Friday, October 31, 2008

How does a bull market start ?

Readers are going to find the title of this post, amusing. The last post said rather boldly - "Enjoy This Bear Market Rally". Now, today, I am talking about a bull market.

The reason is that every market has an inflection point (A moment of dramatic change), the point at which a market stage ends, and, a new market stage begins.

Now a bull market begins with a lot of base building. When the process of base building leads to a breakout, we say with some certainty that a new bull market has begun. But, is it possible to define the point at which we can say that the bear market has come to an end ?

We will turn to the experts to seek an answer to this question.

William O’Neil, developer of the CANSLIM investing method says:

"All major bull markets started with a reversal and then a follow-through within the next four to ten trading days."

What is a follow through day ? The Follow Through day occurs when the Index records a gain of at least 3% with above average volume.

On Monday, October 27, the Nifty and the Sensex did have a reversal day. The Nifty fell to 2252, then recovered all its intra day losses to close at 2525. Now, the Index needs a follow through day within the next four to ten trading days. With two holidays this week, the fourth trading day falls on Monday, November 3, and the tenth trading day falls on November 11.
If we have a strong follow through day between Nov 4 and Nov 11 with above average volume, the reversal day will be confirmed, and, according to Mr O’Neil, a bull market may well have started.

My Notes: I have not done any research on such inflection points. The base building process is my signal, that will take its own time.

Thursday, October 30, 2008

Enjoy this Bear Market Rally

What do I say this is a bear market rally ?
By looking at the intra day movement of the Dow yesterday (Wednesday, Oct 29)
At 2:30 PM, the Dow was at 8945.
At 3:45 PM, the Dow was at 9320, up 375 points.
At 3:55 PM, the Dow was at 8908, down 412 points in 10 minutes
At 4:00 PM, the Dow closed at 8984.

Is there a method in this madness ? I doubt it. This volatility tells us that the bear market is alive. The end of a bear market is marked by a fall in volatility. Stocks begin to sleep as a base building process begins. This is NOT the case now. While there will always be exceptions, it is wise to follow the most likely scenario (base building).

The rally that we are seeing now, is probably an intermediate up move in a bear market. I call this an intermedaite uptrend since the market is already 20% up from its lows. It is in fact a V shaped rally.

At some point, this up move will face resistance. the two resistance levels are: 2700, and, 3000. You can buy on dips, with the idea of taking profits on any up move. Always keep stop losses.

BLOG WEBSITE

My blog now has a website address: https://sudarshanonline.com/

The earlier blog URL will continue to work.

Wednesday, October 29, 2008

Happy Diwali with a stock market rebound

At 7:27 AM on Wednesday, the Nifty appears likely to open around 2760, which is a good 500 points above Monday's low. There is a lot of volatility which shows in the Nifty movement.

On Friday, October 17, at 3:15 PM when the Nifty was at 2525 approx, I suggested on CNBC, that investors should put in 5% of their investible funds. In the blog, later, I explained that Friday was a 4 standard deviation event - traders should take advantage of such rare moves.

I write this to explain a point - we are traders, therefore the assumption of risk is an integral part of our activities. In a new blog entry, I have explained the difference between loss (destroys capital) and risk (part of trading). You can read it Here .

Let me discuss the impact of the current up move on different classes of market participants:

1. Day traders & Swing Traders. Keep volumes low (due to increased volatility). With the market entering a short term up move, trade only on the long side of the market for the next few sessions. Buy on intra day dips.

2. Position Traders. There is likely to be more upside, so consider buying blue chips. Keep a stop loss which should be wide enough to account for volatility. If the trade moves in your favor, consider moving your stop to breakeven. Buy on a day when the market/stock is in a dip.

3. Investors. These are people who own stocks and are waiting for 'recovery'. Blue chips are available at low prices. Try to switch from momentum stocks to blue chips.

Please understand that we are looking at a short term uptrend. This may turn into an intermediate up move. But, the bear market is still intact. Nothing has changed.

Is 2252 (recorded on Monday) the low of this bear market ?
Maybe. Who can tell ? We have to wait for a few months to find this out.

Happy Diwali

Tuesday, October 28, 2008

Timeline for a Crash

I write a daily newsletter for my subscribers. I have been doing it for many years, now. The letter is written in the evening. What was I writing when the bear market started ? I checked up my archives, and I am giving below the actual advice given on a day to day basis. Here are the excerpts:

Monday, January 7, 2008. Nifty: 6273
We have to go with the flow. Short term traders should continue to seek buying opportunities. Position traders should wait for a dip. (A correction will come, be sure about it !)
However, all good things must come to an end. Therefore, it is fair to assume that even this up move will soon give way to a consolidation or even a dip. But, that has not happened till date. Therefor, short term traders should go with the trend which is up. Investors or position traders can as well wait for some kind of cooling off before making fresh investments.

Friday, January 11, 2008. Nifty: 6218
For short term traders, the Nifty outlook remains bullish. This does not mean that a decline is not coming. It means that traders should continue to look for buying opportunities on dips. The Index is now in a trading range between 6100 and 6350. If the breakout is above 6350, expect a quick move to 6500 or even 6600. A close below 6100 will be a suggestion to avoid positions in the market.

Tuesday, January 15, 2008. Nifty: 6061
A narrow range fell apart today, with the Nifty seeking lower levels. Momentum is no longer favoring the bulls. Traders should stay away, while Investors are still waiting for a dip. They should hold their patience.
The short term trend has changed to down. This happened today when the Nifty closed below 6100 giving a trading range breakdown.
The intermediate trend is UP. This trend changes to down, if and when the Nifty closes below 5700.

