Broking firm ICICIdirect gave following rationale and strategy to go long on HDFC Bank and short on Nifty:
Parameters:
Current price ratio (Nifty/HDFC Bank):7.40
Target: 6.66
Stop loss: 7.77
Rationale:
> The broader markets are witnessing sharp volatile moves amid global uncertainty. However, we expect the Nifty to trade with a positive bias till it is able to hold above 7800. In such a scenario, heavyweights from the private banking space are likely to outperform and lead the recovery process.
> The Bank Nifty remained significantly under pressure in the last couple of months and the October series has started with the highest open interest since May 2014. Noteworthy reduced roll spread also indicates accumulation of short positions in the banking index. With a gradual recovery, we believe these short positions may be covered. In such a scenario, banking heavyweight HDFC Bank is likely to take the lead.
> The recent declines started after the FOMC meet on September 18. While the Nifty is lower from those levels, HDFC Bank has been able to surpass those levels. Currently, the highest Call base of the stock is at the 1100 strike for the October series, which seems to be an immediate target for the stock.
> Leverage in HDFC Bank is one of the lowest in the banking space. The stock has declined amid long liquidation and did not see any major short additions. The current month open interest in the stock is lowest since March 2014. Hence, leverage closure is not expected in the stock even if the broader market declines.
> At the same time, fresh longs may be added in the stock as it is continuously outperforming the market and is just 5% away from its lifetime highs while the Nifty is more than 13% away from its highs. Such an outperformance from the index heavyweight amid continuous FII sell-off is likely to provide alpha from this trade in the near term.
> The price ratio of Nifty/HDFC Bank is continuously going down on the back of continuous outperformance from HDFC Bank. It has moved below the down trend line prevailing since January 2015 and is likely to move much lower. We expect the ratio to move towards 6.6 levels in the days to come, benefiting the strategy.
Strategy: Buy HDFC Bank October Futures in the range of 1,060-1,065 and sell Nifty October Futures in the range of 7,890-7,900.
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