

Pegatron (4938 TT) NR

Tata Consultancy (TCS IS) NR

Weichai Power (2338 HK) NR Note: NR = Not Rated. Source: MHSC Group

Important Disclosure Information Note 1: Where “disclosure date” appears below, this means the day prior to the report date for securities listed on the Hong Kong Stock Exchange. For all other securities, it means the end of the month preceding the date of this report, unless that month end is within 10 calendar days of the report date in which case the disclosure date is the end of the preceding month. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated.

As at the disclosure date, the following applies :-

Company Disclosures Mizuho Securities Co., Ltd. and its affiliates (collectively, the “MHSC Group”) have verified that there are no relevant disclosures for the securities mentioned in this report.

Mizuho Securities Asia Limited Ratings for Fundamental Research

Mizuho Securities Asia Limited ratings are based on the following definitions.

Ratings and price objectives are based on returns expected over the next 6-12 months.

BUY Stocks for which our price objective, as of the date it is set, exceeds the share price by 10% or more as of the date of the rating.

NEUTRAL Stocks for which our price objective, as of the date it is set, is within 10% of the share price as of the date of the rating.

UNDERPERFORM Stocks for which our price objective, as of the date it is set, is below the share price by 10% or more as of the date of the rating, and/or which are

expected to be among the stocks that provide lower investment returns than stocks within their respective coverage groups that have “BUY” or “NEUTRAL” ratings.

RS RATING SUSPENDED – rating and price objective temporarily suspended.

NR No Rating – not covered, and therefore not assigned a rating.

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Mizuho Securities Asia Limited is using an absolute performance rating system, based on capital returns of share prices compared to price objectives with an investment horizon of six-to-twelve months. Stocks are classified into coverage groups, with the proviso that “Underperform” ratings must apply to at least 10% of any coverage group equal to or greater than 10 companies. However this ratings dispersion may be varied from time to time if we believe that different ratings better reflect the prospective investment returns from a given coverage group.

Prior to 4 October 2011, Mizuho Securities Asia Limited had a Buy/Hold/Sell rating system with definitions that correspond with the Buy/Neutral/Underperform recommendations outlined above.

Investors should be aware that share prices are prone to volatility. An investor’s decision should depend on individual circumstances and other considerations. Recommendations should not be the only factor in making an investment decision. Should you require additional information on the valuation methodologies used to derive the price objective(s), please contact the author(s) of this report.

THIS RESEARCH HAS BEEN PRODUCED BY MIZUHO SECURITIES ASIA LIMITED IN HONG KONG. IT HAS NOT BEEN PRODUCED IN THE UNITED STATES For the purposes of disclosure under FINRA rules, our ratings correspond to “Buy”, “Hold/Neutral”, and “Sell”, respectively.

Analyst Certification Each research analyst listed on the cover page of this report certifies that the views expressed in this research report accurately reflect the analyst's personal views about the subject security(ies) and issuer(s) and that no part of his/her compensation was, is, or will be, directly or indirectly, related to any specific recommendation or view

expressed in this research report.

As of the date of this report, the research analyst listed on the cover page of this report, or his/her associate(s), does not have any interest (including any direct or indirect ownership of securities, arrangement for financial accommodation or serving as an officer) in any company mentioned in this report, knows or has reason to know of any conflict of interest at the time of publication of this research report that could influence the research analyst’s views in the report.


16 23 February 2012

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Mizuho - Madness of Crowds- 23 February 2012

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Transcript of Mizuho - Madness of Crowds- 23 February 2012