Wednesday, January 16, 2008. Nifty: 5951
The short term trend has changed to down. This happened when the Nifty closed below 6100.
The intermediate trend is UP. This trend changes to down, if and when the Nifty closes below 5800. (This has changed from 5700)

Friday, Janaury 18, 2008. Nifty: 5701
The Short term trend is down. This trend changed to down when the Nifty fell below its trading range support at 6100. This is the trend that should be followed by traders.
The Intermediate trend changed to Down on Friday. This happened when the Nifty fell below 5800. This is the trend that investors should be tracking. In a down trend, avoid making new commitments. Investors should wait patiently for this decline to be over.

Strong support for the Nifty comes in the 5500 area. Think of this as a support zone rather than a number. This support should hold. But, if this zone does not hold, then we are looking at a bear market, that may take us down all the way to 4500. This is a very unlikely scenario. But, traders & investors should be aware of the possibilities.

--------------------------------------------------
The Rest, as they say, is History.

Monday, October 27, 2008

Monday Morning - the day after

My Blog Entry 'This Bear Market is Different' evoked a number of thoughtful comments. You can read the entry and the comments Here .

I am pleased to say that the comments have caught the market scenario better than my own thoughts.

Now, on Friday, the Nifty fell by 14% - (four standard deviation move) - this is a rare event which should happen once in a few hundred years. But financial markets do show a lot of variation from the laws of probability - hence, events that should not take place, do take place often.

We have no control over the markets. But, we can define our own response. What should investor response be ?

This is how I thought on Friday, 3:15 PM.
We are looking at a rare market movement - a 14% decline which is coming after a significant decline has cut the Nifty by 60%. The only example I could think of quickly was the 1987 crash in the Dow. It fell 23% on 'black monday'. The next day, Tuesday, the Dow opened lower but rallied soon. The Dow remained in a trading range for over 12 months subsequent to the crash, but did not fall below the lows made on Tuesday.

The Nifty may fall more, I am not making a call on the lows of the bear market. Yet, there appears to be probability that the decline may result in a bounce. I do not suggest ever to catch to buy in a falling market. Yet, a once in two decade event calls for exceptions. Therefore, my suggestion to investors to invest 5% of their available funds in the market today.

Monday Morning

My weekend reading suggests that there is much more pain ahead. But the markets have a mind of their own. After a large range expansion (RE Bar) it is wise to trade lesser volumes and expect choppy markets.

Saturday, October 25, 2008

This Bear Market is Different

In the good old days, analysts came on CNBC and said "this bull market will last forever, this time it is different". I was always afraid of this bullish explanation - "it is different." It never was different - greed was in control everytime there were bull market excesses.

Now, ten weeks into the relentless selling that is going on, I sometimes think - "this bear market is different".

There are no rallies, no pullbacks, just selling. The Nikkei falls 11% because Sony disappoints. India falls 14% because the Nikkei falls. Europe falls because Asia falls, S&P futures are locked in a limit on Globex, then surprise ! - the Dow and S&P lose just 4% each, while the rest of the world loses 8% to 14%.
On Friday, so called 'Black Friday' - I thought, the Nifty is at 2500, very close to a strong support base between 1800 and 2500. On CNBC, I said at 3:15 PM, - "those with spare money not required for next five years may like to invest 5 percent in the market"

First, a word of explanation. I practise very conservative asset allocation. From July 2007 onwards, my allocation for equities was cut slowly till it became 30% of total portfolio. Therefore, I do feel financial pain, but the pain is probably manageable.

Now about this bear market. A 400 point decline (Nifty not Sensex) appears to be 'irrational pessimism.' That was my first reaction.

After a restless night, I am not so sure.

What is 'Deleveraging' ? How will the world wide credit crisis affect us ? How much impact will a world wide recession have on India ? What happens if 'hot money' continues to flee ?

Finally, let us face it, the middle class investor is devastated. Rs 100/- has become Rs 20/-. The first time investor has lost all her capital, therefore, will not re-enter this market for the next five years.

Then, there are fundamental changes in world economic and social order. Nationalisation is again in favor. Croney capitalism (crooked capitalists in alliance with the powerful!) has caused worldwide havoc. How much damage has been done ? Will a repair job swing the other way - too much control ?

Now for the good part. If you note, almost all the issues I have outlined relate to financial engineering. This bull market was created by financials, and, the bear market will see the end of financial services as we know them. That's fine. Maybe, the economic order is resilent, manufacturing and services are fine, and will grow once the system is purged of these horrible financial wizards.

So, what is the answer ?
Er.. what was the question ?

The Question could be: when will this bear market be over ? The answer should be: The Nifty is now at levels where it will find significant chart support. There is a lot of support between 1800 and 2500. This means that we may be see the end of this leg of the bear market between 1800 and 2500. This process may take its own time, but there will be many opportunities for investors in the near future.

Thursday, October 23, 2008

Naughty Nifty, falls again

I have seen and traded in two bear markets - 1992 and 2000. But the last 10 weeks have been indeed remarkable.
Change of subject: have you read about the Battle of Britain ? This was in World War 2, when the German Air Force bombed London 24 hours a day, for many months. How did the Londoners feel ?
Like traders facing waves after waves of selling. The Nifty has not seen a decent rally for the past many weeks. Downside momentum is so strong, the fallen market does not have the strength to raise its head, leave aside stand up.

Is Bad news Good ?

Conventional wisdom says that the end of a bear market is visible when the market is pounded by bad news but it fails to go down.
The wise did not tell us the inference when the market is pounded by bad news and it goes down. I suspect this is a sign that the bear market is alive and kicking.

Understanding Momentum
In the present scenario, support and resistance on the Nifty have no relevance. If an FII is selling, do they say to themselves - "I should not sell here because the Nifty has support " ? No. Chances are they shout loudly on the phone - "sell quickly and get out!".
The down momentum must stop before traders can start thinking about a short term or intermediate up trend. These are not normal, cyclical markets.

