Stocks might overheat and run up to new highs even before B-Day.
The average daily traded volume for the past two months and the average size of each trade are useful indicators for position size. So is the delivery: trade volume ratio.
The first full-year Budget of the National Democratic Alliance (NDA) government is around the corner.
Although the NDA was in charge for almost 11 months of the previous financial year, it could only announce a hasty Budget on July 10. That contained little in the way of change over the Interim Budget of the outgoing United Progressive Alliance (UPA)-II government.
There are massive expectations centred around the event, with high hopes that Jaitley will deliver a workable blueprint for growth.
As such the market is likely to be optimistic. Stocks might overheat and run up to new highs even before B-Day. Whether that level of enthusiasm will be sustained after the speech is another matter.
Two sectors could arouse unusually high levels of interest even in an overheated scenario. One is related to the railways. This is listed companies that could benefit from a "good" Railway Budget.
The Railway Budget is not the finance minister's responsibility of course, and it will be released two days earlier than the main Union Budget.
But there are strong expectations that the Modi Sarkar will try to reform the largest Indian PSU and allow more free flow of FDI as well as more in the way of manufacturing and operational opportunities for listed players.
Good sentiment about the Indian Railways (IR) should affect listed stocks like Texmaco Rail and Engineering, Kalindee Rail Nirman, Nelco, BHEL, Titagarh Wagons, Zicom Electronic Security Systems, Stone India, Container Corporation of India, BEML, Hind Rectifiers, etc. Each of these has some connection with IR and could be a beneficiary.
Several of these stocks are illiquid except when there is a buzz about reforms in the IR.
It is also entirely possible that the IR Budget could be a "Buy on Rumour/Sell on News" affair where disappointed bulls exit immediately after the Railway Budget if the investment opportunities turn out to be less juicy than expected. As such, the trader should buy these "railway stocks" carefully, and be prepared to book profits two weeks down the line.
Don't take large positions in the smaller, less liquid stocks. The average daily traded volume for the past two months and the average size of each trade are useful indicators for position size. So is the delivery: trade volume ratio.
If the pattern mirrors the historical ones, there will be a massive climb in volume on the Rail Budget session itself and there will be a price rise in the two or three preceding sessions. There is usually a fall in volumes (regardless of price trends) a few sessions after the Budget.
The other interesting group is "defence-related" stocks. There are hopes that the Modi Sarkar will follow through on the Make in India rhetoric and allow for higher investment opportunities in Defence related sectors.
These stocks could be beneficiaries and the positive effects of speculation will drive them up until the Union Budget.
Pipavav Defence & Offshore, Astra Microwave Products, Bharat Electronics, Walchandnagar Industries, Larsen & Toubro and BEML could be among the stocks that respond positively to liberalisation or changes in defence procurement policy.
Here, the liquidity is a little better but there also appears to be a general improvement in trading volumes centred around the Budget. Again, traders who do enter these stocks should be careful about not getting stuck if liquidity suddenly eases off.
Overall, these two groups of stocks could do well in the next 10 sessions or so. But view any positions taken in these strictly as short-term trades.
Be prepared to sell off and book profits (or losses) across the entire set if the Budget disappoints. Be prepared to book some profits anyhow.
The author is a technical and equity analyst.