Every April month tendering and awarding activity for last 5 years
Yearly tendering and awarding activity
SBI Net profit for FY23 crosses Rs 50,000 crores and stands at Rs 50,232 crores witnessing a growth of 58.58% YoY while Bank of Baroda reported highest quarterly net profit at Rs 4,775 crore.
SBI earnings were driven by by ~16% YoY growth in advances while BOB delivered credit growth of 18.5% YoY.
SBI margin improved 7 bps at 3.37%, highest seen in past several years, led to 8 year high RoA of 1.23%. BOB delivered and 16 bps QoQ improvement in margins.
GNPA and NNPA lowest in last 7-8 years at 2.78% and 0.67% for SBI while asset quality was its best with GNPA and NNPA lowest in last 6-7 years at 3.79% and 0.9% for BOB.
Continued healthy growth at 12-13%, lower slippages and recoveries from stressed assets to sustain RoA at 1-1.1% in FY24E for SBI. For BOB sustenance of healthy credit growth (guidance - 12-14%), steady margin and lower credit cost at ~50 bps to keep RoA at ~1% ahead.
Buy rating on both. SBI (Target price – Rs 725) - Fantastic quarter with earnings momentum surging. Bank of Baroda (Target Price – Rs 220) – Strong all-round performance; outlook remains intact.
Top Picks
Indian Oil Corporation (CMP: Rs 86, Target Price: Rs 105, Upside: 22%, P/E Multiple: 7) - In Q1FY24-TD, GRMs are likely to be subdued but expected to be countered by strong marketing margins. However, we expect GRMs to improve in H2FY24 with expected rise in demand. IOC also plans to increase its refining capacity from current 80 MMT to 107 MMTPA by 2024-25. Higher dividend payout (7-8% yield).
HPCL: (CMP: Rs 256, Target Price: 310, Upside: 22%, P/E Multiple: 5) - HPCL’s refining capacity is expected to increase from 8.3 MMTPA to 15 MMTPA. HPCL has the highest Marketing: Refining capacity mix, which would work favorably in current environment of higher marketing margins. Higher dividend payout (5-6% yield).
Siyaram Silk Mills (Target Price: Rs 710, MCap: Rs 2,708 crore; Upside: 23%)
Wipro has announced a share buyback program amounting to Rs 12,000 crore. The good news for investors is that, unlike other buyback programs in the recent past, it will be through a tender route - which means investors can tender their shares at the buyback price.
The buyback presents an opportunity for investors to make money. We will explore the opportunity in Wipro buyback in this article.
The Wipro board has approved a buyback of 26.96 crore shares which translates to 4.91% of total equity shares on a proportionate basis. The company will buy back shares at Rs 445 per share from investors.
As per SEBI guidelines, 15% of the buyback (in this case, Rs 1,800 crore) has to be reserved for retail investors. Investors holding Wipro shares with an investment below Rs 2 lakh will fall under the retail category.
The company has not announced the record date, timelines, and other offer details yet.
Wipro promoters hold 72.92%, and Foreign investors have a 9.78% stake in Wipro as of 31 March 2023. As per reports, promoters are also expected to participate in the buyback.
Like other IT giants, Wipro's share price has also struggled in the last one year - the stock price has fallen nearly 15% in the time frame. In 2023, the share is down 2.63%. On 18 May 2023, Wipro shares closed at Rs 383 per share.
We have shared two crucial numbers above - the current market price (CMP)* of Rs 383 and the tender price of Rs 445. It makes all the sense to buy at the current levels and tender at Rs 445 and make double-digit profits.
However, in the real world, the equations are never so simple. The equation gets complicated as there is another parameter called Acceptance Ratio. Let us understand this term in detail first.
The acceptance ratio in a share buyback process refers to the proportion of shares tendered or offered by shareholders that the company is willing to accept for repurchase. When a company announces a share buyback program, it sets certain parameters for the buyback, including the maximum number of shares it intends to repurchase and any conditions or restrictions associated with the process. The acceptance ratio is typically expressed as a percentage or a ratio indicating the percentage of tendered shares that will be accepted for repurchase.
For example, a company announces a buyback program, and the acceptance ratio is 50%. It means that for every share tendered by a shareholder, the company will accept and repurchase only 50% of those shares. The remaining 50% would be returned to the shareholder, who would retain ownership of those shares.
So if you think, you will buy 100 shares and sell - the problem is not all 100 will get accepted. Post the buyback (when balance shares are returned to you), the price of the shares you hold may fall, and you may suffer losses on them.
As a retail investor, the maximum number of shares you can hold at the current CMP is 449 (445*449 < 2 lakh). Now look at the below table - we have highlighted different cases (the profits) based on the acceptance percentage.