And, yet a final low will be made.
Since we can never call the lowest point of the down move, it is wise to wait till (a) down mometum ends, (b) consolidation begins, and, (c) there is a test of the lows made. If this requires you to buy 20% higher, so be it.

Morning After the Dow is minus 500

I write this at 6:58 AM, with the Nikkei down by 626 points at 8048. Anyone who saw the Nikkei at 10,000 (falling from 18,000) may have thought : The Nikkei has fallen so much. How much lower can it go ? The answer is for us to see. The Nikkei has fallen 20% in the last few days from 10,000 to 8000.

The same reasoning should be applied to the Nifty. The Singapore SGX Nifty should open a 100 points lower, somewhere around 2950. So, we should ask ourselves: how low can it get for the Nifty ? The Nifty could reach 2000. After all, we have seen the index fall 1000 points in the last 25 days. So, what is another 1000 points in the next few months ?

How about some more doomsday predictions. Below 2000, support comes in at 1600, then 1200. Can the Nifty fall to 1200 as the world enters the 'mother of all bear markets' ?

Quick update, at 7:04 I check the SGX Nifty. It shows 2880, so my estimate of 2950 was optimistic.

Now, momentum is clearly down, but the world is not coming to an end.
Markets can become irrational for long periods of time. We see this happen every time during the last phases of the bull market. Surely, the bear market will also see irrational moves to the downside. I think, this may be happeneing, now, in many countries including India.

The issue with bear markets is what happens after these irrational moves. The market usually begins a base building pattern which lasts for several months. Therefore, much as I like to go out and buy, these 'bargains' may come at even lower prices. In any case, even if a low is being made now, there will be a period of consolidation which will be the right time to buy. No hurry.

For day traders, go with momentum, do not try to buy.

Wednesday, October 22, 2008

Long Wait for the Morning

So much for the rally! After a few days of relative calm, suddenly, the Asian markets got the jitters. This led to steep declines in the Nikkei, then to the Asian Contagion, finally to new lows in India.
The bear market is alive and kicking. We expected that there will be some kind of a relief rally. There was a small rally, but it was just a couple of days.
The Nifty fell again, by 170 points. This is a lot since the Nifty has already halved itself. Unfortunately, it does appear that things will get worse before they get better.
The positive divergence visible on the daily chart has not been cancelled yet. But momentum is far more powerful than divergence. And, momentum is clearly on the downside.

Weekly Nifty

The RSI on the weekly Nifty is currently at 22.5 This is the lowest since 2002. In the period 2001 - 2002 the RSI fell below 25. This was a sign of weakness. It took the market two years of sideways movement before the new bull market started.
It is difficult to say how much time this will take. But, the bear market is not going to end quickly, that much seems evident.

Will Fibonacci support hold ?

After 3800 broke down, I have suggested that there is no support in the Nifty till 2000. This does not mean that the Nifty will touch 2000, it simply suggests that technical points are not available to stop this decline. the market can stop whenever it wants.

A question is: The 61% fibonacci retracement comes in at 2900. Can the Nifty stop its decline at this level ? The asnwer is: Fib support is relevant only if prices stop falling, momentum reverses to favor an upside. Until this happens, Fib support is only imaginary. The difference between visible support on charts (like 2000) and Fib support is : visible support are levels that the index has seen, while Fib support exists only in the chartist's imagination.

UK wealth management firm goes bankrupt

Careful with your money, please. This theme has been covered in my blog many times. Avoid brokers who trade for themselves, indulge in a host of other activities beyond broking. Stay with the boutique broker - the broker who knows you and you have his cell number. In any case, do not give any money to anyone for investing, 'wealth management' or whatever.(this is common sense but so many break this simple rule).

Read the bankruptcy here

This is what the web site says:

Please be advised that Blair Nimmo of KPMG LLP was appointed Provisional Liquidator of Echelon Wealth Management Limited on 17 October 2008.
The company has ceased to trade.
The Provisional Liquidator will be in contact shortly with all known creditors and in the mean time would ask that all correspondence be sent to:
Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2EG.

Tuesday, October 21, 2008

A trading range may be developing

As the Nifty closes higher, there is some reason to expect that 3050 may have become a short term low. Yet, the risk of a further decline is also high. The Index closed at 3235, just 185 points above the low point of 3050. Given the enormous volatility we have seen, it is possible for the Nifty to fall and close below 3050, in just one day. Traders should keep proper stops for all trades. They should also plan to take profits on any range expansion in their favor.

Having a view on the market helps the trader to plan and execute her trades systematically. One view is to assume that the market may go up to touch 3300 or even 3500 resistance. Traders holding this view should go long on dips, keep a protective stop below 3050. They should also take partial / full profits on any surge in their favor. Traders viewing the rally as a shorting opportunity can sell at current levels with 3300 as a stop loss.

The Nifty is in some kind of a trading range between 3300 and 3050. It is thus possible to have a long or short strategy for traders. I do feel that it is too early to suggest that the bear market is over. Just two days ago, the Nifty made 27 month lows. We need weeks / months of base building before we can call the end of the bear market.

Probably a short term low is in place

The good news is that the market may have seen at least a short term low on Friday, Ocotber 17. If this analysis is correct, then over the next few days (or weeks!) money will be made on the long side of the market, by buying. If this analysis turns out to be wrong, a small loss will be made as trades are stopped out.

It does appear that Indian markets may continue to underperform the U.S. market. The reason is : FII's. With the U.S. Dollar getting stronger, U.S. markets roaring upwards, it makes sense to sell in India and invest in the USA. Sense for the FII's, that is.

This is a factor over which we have no control. What this means is there may be sudden bouts of selling coming in on rallies. Therefore, (a) Traders should take profits on Range Expansion - big move in their favor, and, (b) do not trade on both sides, meaning long and short both. Take a view and trade only on one side. This will ensure that they do not get caught in volatility.

Have Fun!

Monday, October 20, 2008

How Low is Low ?

Short term trading is about momentum. In fact, even investing is a lot about long term momentum, but we will leave that issue for now.

If we assume that the Nifty is ready for a bounce (it is!), what are the resistance levels at which it can stop ?
All numbers discussed here are for Nifty October Futures. The first, most obvious resistance is at 3135 - 3155 zone. This is the zone that provided support on Wednesday, Oct 16. if this zone is taken out (meaning the Nifty continues higher), A-B-C targets for the Nifty are at 3208, 3306 and 3463.

The easiest way to catch this up move, is to use a trend indicator on an intra day chart. Keep the trend definition a bit wide to allow for the increased voaltility. For example, instead of using a 13 period average, use 34 period. If the futures approach any of the suggested resistance levels, switch over to the smaller period average to ensure tighter stops.

If our analysis is wrong, and, the Nifty continues to move down, then what ? Well, there is no support for the Nifty - a statement I have made many times. In case of a decline, traders should follow intra day charts to go with the downside trend. A change in trend will be a signal to exit.

Please remember that the Nifty cash index made 27 month lows on Friday October 18. This is NOT bullish. Yet, all markets will change their trend. If you are a short term trader, catch this change of trend with charts. If you wish to take positions, then the signals have not come in yet.

Sunday, October 19, 2008

A Difference in Approach

First, let me tell you, I love Chandigarh. Delhi is my favorite city, but Chandigarh and Jaipur come next.

I made presentations at two CNBC Investor Camps in the last 25 days. Late September was Chandigarh, while yesterday, October 18 was at Kanpur.

I may well have formed an incorrect assessment. But for what it’s worth, here it is: the attendees in Chandiagrh were visibly enjoying a higher standard of living. It doesn’t take a genius to work that out. Chandigarh is the king of cities, while Kanpur is a poor cousin. But there was also a great difference to the attitude to learning.

In Chandigarh, participants were searching for an approach that will 'revive' their portfolios back to the original values. They wanted an easy answer that would not involve a commitment of time, money and effort. Their body language said "We are high net worth individuals. How dare the market do this to us. You people from CNBC should quickly get this sorted out so that we can go back to our original net worth. It is our right to speculate and not lose."

The Kanpur crowd were very different:
They were keen to learn.
Their questions were on methods and what they could do to improve their results.

This is only part of the story. We have a large client base in Chandigarh. But none of our clients were present in the Chandigarh Camp. Thus, it is likely that professional traders did not attend the camp.

Please understand that I am not commenting on the poeple living in these cities. The idea is to highlight two different approaches:
First way: I know it all. The market is wrong. All of you should quickly set the market right.
Second way: I will learn the business of trading. I will do whatever it takes to succeed. The learning process may be painful but in the long run it will lead to investment / trading success.

Friday, October 17, 2008

What is going on ? It is a bear market.

So much for the rally. After a higher open, the gains lasted for maybe two hours (positive territory). Then, the Nifty was back to business, falling, faling .....

The Bear Market seems to be following the pattern of the earlier bull market. In the good old days, the bull market aw strong upside moentum. Corrections in the market were mainly intra day, running corrections lasting just a few hours. Now the shoe is on the other side. Rallies last just a few hours.

Markets tend to overshoot. Thus, we had bull market excesses. Now, maybe we will see bear market excesses. Bull market excesses are identified by euphoria - everybody is in the market, everyone is an expert, certainly better than Sudarshan. Bear market excesses are identified by disinterest. People simply turn away from the market. This lays the foundation of the next bull market. On the charts, disinterest takes the shape of a consolidation / trading range.

In India, markets keep on falling. New lows are being made. There is no sign of disinterest or trading range.
However, even as the bar market continues, there will be rallies. Nifty seems to be ready for one such rally. There are divergences on many charts, including the Nifty. I wrote this yeterday, then the Nifty fell 195 points today. But, the technical patterns have not been cancelled. Therefore, traders may like to take buying signals on intra day charts. Keep proper stops. if the signal does not work out, you are stopped out for small losses. When the short term trend does change to up, you should make some money.

Thursday, October 16, 2008

NEW LOWS AGAIN, Nifty closes at lowest in 26 months

On 10 August 2006, the Nifty closed at 3260. Since then, the Index has never closed below 3269.30 - today's close.
Now, new lows are not bullish. yet, we should remember this saying: "The Trend is your friend until it comes to an end".
Calling the low or high of any move is dangerous. We will not try to do this. But, the daily chart for the Nifty does have some interesting possibilities.
The 14 RSI shows signs of possible divergence. I say 'possible' since the down move is not over yet, therefore the RSI may move down cancelling the possibility of a divergence. As of today, the Nifty has made lwoer lows, but the RSI has not yet made a lower low. It can easily do so, but it has not yet done this.

How do you trade a possible divergence ?
Well, this unconfirmed divergence is NOT a buy signal. It is an indication of a possible bottoming out process. The first signs of bottoming out will come if the Nifty closes above today's high - above 3330 over the next few days. If and when that happens, buying is possible with a stop below the low of the down move.

A Trading Range
Hidden inside the volatility is a small trading range for the Nifty. With support at 3280 and resistance at 3500, the range is above today's close. If the Nifty is going through a base building process, then we can expect the Index to move up inside this trading range, looking for a rally to 3500.

What happens if the market continues to move down ?
Well, it is business as usual. We should see the Nifty sliding down, making these new lows. So what else is new ?

How low is Low ?
Briefly, lower than you can imagine. So, avoid long term buying. Buy only blue chips. Do not run after momentum stocks of the previous bull market. the next bull run will find its own favorites.

News from Blogs that I read

Upsetting news from China

Tom Albanese, Rio Tinto’s chief executive, on Wednesday warned about the health of China and said the slowdown in one of the world’s fastest growing economies had led the mining company to revise its capital spending plans. Mr Albanese said there had been a marked reduction in Chinese commodity demand from the overheated levels of 2007 and added that the “vast majority of Chinese aluminium producers are now making operating losses.”



Hobson's Choice

When the world is going into a recession, should we not sell the US Dollar ? The answer seems to be: Not really. The Euro zone may see a worse recession as compared to the US of A. Therefore, the Euro may fall against the dolalr. So, buy the dollar against the Euro. Strange are the ways of the financial markets.

Wednesday, October 15, 2008

Big decline Again, Nifty continues in bear grip

The trend remains down. Downside momentum is so strong that even one day of up move is not being sustained. After the Nifty moved up on Monday, the next day saw a decline, and the day after - today has seen the Nifty fall by 190 points. That's a lot!

The 'good news' for bulls is the lowering of the resistance threshold. From 4000, thanks to new focus points on the Nifty chart, resistance has come down to 3600. This means, buying is suggested if the Nifty were to close above 3600.

What about the downside ?
There is minor support at 3200 - the lows made on Friday. If the Nifty falls on Thursday, as it well might, then traders should watch for 3200 support. If support holds, then there may be a 'Spring' - a buying opportunity. There are many 'IF's.
If support does not hold, we can expect a slide to 3000, or even 2600, slowly.

Buying is difficult in a Bear market.This seems reasonable, since the trend is down.

Tuesday, October 14, 2008

Nifty fails to rally - Some disappointment

First, a thank you to Indian bureaucracy.
You saved this country from sub-prime or similar disasters. By remaining convervative in your approach, insisting on a proper regulatory environment, the Reserve Bank has saved this country from the greed of dalal street / investment bankers.

Now for the Market.
The Nifty closed at 3518.65, just 20 points above yesterday's close. This was a setback on a day when most world markets were roaring up. The next few days will tell us if the Nifty is going to underperform or today was just an exception.

For the Nifty, the nearest pivot high is at 4000. An intermediate up trend is possible if the Nifty were to close above 4000. With time, these levels may change. Closer to current market price, we have resistance at 3600. A short term up move will be signalled if the Nifty were to close above 3600.

While the Nifty remains below 3600, it will be locked in a range beetween 3250 and 3600. This means support should come in at the lower end of this range. It also suggests that a breakout above 3600 should see a rally to 3950 - 4000.

Is there a selling opportunity ? Yes, below today's low - 3495, a high risk sell exists with a stop above 3600. The area between 3495 and 3600 is a no trade zone.

Monday, October 13, 2008

Relief rally comes as a relief

Governments join hands to save banks. The net result is : The financial services sector is effectively nationalised.

How things change! Just a new months ago, privatization was the way to go. Now, starting from the USA, leading to Uk, Belgium, Iceland, Germany and more, countries are nationalising their banking companies.

I think this is all for the good. Financial Services offer immense opportunities for manipulation & fulfillment of greed. The value addition by these companies is negligible. Compare for example an "Investment bank" (brokers in India who also provide other services) which wheels and deals and Tata Steel which makes steel. Tata Steel adds value for every ton of steel it makes. It provides employment, pays taxes, fulfills its role as a contributor to society. The Investment bank makes money by manipulation & insider trading, it employs very few people who are paid absurd salaries and bonuses. What value addition does it provide ?

Then, the long term impact of the nationalisation will be beneficial. But, this will certainly hurt shareholders of the nationalised entities. As an example, the Royal bank of Scotland (RBS) was nationalised today in the UK. Its share price fell 6.56% today while the FTSE was up by almost 5%. (The RBS has already fallen 80% from its highs!). Most other banks / housing societies also saw similar decline in equity prices.

PSU BANKS
For this reason, it is wise to invest mainly in PSU Banks.

Here is a suggested Portfolio for investors wishing to invest now.

Saturday, October 11, 2008

Manage your Risk, let the market decide its low point

From Behind the Headlines comes advice that perfectly echoes what I think & say.

"And shame on everyone who thinks they know where the market will bottom, when the market will bottom and how it will bottom. Nobody knows, not even technical analysts.

Nobody knows what the market will do. But what the good technicians can do better than anyone else is assess market risk and market reward and take a position - figuratively or literally.

And in today's market, Larry Williams said it best that the best risk control is in position size.

If it is wrong, they stop out for a limited loss. If it is right, they add to the winner and ride it until it no longer has a good risk/reward profile. "

The Kirk report Says:
While all of us would very much like to return to business as usual, unfortunately there's little reason to believe that will happen anytime soon. The best we can do is manage our risk, stay opportunistic, keep our emotions in control, and keep our eyes open for signs that the worst is really behind us. As long as you do that, you'll be fine no matter what comes our way next.

Friday, October 10, 2008

Markets Crash WorldWide

As India wakes up to start a new day of trading, markets have crashed world over. The Dow closed at 8579, down 678. The Nikkei is down 974 points at 8183.

THIS IS A FINANCIAL CRISIS

1. Volatility will be extremely high. Do not trade. Wise traders stay away in such situations.
2. Do NOT try to catch falling knives.
3. Cash is King. Remember, a fool and his money are soon parted.

Thursday, October 9, 2008

Careful, 2 + 2 is not equal to 5

A worrying news item on Bloomberg can be read here. A chinese steel company cannot pay its short term working capital loans. It has suspended production, and, "The company has been having financing problems for a while.'' This by itself is not unusual. What is significant is the company's "net profit more than tripled to 230.4 million yuan in the second quarter from a year earlier". Both items are contradictory. How can a company with large increases in net profit fall into a cash crisis soon after. Unless... the profit numbers were fudged in some way ? Or, the liquidity crisis is much larger than we imagine ? Either ways this is a worry.

Cash is King.

Peter Drucker the father of modern management had a simple rule to identify well managed companies. He wrote - "Good companies pay their bills in time. "

Relief Rally Ahead !

A sharply oversold market is now ready for a bounce. For India, Infosys results due on Friday morning may set the undertone for the next few days. The market is ready to go up on the slightest piece of good news. If Infosys guidance is pessimistic, we may react on the downside. But, the smallest hint of "we are going to do well" should see a decent rally in the stock market. The Nifty should open higher, and a rally to 3750 or 3800 seems easy and likely (assuming Infosys does not disappoint).
On the downside, I expect support to come in at 3500 (almost the point at which the Nifty closed on Wednesday).

Sectors for short term trading
If Infosys does not disappoint, then large cap stocks in the IT sector should be considered for swing trades. There is a buy on dips opportunity. All trades are short term.
PSU's like NTPC, National Alum, ONGC, BHEL & State Bank come in the list of potential swing trades. I do not consider momentum stocks for trading in the current environment since they represent high risk.
HDFC Bank, CIPLA, HDFC, Zee, Grasim in the private sector represents opportunity.

Insurance for Bank Deposits

I have a blog entry on insurance available on bank deposits. Read it here.

Wednesday, October 8, 2008

Nationalisation of banks in the UK

The wheel has turned full circle. After the 1980's effectively de-regulated the financial services industry in the U.K., regulation is back in fashion. Not just regulation, but public ownership of banks has become a reality. The largest banks have been nationalised, or part nationalised, if you prefer. Part, because the shares will still be traded on the stock exchanges. The Govt will probably be the largest owner, but not the only owner.

The excesses of greed driven capitalism have to be corrected. If this is not done now, the risk takers will cause another crisis soon enough. The Financial times writes "History suggests that corporate contrition only lasts until the next generation – too young to feel the pain of the last shake-out – takes control. That gives government and regulators 10 years or less to shore up the system against counter revolution (greed coming back)."

Lessons for the Indian market participants:

On TV, you hear our own investment bankers (brokers & fund managers) demand "reforms". These so called 'reforms' are nothing but desire for more and more from the govt by giving less and less to society. I think the clamour for 'reforms' will die out, since no govt will give in to the demand of these investment bankers who almost destroyed the world economy.
Then, makets will now value companies on the basis of their performance, rather than on their ability to extract concessions from the govt. Financial services in the private sector is now an extinct species. Banking & Insurance - will be the subject of govt control and maybe ownership.

My suggestion is to focus on PSU banks, institutions & PSU's in general.

Fed fires last arrow - Market not impressed

A concerted rate cut was probably the last of the market boosting measures by the U.S. fed. This has happened. Yet, the market is not impressed, with the Dow down 190 points, as I write.

It soemtimes appears that the top government officials do not understand the economic environment. What is the purpose of the half percent rate cut , from 2 to 1.5 ? Was the bear market about a half percent cut ? Did the Dow fall 30% because the market wanted the fed to cut rates by half percent ? No. There is a large conomic crisis engulfing the Western world. A minor rate cut will not solve the crisis.
Bloomberg reports: "In more typical market conditions, stocks rally when a Fed chief indicates he'll reduce rates. Now, Bernanke's message may have less power because traders already anticipated for weeks that policy makers would need to make that move, and because of rising concern even rate cuts may do little to immediately help banks scrambling to reduce their vulnerability to loan losses."

This bear market will not end by one grand gesture. Mr Bernanke waves a wand and the bear market ends - this scenario is as unlikely as the Nifty touching 6500 in two months. One of the important lessons is to wait patiently before committing your money to this market.

Tuesday, October 7, 2008

Is this an economic crisis ?

Fortunately, for India, this is not a crisis, just a fallout from a crisis affecting the western world. For Europe and America, it is a crisis. At voxeu.org, a paper on the crisis says:

The episodes of credit crunches and housing busts are often long and deep. For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tend to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half. (Italics mine)

There is more. "The unique nature of the current financial crisis—combining a house price bust, a credit crunch, and an equity price bust—unlike any other one the US has experienced before, makes it difficult to assess its implications for the real economy."

My Notes: The bear market will not end abruptly. Bull markets start from long bases. This takes time. Once the volatility comes down, there should be many opportunities for traders.

Will regulators do their job ?

In the USA, Bankers are now a discredited group, reports Bloomberg, - "Bankers Might Need 50 Years to Regain Credibility". The bankers referred to, are really investment bankers, similar to brokers in India. "The real bloodshed will occur in the weeks and months ahead. Nobody knows what the real outcome of this disaster will be, although it's very likely that the financial industry will be crushed. "

American regulators will no longer be pushed about by financial wizards. (They are not really wizards, are they ? Just overpaid ****!) On the contrary, "we are going to see newly empowered regulators go on the rampage. The taxpayers will demand nothing less. ".

What about India ? I have written earlier about proprietary trading in derivatives by some brokerages. This is an activity that should be stopped forthwith, by SEBI, before a catastrophe happens. Why should a brokerage use public money - your money to trade privately ? Brokerages are allowed tax benefits, access to institutional finance and entry into stock exchanges for one purpose - to serve the clients. Trading in derivatives is not part of their charter. It is a black hole which may well be the cause of manipulation of the markets. It serves no economic purpose.

UBS - the large Swiss bank has just announced that it will stop all proprietary trading. If UBS feels this activity has large risks, what do you think could happen in India ? In difficult times, the wise regulator plugs all leaks, prevents any possibility of misuse.

The Next Bull Market will be Different

We are in a bear market, with prices falling rapidly. Yet, we must remember that stock prices will never become zero. There is intrinsic value in many stocks. Many of these companies create value, earn money, grow. Unfortunately, there is a disconnect between stock market prices and business values. A business can prosper while the market can languish. Also, each new bull market brings out a new set of favorites.

It is possible that the markets may stop falling rapidly. The next decline may be slower. World over, markets can go into a trading range that may last for many years. History tells us that bear markets do not vanish in a minute.

In 1985 a bull market started in India, after the first Rajiv Gandhi - V P Singh budget cut income tax to 50% (from 66%). Euphoria took over the market. After one year, the market topped out in 1986. The bear move that started in 1986 bottomed out in 1988. The 1988 - 1992 bull market saw the sensex go up from 400 to 4500, a gain of almost 1000% in five years.

Now comes the interesting part. This extraordinary bull market peaked out in 1992. The market then went into a trading range for 10 years, finally emerging in 2004 to make new highs.

The 2003 - 2008 bull market saw the Sensex go up from 2800 in 2003 to 21200 in 2008, a gain of 657% in four and half years.

After such stunning bull moves, the market needs rest. The excesses of the bull market have to be exorcised.

As the market will bottom out, I am looking at a new bull market based on these themes discussed below. This is a rough idea, it will probably change many times.

1. Greed Kills.

Capitalism turns into killing fields when Greed overcomes human nature. This happens when financial managers are given control over the country. Productive efforts are ignored by financial wizards who only understand the language of money.
The last few years saw this greed in full flow. The wheel is likely to turn full circle. Businesses are being nationalized in America and Europe. The process of privatisation will virtually end. The reverse (nationalisation) will begin.

Suggestion: Avoid companies where greed may overcome the management. Avoid private sector financial services companies, private sector banks. Invest in public sector banks, semi public sector financial institutions (like IDBI ).

2. Technology changes the nature of business.

I feel that there will be a big shakeout in brokerages. The business of broking as we know it will vanish. As an example, the NSE has introduced software which allows retail clients to directly log into the NSE Servers and trade. Soon enough, middle level full services brokers will become redundant. Large broker bankers (ICICI, HDFC etc..) or small boutique brokerages will survive.
Do not invest in brokerage equities.

There will be companies where technology will bring benefits. These will be manufacturing companies. For the past few years, services (mainly financial services) have led the market. Now, technologically drivern manufacturers may lead. This is all for the better, since the manufacturers actually add value.
The underlying theme is: which companies take advantage of technology ? Two beaten down metal stocks, Tata Steel & Sterlite come to mind. So does Maruti. There will be many more.

3. Natural Resources
Natural resources are in short supply. Companies that own such resources should prosper, no matter what the short term outlook may be. Examples: ONGC, Cairn, Neyvelli, Sesa Goa, GMDC.

4. Public Sector is IN.
One advantage of the public sector is that it cannot be nationalised. (sorry about that!). A sea change has taken place in the structure of these businesses. They are probably better managed than most private sector units.

Monday, October 6, 2008

World Wide Crisis of Confidence

Markets around the world are under heavy selling pressure. The Dow falls through the 10k mark. Two of the BRIC countries, Russia and Brazil have seen trading halts today, when stock prices fell 10% or more.

Bloomberg reports: The credit crisis that pushed money- market rates to records last week will deepen a U.S. recession and extend it into next year, according to a survey by the National Association for Business Economics.

Many of us expected more pain in this bear market. That pain has suddenly come upon us. Below 3800, I had suggested that the Nifty may go into a free fall. There is no support before 2000. I do not suggest that the Nifty will reach 2000. But, the absence of support means there is no technical level to follow. The Nifty will stop wherever it wants to. (All of this is old hat, because I have written about this many times earlier. This is a repeat). Wait patiently for this decline to stop. There is no hurry to buy. Do not catch falling knives.

Everbody to blame but me
Mr Richard Fuld, CEO of Lehman brothers, said the investment bank was felled by rumors, out-of-date rules and slow reactions by regulators that fueled a ``storm of fear'' on Wall Street. Mr Fuld was giving testimony to a U.S. House of representatives committee. The committee chairman said that ``Mr. Fuld takes no responsibility for the collapse of Lehman.''

I am not surprised. Brokers and Fund managers who call themselves "Investment Bankers" believe that they are one step above God. They have managed to almost destroy the USA and Europe - an achievement not many can claim.

For us, the moral of the story is: do your own thing. Listen to everyone but take your own decisions.

Prices fall in a bear market

The Nifty has fallen to 3600 today. In January of this year, the Index was at 6350. That's a loss of 2750 points - 43%. By all standards, a 43% decline in prices represents a severe bear market.

All of this is History. The fact is: share prices have come down. Most mid cap / small cap stocks have fallen more than 43%. You know it if you own some of them.

There is no purpose in crying over spilt milk. We should look ahead.

If you own shares:

Switch from momentum stocks to blue chips. Try to buy marketable (futures lot size) lots. The advantage in owning marketable lots is your ability to sell calls against these shares. Okay, Sell calls against the shares that you own. This will allow you to collect some 'rent' on your shares. While the amount may not be significant now, over a period of time, the options premium collected every month will slowly become a significant amount, reducing the cost of youe shares.

If you do not own shares:

Keep 3600 as a benchmark. Invest 10% of your capital at this level. Every time the Nifty goes down by 150 points (from the latest highs recorded) , invest 10% more. on every rally of 100 points, sell 5%. After a few years, you will possess a worhtwhile portfolio at low cost. This system will work because of one assumption - that the market will remain sideways for a few years.

Sunday, October 5, 2008

Stocks Poised for a big Move

PFC (Power Finance), State Bank and PNB futures are suggesting a big move is coming in their prices. The direction of the move is unknown, it could be up or it could be down.

Time is also an unknown factor. The increase in volatility could take place tomorrow, or over the next few days.

Then, when will such a breakout take place? Soon, but this could mean a day or many days. What is the direction of the breakout ? It could be up or down.

Yet, the fact that a significant move could take place is useful, tradeable information.

I track such futures on intra day charts. I also set some trend parameters which help me to identify a new trend. When the chart suggests a new trend, I will take position based on the intra day move, which requires a tighter stop. Often, such trades work well.

There is risk of significant loss in futures trading.

Money for the rich, no money for million lives

United nation statistics suggest that an investment of Euro 13 billion can save the lives of 5,00,000 women every year, who die during child birth.

The Gaurdian has the details.

The Belgian govt paid Euro 17 billion to save Fortis - a financial securities firm. The USA will pay $700 billion to save the rich greedy brokers.

Yet, half a million mothers can be saved, year after year for much much less.

Is He sleeping or is He waiting ?

Must Watch this Sunday

Here is a 9 minute video that you should watch. I laughed for all the nine minutes.
How Markets Really Work

In 'Practical technical Analysis', I have a new topic: Trading big news events

Saturday, October 4, 2008

Q2 results : Is there a delay ?

When companies delay the publication of Quarterly results, investors should be worried. Why the delay ? Here are some companies who have announced the dates. Watch out for the late comers.
Brokerages:
MOTILAL OSWAL FINANCIAL SERVICES LIMITED 10-OCT-2008
GEOJIT FINANCIAL SERVICES LIMITED 11-OCT-2008
Media:
NEW DELHI TELEVISION LIMITED 14-OCT-2008
IT:
INFOSYS 10-OCT-2008
HCL TECHNOLOGIES LTD 15-OCT-2008
MPHASIS LIMITED 16-OCT-2008
SATYAM 17-OCT-2008
Banks:
AXIS BANK LIMITED 13-OCT-2008

Where has technical analysis gone ?

Almost all the email / comments I receive in this blog have been appreciative. Now, like a favorite student admonished by the teacher, I am receiving comments that I seem to have strayed from the path of technical analysis.
Guilty.
The Nifty closed at 3818.30, the lowest weekly close since 8 April, 2007. If we are closing at the lows of 18 months, we are in a bear market.
Follow the trend, is a basic maxim in technical analysis. Then, most of our trading should be on the short side. The bear market is assumed to continue until proved otherwise. What is the proof of a new bull market ? If the Nifty closes above 4300 (the last intermediate high), we may well say that a new up move has started. (The 4300 number will change with time).
Within an intermediate down trend, there will be sharp rallies. This is the nature of the bear market.
Trading, then, is possible for taking short positions on rallies (going with the primary trend), and, also for intra day / 2 or 3 day up moves that can emerge suddenly.
Weekend cheer:
Goldman Sachs now predicts the US recession will be "significantly deeper" than previously thought. 'Headline' unemployment (the number cited by the Bureau of Statistics) will reach 8% by 4Q09. Also, 3Q08 GDP growth will be 0.0% at best. U6, a broader measure of unemployment and underemployment used by Bureau of Labor Statistics but not often publicized, now stands at 11%.

What Lies Ahead ?

The most painful part of the bear market may be in front of us. This could be the last leg of the bear. Stock prices start falling because there are no buyers left. The last of the bulls will slowly sell off. There is a complete disconnect between 'value' and stock prices. Many blue chips start selling for what may be handsome value in normal times. But, these are not normal times. Slowdown, recession, destruction in asset prices, become commonly used words. Even this phase will end, but we do not know when. It could be six months, or it could be three years.

How do you cope up in environment of pessimism ?
If you own stocks, switch from momentum stocks to blue chips. Try to create marketeable lots, meaning lots of shares equal to their futures lots. (Example: 1 future in Reliance Capital is 138 shares. if you own Rel Cap, try to make your quantity equal to 138). once you have such lot sizes, consider selling calls against your equity holdings to reduce the cost of your investment.
If you are in cash, either wait for a base formation, or buy small percentages of your available cash in panics, say 5% every time there is a dip.

Comments to this post :
comment:
if the bear markets are to terminate six to eight months from now then satyam @225, kotakbank @ 350, Dlf @ 175, Nifty @ 3175 is a possibility. Do you agree?
My response:
Yes, this is possible. We are in a bear market. Prices will move lower. We have no way of saying when the down trend will end. Maybe now, maybe later. The bear market is assumed to continue until reversal signals come in. Such signals have not yet been seen.

comment:
Gold & crude going downside, generally it has been observed that when it goes down indian mkt goes up, but now a days no co-relation exist, whats your view ?
My response:
I can only repeat what the economists are saying. Commodity prices are falling due to 'demand destruction' , meaning a slowdown or a recession in the western economies. Therefore, our stock market is under pressure since we are likely to be affected by any world wide slow down.
Yet, what could happen if crude were to fall to $50 ? I do not know the answer. It is wiser to track the price charts. the charts will tell us what may happen.

Thursday, October 2, 2008

Living with a strong Dollar

"Many momentous historical developments occur without the participants fully realizing what is happening." - George Soros

As the Rupee weakens, there is a broad consensus that the dollar is likely to become stronger. www.blackswantrading.com suggests that year 2009 is likely to see a strong dollar. They say, the reason is:
Our broader underlying theme of dollar bullishness hasn’t changed—our scenario is simple: Deleveraging means money moves to the center (US capital markets). And there is unseen dollar support by big players out there, as it is in no one’s interest for the world’s money i.e. the world reserve currency, to be trashed when confidence in the system is paramount to achieving stability and staving off global depression.
If this does happen, then their prediction is:
--> The Euro continues to weaken
--> Crude prices will remain on the lower side
--> Commodities will remain under pressure
--> The up trend for Gold is over and done with
--> Stocks - No guess on where this could go

As the U.S. economy weakens, here are some thoughts:
We’re not in for easy times like we’ve become so accustomed to – that’s for sure. But
it’s not the end of the world either. The lending system is going through a cleansing
period. After a bubble of easy credit that’s now burst, it’s about time we get some
cleansing.

What does this mean for our market ?
Well, economic policy is beyond the technical analysis capabilities of this blog. So, I will look at the charts and say:
A bear market does not end with drama. It ends with a whimper. