The rupee appreciation since April 2007 has not discouraged foreign institutional investors (FIIs) from increasing their exposure in front-line information technology (IT) stocks.
They have increased their holdings in Infosys Technologies, TCS and Wipro between two and four per cent, going by the shareholding data for the quarter ended December 31, 2007.
The FIIs’ stake in Infosys Technologies, for instance, moved up from 32.55 per cent in March 2007 to 32.78 per cent in September 2007 and 33.25 per cent in December 2007.
They added 28.04 lakh shares since March last year as the stock dropped by 38.8 per cent from its high of Rs 2,439.
TCS, the country’s largest software services company, has been on the FII radar despite the stock having lost 31.6 per cent from its 52-week high of Rs 1,350.
The FIIs added 24.94 million shares to their portfolio since March 2007. As a result, their stake in TCS increased from 7.06 per cent in March 2007 to 10.65 per cent as on December 31, 2007.
The stock price of Wipro too declined in line with its peers – down 33.3 per cent from its 52-week high of Rs 690.
Undeterred, FIIs bought 12.41 million shares of Wipro in the last nine months, increasing their exposure from 5.14 per cent to 6.04 per cent.
The major reason behind the stake hike by FIIs has been cheap valuations of front-line IT stocks, in terms of price to earning multiples (P/E).
Though the 30-scrip Sensex is trading at P/E of over 26 based on trailing twelve months (TTM) earnings, Infosys Technologies and TCS are available at a P/E of over 18 times.
Wipro, which will announce its third quarter result tomorrow, is trading at a P/E of over 21.31 times.
Analysts expect the forward earnings of these stocks to be much below their earnings potential going forward.
Infosys Technologies has been trading at P/E of 17.5 times; TCS trading at 16.4 times and Wipro is trading at 17.4 times estimated FY 2008-09 earnings.
There is buying in IT stocks as the North American financial services’ spend is expected to grow at the rate of 4.1 per cent year on year, inspite of a slowdown in 2008. The IT spending by European financial services should remain strong at 5.7 per cent.
Accenture said that it has not been impacted by the changes in IT budgets so far. “ …70 per cent of US companies in the business round table expect pretty significant increases in sales and almost 80 per cent expect their employment to rise”, it reported.
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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