Let us understand the above table by assuming the acceptance ratio comes to be 60%.
We have arrived at a breakeven price of Rs 290 per share based on the assumption of a 60% acceptance ratio. However, if the acceptance ratio changes to 35%, the breakeven comes at Rs 350 per share.
The final part of the equation is to understand the breakeven price. If you look at the amount you received from the tender offer and shares in your DEMAT account, if the shares price of Wipro falls to Rs 290, then you don't make any money in the trade (breakeven). Assuming the price is Rs 360 post buyback, you will make a profit of Rs (360-290)*180 = Rs 12,600
Let us sum up the trade for you with a 60% acceptance ratio:
We do believe that the acceptance ratio is likely to be north of 60%. In the last 4 buybacks, retail acceptance has been in the range of 50-100%, with 100% three times. Do note, it is a high-risk trade in which the acceptance ratio plays a crucial role.
*As on 18th May
Source: ICICIdirect Research
Earlier this month, we had the unusual scenario of the usually stable stocks of financial services giant twins – HDFC and HDFC Bank – falling 5-6% on a single day. The trigger? The much sought-after index maker MSCI had decided to give a lower weightage to the merged entity (HDFC Bank) once it is included in the benchmark, after the merger is completed formally.
From a situation where there were expectations of substantial capital inflows into HDFC Bank after the index inclusion, the scenario actually changed to one of possible selling in the stock to maintain the weightage in the MSCI index.
Much of these aspects are better understood if we take stock of how the index is constructed in the first place, get a grip on free float marketization, and make sense of key issues such as foreign room and adjustment factor.
Here’s more on the inclusion of HDFC Bank in the MSCI index and the stock reactions.
Free float market capitalization
Before getting into the index addition part, a brief background would be in order.
HDFC and HDFC Bank decided to merge in April 2022. The ratio of merger was set at 42 shares of HDFC Bank for 25 shares of HDFC. The transaction is expected to be completed by July 2023.
Presently (as of May 16), HDFC has a market capitalization of Rs 5.08 lakh crore and a free float market capitalization of Rs 5.03 lakh crore. HDFC Bank has a market capitalization of Rs 9.35 lakh crore and a free float market capitalization of Rs Rs 7.39 lakh crore. The combined market free float market capitalization is thus around Rs 12.43 lakh crore (7.39 5.03).
Free float market capitalization is calculated by multiplying the market price of a stock with the number of shares (excluding the shareholding of promoters). This gives a clear picture on the liquidity available for a stock in the market.
Now, MSCI indices use the free float market capitalization method to assign weightage to stocks.
Index inclusion and weightage
Now, HDFC is already present in the MSCI India and MSCI Emerging Markets indices. As of April 28, 2023, the index factsheets show that HDFC had a weightage of 6.61% in MSCI India and was the second largest constituent in the index behind Reliance Industries (10.16% weightage). In the MSCI Emerging Markets Index, it carried a weightage of 0.91%. Since HDFC Bank is a listed entity in the Indian markets, after the merger, the combined entity (HDFC Bank) would be included in the MSCI indices as a matter of continuity and HDFC would obviously be removed since it would not exist as a separate entity anymore.
The concept of foreign room becomes important here.
MSCI indices require considerable room for foreign investors (FIIs and FPIs) in buying stocks for them to be included in benchmarks. Foreign room is the portion of the shareholding available for foreign investors in companies.
One of the reasons for HDFC Bank not being included in the MSCI indices pre-merger was that there was no foreign room available for investments, whereas HDFC had the requisite headroom. The RBI limits the total foreign investments in banks at 74% for them to be treated as Indian banks.
Now, for the merged HDFC-HDFC Bank entity is expected to have a foreign room of a little over 17% according to analysts quoted in the media, going by the March 2023 shareholding pattern of the two companies.
Adjustment factor hurts merged entity
The next critical aspect to note is the adjustment factor that MSCI uses for the inclusion of stocks in its indices.
Ideally, after the merger of HDFC Bank and HDFC, the total weightage of the combined entity should have been higher in the MSCI index, going by the total free float capitalization mentioned earlier.
Had the MSCI’s index construction methodology used an adjustment factor of 1, the MSCI India index would have had HDFC Bank (merged) with a weightage of around 13%.
But the index aggregator instead released a statement earlier this month stating that it would use an adjustment factor of only 0.5. The analysis of the reasons cited – estimated post-even foreign room and risk of reverse turnover – indicates that flows into the stock after merger could be volatile and there may be a situation where the foreign room may fall below 15%.
Also mentioned in the methodology document of MSCI was the fact that an adjustment factor of 0.5 can be given for cases where the foreign room is between 15% and 25% based on its reviews.
MSCI reviews weightages and adjustment factors once every quarter.
Thus, HDFC Bank (merged entity) would get only half the weightage in the index compared to the full proportion expected earlier.
According to analysts quoted in the media, an adjustment factor of 0.5 would mean that the merged entity would have lower would have only 6.5% weightage in the index, lower than even the 6.74% weightage that HDFC currently enjoys.
Outflows expected as against inflows
Had the adjustment factor of 1 been applied as expected earlier and the weightage for HDFC Bank (merged) and a weightage of around 13% accorded to it in MSCI India, there were expectations of $3 billion in inflows into the merged entity’s counter.
Since MSCI indices are used by a host of FIIs, FPIs, and mutual funds to participate in various global markets including India, this move was keenly followed.
Now that the weightage of HDFC Bank would only be 6.5%, the situation meant that there would be net outflows of $150-200 million, and limited possibility of any incremental inflows.
This move from the MSCI surprised the markets and as a result there was heavy selling pressure in both HDFC and HDFC Bank, as both stocks fell around 5-6% on May 5. They did recover in the week after, but still trade below their prices recorded on May 4.
For passive investors, there was one key lesson here. Even though passive investing involves mechanically buying the index, there are risks beyond their control and are completely unanticipated such as an index provider changing weights all of a sudden.
Declining Gas prices making gas stocks attractive
Paints -Strong demand recovery; benign input cost drives margin
Moderation in margins and anticipated impact of ECL provisioning drag PSU banks prices
Margin Expansion Galore for Auto Space
Going forward we expect auto volume growth to taper in FY24E, albeit on a high base. We however continue to remain positive on the PV (underpenetrated category domestically) and CV domain (beneficiary of robust government spending on infrastructure). Our top bets in the OEM space are Maruti Suzuki (Rating: Buy; Target price: Rs 11,200), Eicher Motors (Rating: Buy; Target price: Rs 4,165) and Ashok Leyland (Rating: Buy; Target price: Rs 185). Our top bets in Auto Ancillary space are Mahindra CIE (Rating: Buy; Target price: Rs 520), Mayur Uniquoters (Rating: Buy; Target price: Rs 580) and Ramkrishna Forgings (Rating: Buy; Target price: Rs 400).
Firm Sugar prices, stable sugar recovery & higher ethanol volumes to propel earnings in FY24
Pharma companies some respite in US markets
L&T misses earning estimates, outlook intact (Mcap: Rs 3.13 lakh crores, Target 2,650)
Hidden Gem
Gujarat Gas: Lower gas prices to drive volume recovery (CMP: Rs 485, Target: Rs 570, Upside: 18%)
Conclusion
India inflation data, indications on Monsoon arrival and earnings of mid/small cap segment would be key drivers for coming week. Nifty to consolidate.
Source: ICICIdirect Research
In the previous post, we went through the fundamentals of volume analysis, how to interpret it, and some notable technical analysts and researchers' observations.
We will continue with it in today's post and study some advanced volume analysis principles with some helpful indicators.
We covered volume using a straightforward trading example in the previous piece, but I believe it's essential to learn more about volume using a bid-ask table.
Suppose we have a bid and ask table for a stock as shown below:
In this table, the bid price represents the highest price that a buyer is willing to pay for the stock, while the ask price represents the lowest price that a seller is willing to accept for the same stock. The bid-ask spread is the difference between the bid price and the ask price.
The bid size represents the number of shares that buyers are willing to purchase at the bid price, while the ask size represents the number of shares that sellers are willing to sell at the ask price.
Let's assume that during a specific period of time, the following trades occur:
To calculate the volume of each trade, we can multiply the price by the number of shares traded. For example, the volume of the first trade would be 100 x 10.00 = 1,000 rupees. We can then calculate the total volume for the period by summing up the volume of each trade. In this case, the total volume would be:
INR1,000 INR502.50 INR1,515 = INR3,017.50
The total volume indicates the total value of shares that were traded during the period. Traders and investors use volume analysis to identify potential price movements and trends. High volumes can indicate strong buying or selling pressure and potential price movements in the direction of the volume, while low volumes may indicate a lack of market interest and potential price stagnation.
As we know, the total volume for the period was INR3,017.50. This tells us the total value of shares that were traded during the period, but we can also use this information to calculate the average volume per minute or per hour, depending on the time frame we are interested in.
Let's assume that the period we are looking at is 30 minutes. We can calculate the average volume per minute by dividing the total volume by the length of the period:
INR3,017.50 / 30 = INR100.58 per minute
This means that, on average, INR100.58 worth of shares were traded every minute during the 30-minute period. We can use this information to compare trading activity across different periods of time and identify trends and patterns.
In the bid and ask table example above, we can see that there is more buying interest at the lower price levels and more selling interest at the higher price levels. This means that if the price were to increase, there may be more selling pressure, while if the price were to decrease, there may be more buying pressure.
Useful indicators for Volume Analysis
1. On-Balance-Volume (OBV):
On-Balance-Volume (OBV) is the granddaddy of all volume indexes. Joseph Granville proposed OBV in 1976. On-Balance Volume (OBV) is a technical analysis indicator that measures buying and selling pressure by cumulatively adding or subtracting the volume traded on a stock or other financial asset based on whether prices close up or down.
The theory behind the OBV indicator is that when the volume on up days is greater than the volume on down days, it is a sign of accumulation and suggests that investors are buying the asset. Conversely, when the volume on down days is greater than the volume on up days, it is a sign of distribution and suggests that investors are selling the asset.
The OBV is calculated by taking the cumulative total of the volume traded on up days and subtracting the cumulative total of the volume traded on down days. If the closing price of the asset is higher than the previous day's closing price, the volume for that day is added to the cumulative total. If the closing price is lower, the volume is subtracted. If the closing price is the same, no volume is added or subtracted.
Traders often use OBV in conjunction with other technical analysis tools to identify potential buying and selling opportunities. For example, if the price of an asset is trending upwards but the OBV is trending downwards, it may suggest that there is a divergence between the price and the buying pressure, which could signal a potential reversal. Conversely, if the price is trending downwards but the OBV is trending upwards, it may suggest that there is a divergence between the price and the selling pressure, which could also signal a potential reversal.
How can the OBV be used in prices that are in a consolidation pattern or trading range rather than trending? When prices are in a trading range and the OBV breaks its own support or resistance, the break often indicates the direction in which the price breakout will occur. Therefore, it gives an early warning of breakout direction from a price pattern.
2. Money Flow Index
Another method of measuring money flow into and out of a stock is the Money Flow Index. It considers "up" days and "down" days to determine the flow of money into and out of a stock. It takes into account both price and volume to determine the strength of the trend and the likelihood of a reversal.
The MFI is calculated by first calculating the typical price of the asset, which is the average of the high, low, and closing prices for a given period. The money flow is then calculated by multiplying the typical price by the volume for that period. This gives an indication of the amount of money flowing into or out of the asset.
An MFI value above 80 is typically considered overbought and may indicate that the asset is due for a price correction, while an MFI value below 20 is typically considered oversold and may indicate that the asset is undervalued and due for a price rebound. These parameters, along with the period, are obviously adjustable.
Conclusion
Volume analysis is an essential tool for traders and investors to understand the buying and selling activity of a particular asset. By examining the volume, you can determine whether there is sufficient market interest and liquidity to support a trend, identify potential reversals and breakouts, and confirm price movements. However, volume analysis should not be used in isolation, but in combination with other technical and fundamental analysis tools to make well-informed trading decisions. By mastering the art of volume analysis, traders can gain a competitive edge in the market and achieve their investment goals.
Indian airline companies have rarely had a smooth run over the long run. Very few have taken off well over the long term. Following the turbulent journey and failure of the likes of Kingfisher Airlines, Jet Airways and Paramount Airways, Go First (Go Air earlier) is the latest addition to list of airline companies that have gone under. Go First filed for bankruptcy on May 2, 2023. A key reason it cited was the inability of its airplane’s engine vendor, Pratt & Whitney, in supplying fault-free engines as per schedule, resulting in the grounding of its flights and the resultant financial losses.
What led to this sequence of events for a once-successful airline? What are the implications for banks, operational creditors and passengers? What is the way forward for Go First?
Coming at a time when passengers carried by domestic airlines are at record levels of 3.35 crore in January-March 2023, growth of 51.7% YoY, here’s all that you need to know about Go First’s tumultuous flight and the broader ramifications for stakeholders.
Large airline runs into rough weather
Go First has been in operation for nearly 18 years from 2005 onwards. It was among the top four airlines in the country with a healthy 10.6% market share of passenger traffic for the year 2019, behind Indigo, Air India and SpiceJet. Even as recently as the year 2022, Go First had 8.8% passenger market share, third highest in the country.
Its passenger load factor – which measures the ratio of the seats filled to the total capacity of an airline – for Go First has generally remained around the 90% level. It was able to run 200 flights every day, and about 185 flights closer to its bankruptcy. It carried 8.95 lakh passengers in March 2023.
That’s where the good part stops.
Source: DGCA
The airline’s troubles go back in time. The GTF (geared turbofan) engines supplied by Pratt & Whitney to airlines with A320 neo airplanes around the world – including to Indigo and Go First in India – were found to be defective.
The earliest problems arose in 2017. By 2019, the issues were serious enough for the Indian aviation regulator DGCA (Directorate General of Civil Aviation) to ask airlines using the faulty engines to ground them until the defects were rectified.
Unfortunately for Go First, from 7% of its flights being grounded in December 2019 and 31% by December 2020, the proportion rose to as high as 50% or 25 of its Airbus A320 neo aircraft fleet as of December 2022.
Go First filed an arbitration case against Pratt & Whitney. The Singapore International Arbitration Centre (SIAC) had asked Pratt & Whitney to deliver at least 10 serviceable spare leased engines by April 27, 2023 and a further 10 spare leased engines per month until December 2023. Unfortunately, none of the engine deliveries happened. Go First has claimed that had these engines arrived on time, it would have returned to full operations by August or September this year.
For its part, the engine maker has claimed that Go First did not make payments and had a history of defaults on financial obligations.
Indigo, too, faced these issues, but was able to get back to its feet quickly due to a much larger fleet size and stronger finances.
In the meantime, 2020 saw the COVID-19 pandemic and the resultant lockdowns seriously hurt the entire airline industry, with Go First also facing the heat.
In the aftermath of the pandemic, inflation soared with crude oil and a host a commodity prices soaring, further worsened by the Russia-Ukraine conflict.
These events jeopardised an already financially fragile Go First, which called back its intended IPO in 2022 due to volatile market conditions.
Indigo was able to overcome the issue as the airline re-inducted some of the defective plane engines after fixing them. Also, currently the majority of its A320 neo aircraft are now powered by CFM engines instead of those from Pratt & Whitney, according to reports.
After Jet Airways’ failure in 2019, Indigo gained further strength and has more than half the domestic market share. The ailing government-run Air India was also bought by the Tata group. With Vistara and Air Asia already under its wings, and Air India added to its repertoire, competition became even more severe for Go First, as it was already troubled with grounded aircraft.
Financial woes and eventual grounding
The promoters of Go First pumped in Rs 3,200 crore over the past three years, of which Rs 2,400 crore was injected in just the last two years. They had reportedly ploughed in Rs 6,500 crore totally since the airline’s inception.
Given the post-COVID airline industry woes and with half of its fleet grounded, Go First could not function as usual, especially given the surging fuel and operational costs. Given the losses and curtailed operations, the promoters were not keen to plough in any more equity into the airline.
The airline has claimed that the grounding of 50% of its aircraft meant that it suffered a revenue loss of a whopping Rs 10,800 crore and incurred additional operational costs. It further claimed that Pratt & Whitney’s actions had also “driven some lessors to repossess aircraft, draw down letters of credit and notify further withdrawal of aircraft.”
It also claimed to have paid Rs 5,657 crores to lessors in the last two years, of which around Rs 1,600 crores was paid towards lease rent for non-operational grounded aircraft from the funds infused by the promoters and the Government of India’s Emergency Credit Line Guarantee Scheme.
Go First has sought Rs 8,000 crore in compensation from Pratt & Whitney for the loss in the SIAC.
In fact, Go First’s staff salaries were delayed in recent months and were not given on time.
Lenders face anxious times
The financial and operational troubles of Go First aren’t isolated problems. It has loans of Rs 6,521 crore that it needs to repay. It has serviced interest for the month of April 2023, but the future remains uncertain.
Central Bank of India, Bank of Baroda, Deutsche Bank and IDBI Bank are among the key lenders to the airline. The outstanding exposure of Central bank of India was Rs 1,305 crore and was almost similar for Bank of Baroda as well. Go First had also taken Rs 1,292 crore loan from the government’s emergency credit scheme announced during the COVID crisis.
In addition, the airline has defaulted on payments to operational creditors, including Rs 1,202 crore to vendors and Rs 2,660 crore to aircraft lessors.
In all the total liabilities stood at Rs 11,463 crore for Go First. Some reports suggest that a few of the bankers are open for negotiation in repayment. Others suggest that the recovery for banks may not be more than 25-30% of the outstanding loans.
Airfares soar, revival chances weak
Go First had cancelled flights till May 5 earlier, but has extended the suspension by a week to May 12 now.
Given that this is the peak summer season, there is huge air traffic to cater to for airlines as passengers head out to various destinations for their holidays.
As Go First has been grounded, the capacity available is reduced, thus increasing fares massively.
Some airlines are reportedly charging Rs 28,000 for the Delhi-Mumbai route as spot fares. Mumbai-Goa fares have risen to Rs 15,000 from Rs 6,000 a week ago according to reports.
In most cases spot fares have doubled or in a few instances the tickets are now 3-4 times costlier than they were a week ago, according to news reports.
Given the surge in air travel, it is unlikely that the fares would come down any time sooner and airlines would look to make the most of it, thus burning a hole in the pockets of passengers.
For Go First, the path to revival seems extremely challenging at the moment. The airline has filed a petition in Delaware to force Pratt & Whitney to implement the arbitration award of the SIAC.
In addition, the insolvency proceedings before the NCLT (National Company Law Tribunal) may not get a hearing very soon.
According to experts quoted in the media, even if Go First wins compensation from the engine maker – which in itself may be lengthy process – it remains to be seen if that would enough to repay the lenders and operational creditors. Again, mere payment won’t be enough as the defective engines need to be replaced by sound ones before Go First can run full-fledged operations as before. That seems to be a tall order now.
Source: Company press release
Price and volume are considered as the king of chart analysis as all indicators get constructed by combining them. Therefore, price and volume are the two ingredients that prepare any indicator for market analysis.
Volume refers to the number of shares or contracts traded in a given period of time. The concept of volume is based on the idea that price movements in the market are driven by the actions of buyers and sellers. When buyers and sellers are actively participating in the market, the trading volume is high, and vice versa.
Let's say you are watching the trading activity of a particular stock over the course of a day. The stock's current price is 500 rupees per share, and the following trades take place:
• Trade 1:10 shares are bought at 500 rupees per share
• Trade 2:5 shares are sold at 490 rupees per share
• Trade 3:20 shares are bought at 550 rupees per share
• Trade 4:15 shares are sold at 500 rupees per share
• Trade 5:30 shares are bought at 510 rupees per share
The total volume for the day is calculated by adding up the number of shares traded during each trade, which gives us a total volume of 80 shares for the day. So if A has bought 10 shares for 500 rupees, then someone must have sold the same shares at the same price to A, therefore volume would be not 20 shares, but 10 share, that is, the number of shares traded in 1 trade or transaction.
But how should we analyse and interpret volume? --The trading volume can be used to gain insights into the behaviour of market participants.
Trend Confirmation
An increase in trading volume can often be associated with an increase in buying or selling pressure, which can in turn lead to a corresponding increase in the price of a stock. This is because when there is a higher volume of buyers than sellers, it indicates greater interest and confidence in a particular stock , which means that the demand for the stock increases, which can push up its price. Conversely, when there is a higher volume of sellers than buyers, the supply of the stock increases, which can lead to a decrease in its price. For example, if a company reports better-than-expected earnings, it may attract a higher trading volume as investors become more interested in the company's prospects, which can drive up its stock price.
Here's an example table that illustrates how volume can confirm price movements in the market:
Date |
Open Price |
Close Price |
Volume |
Price Movement |
Volume Movement |
Jan 1 |
100.00 |
101.50 |
100,000 |
N/A |
N/A |
Jan 2 |
101.50 |
102.00 |
150,000 |
Up |
High |
Jan 3 |
102.00 |
102.50 |
110,000 |
Up |
Moderate |
Jan 4 |
102.50 |
102.50 |
100,000 |
Unchanged |
Low |
Jan 5 |
102.50 |
101.00 |
90,000 |
Down |
Low |
Jan 6 |
101.00 |
100.50 |
75,000 |
Down |
Low |
Jan 7 |
100.50 |
99.00 |
250,000 |
Down |
High |
Jan 8 |
99.00 |
98.25 |
200,000 |
Down |
High |
In this example, we are looking at the daily price and volume movements of a particular stock over a period of nine days. As you can see, the price movements are listed in the "Price Movement" column, and the volume movements are listed in the "Volume Movement" column.
The table shows the trading activity of XYZ stock over five days. Each day's volume is the number of shares that were bought and sold during that trading session.
On day 1, the stock opened at INR100 and closed at INR101.5. There was heavy buying and selling activity, with a volume of 100,000 shares. This indicates high market participation and interest in the stock. The increase in price and high volume suggest bullish sentiment.
On day 2, the stock opened at INR101.5 and closed higher at INR102.00 ,as there was high volume, with 150,000 shares traded.
Onn day 3, the stock opened at INR102.00 and closed at INR102.50. There was moderate volume with 110,000 shares traded. The stock closed higher than the opening price, which suggests bullish sentiment, but the volume was relatively low.
On day 4, the stock opened at INR102.50 and closed at INR102.50. There was low volume, with only 100,000 shares traded. The stock closed unchanged, which indicates a lack of conviction among traders.
On day 7, the stock opened at INR100.50 and closed at INR99.00. There was heavy buying and selling activity, with a volume of 250,000 shares. The price closed below than the opening price, suggesting bearish sentiment, and the high volume confirms the strength of the move.
In summary, high trading volume can indicate strong market interest and confirm a price trend, while low volume may indicate a lack of conviction among traders.
In summary, an increase in trading volume can often be associated with an increase in buying or selling pressure, which can lead to a corresponding increase in the price of a stock. However, the relationship between trading volume and stock price is complex, and other factors can also impact the price of a stock.
It's important to note, however, that there is no guaranteed relationship between trading volume and stock price. In some cases, high trading volume may not necessarily result in a corresponding increase in the stock price, and vice versa. Other factors, such as macroeconomic trends, company fundamentals, and market sentiment, can also influence stock prices.
Liquidity
Volume is a crucial indicator of liquidity in any market, including the stock market. Liquidity refers to the ability to buy or sell an asset quickly and easily without significantly impacting its price.
When a market has high trading volume, it generally indicates a high level of liquidity. This is because there are many buyers and sellers actively participating in the market, which makes it easier to buy or sell a particular asset at a fair price. High trading volume also tends to result in more efficient price discovery, as prices are more likely to accurately reflect the supply and demand dynamics of the market.
On the other hand, a market with low trading volume may be illiquid, meaning it may be difficult to buy or sell assets quickly without affecting their price. This is because there may not be many buyers or sellers actively participating in the market, which can lead to wider bid-ask spreads and lower liquidity.
In the context of the stock market, liquidity is important for investors because it allows them to enter or exit positions quickly and easily, without impacting the price of the stock. This is particularly important for large institutional investors who need to buy or sell significant amounts of stock without affecting the market.
Breakouts
Volume is a critical indicator for traders looking to identify potential breakouts in the stock market. Breakouts occur when a stock's price breaks through a key level of support or resistance, often indicating a shift in market sentiment and potentially creating a new trend. You can learn more about breakouts here.
One way volume helps in breakouts is by confirming the strength and validity of the breakout. For example, when a stock breaks through a resistance level on high trading volume, it suggests that there is a significant increase in buying pressure, which can help confirm the validity of the breakout. This can help traders make more informed decisions about whether to enter or exit positions.
In addition, volume can also help identify potential false breakouts, which occur when a stock temporarily breaks through a support or resistance level but fails to sustain the momentum and ultimately reverses back. When a breakout occurs on low trading volume, it may suggest that the move is not sustainable and could be a false breakout. In contrast, when a breakout occurs on high trading volume, it is more likely to be a valid breakout and a potential trend reversal.
Finally, volume can also help traders identify potential breakout opportunities before they occur. By monitoring trading volume and identifying patterns of increasing volume, traders can anticipate potential breakout opportunities and position themselves to take advantage of them.
In summary, volume is a critical tool for traders looking to identify potential breakouts in the stock market. By confirming the strength and validity of breakouts, identifying potential false breakouts, and anticipating breakout opportunities, traders can use volume to make more informed trading decisions and potentially achieve greater returns.
Volume Spikes and Breakout
Volume spikes and breakouts are related concepts in technical analysis, as both can indicate potential changes in market sentiment and price movements.
A volume spike is a sudden and significant increase in trading volume compared to its average trading volume over a given period of time. Volume spikes can occur for a variety of reasons, such as news events, earnings releases, or changes in market sentiment. When volume spikes occur, it can be a signal to traders and investors that there is increased interest and activity in the stock, which can lead to potential price movements.
A breakout, on the other hand, occurs when the price of a stock moves outside a defined price range or technical pattern, such as a resistance level or a trendline. A breakout can indicate a potential change in market sentiment and lead to significant price movements in the direction of the breakout.
Volume spikes can be a valuable tool for traders and investors in confirming breakouts and identifying potential trend reversals. When a breakout occurs with a significant increase in trading volume, it can be a strong signal that the breakout is legitimate and that there is strong buying or selling pressure supporting the price movement. Conversely, if a breakout occurs on low trading volume, it may not be a reliable signal and may be more susceptible to a false breakout.
Examples of volume Spikes
A number of volume spikes appear in the above chart. The first occurs on the start of the symmetrical triangle. The second occurs on a breakaway gap from the earlier symmetrical triangle formation. However, the price peaks almost immediately at the top of the volume spike and goes into a consolidation that forms a descending wedge. The fourth volume peak is interesting because it does occur, but after the breakout there was low volume, bolstering Thomas Bulkowski’s, widely known for his research and analysis of chart patterns and technical trading strategies, observations that volume does not necessarily occur on a breakout or confirm a price reversal.
Key takeaways:
There are some general rules that date back to the work of H. M. Gartley in 1935, a prominent technical analyst and trader who developed a method of identifying specific chart patterns in the stock markets.
1. When prices are rising:
3. When a price advance halts with high volume, it is potentially a top.
4. When a price decline halts with high volume, it is potentially a bottom.
In other words, price change on high volume tends to occur in the direction of the trend, and price change on low volume tends to occur on corrective price moves. Higher volume is usually necessary in an advance because it demonstrates active and aggressive interest in owning the stock. However, higher volume is not necessary in a decline; prices can decline because of a lack of interest, and thus potential buyers, in the slock, resulting in relatively light volume.
US Fed Update
ICICIdirect View: We expect a peak in interest rates and possible rate cut by the end of the year as the impact of higher borrowing cost is now evident in most of the economic data points.
Cement Sector: Heathy volume off-take
UltraTech Cement (CMP: Rs 7,505, TP: Rs 9,000, upside: 20%)
ACC Cement (CMP: Rs 1,770, TP: Rs 2,130, upside: 20%)
Ambuja Cements (CMP: Rs 390, TP: Rs 470, Upside: 21%)
Real Estate: Rate hike cycle pause to drive recovery in stock performance
CRAMs Q4 numbers- early cues mixed but outlook promising
Tyre stocks in focus on record gross margin expansion and decline in crude prices
Major Results
HDFC Limited (Target Price – Rs 3,150) – Steady performance; fundamentals to be back in focus
HDFC Ltd reported slower credit off-take at 9.2% YoY, however, individual book (contributing 83% of portfolio) grew at healthy 15.7% YoY. Improvement of ~10 bps in margins at 3.6%, steadier opex at ~10% and lower credit cost at 25 bps led to healthy growth in earnings at 22.2% YoY to Rs 4,425 crore. Asset quality continued to remain resilient with GNPA at 1.18% on the back of 99% collection in individual segment.
As per MSCI, weightage of HDFC Bank (after merger) in global indices is expected to remain largely steady (HDFC Banks weight seen at ~6.5% vs HDFC Ltd current weight of 6.74%) ; contrary to earlier expectation of an increase (which would have led to an inflow of $3 bn). Though unfavourable change in weight, contrary to expectations could have near term impact on the price, clarity on RBIs approval and index inclusion & weight should put fundamentals back in focus and drive stock price from hereon.
Havells India (Target Price – Rs 1,425) - focus on margin recovery
Hidden Gems
Newgen (CMP: Rs 557, TP: Rs 660, Upside: 18%) - Growth and margins likely to sustain
Conclusion
In coming week, expect Nifty to consolidate in 17,900-18,500 zone while midcaps to outperform.
Source: ICICIdirect Research
MACD stands for Moving Average Convergence Divergence, and it is a technical analysis indicator used to identify changes in the momentum, direction, and trend strength of a security or asset. It is essentially an indicator made up of the convergence and divergence of two moving averages.
Developed by Gerald Appel in the late seventies, MACD helps identify the two most important parameters of technical analysis: trend following and momentum.
To put it simply, MACD is a simple yet highly effective and successful momentum indicator, especially when it complements the price action of the markets.
How to calculate the MACD?
The indicator works by comparing two moving averages of the stock's price, one that is calculated over a shorter period of time and another that is calculated over a longer period of time.
Let’s now look at how to calculate the MACD indicator, which is done in three steps:
Here's the formula to calculate the MACD:
But why do we use 12, 26, and 9 as our parameters for these lines? The default settings in all trading software are set as 12, 26, and 9 days. Though the answer to this assumption is best known to Gerald Appel, the MACD's creator, of course, nothing is preventing you from altering the settings. The aforementioned adjustments, however, appear to have become "stuck" with the indicator.
The MACD indicator can be seen in the lower panel of the following chart:
The blue line is the MACD line (the fast line), while the red line is the slow signal line. The bars oscillating around zero is the MACD-histogram.
The idea behind the MACD is simple:
The intensity of a trend is indicated by the distance or size between a shorter and longer-term moving average (MA). Additionally, it indicates the strength or momentum of the trend.
The essential idea is that a shorter-term moving average just accounts for recent price movement, whereas a longer-term moving average accounts for recent price movement as well as older price movement.
If there is a clear separation between these two MAs, it indicates that the recent price action is diverging from the earlier price activity. This shows that the market is either heading upward or downward.
Interpretation
To interpret the MACD indicator, you need to look at its components and how they interact with each other. Here are some guidelines for interpreting the MACD:
Divergence, on the other hand, happens when the MACD indicator and the asset's price move in opposing directions. Divergence from price action suggests that a trend may be waning or even reversing.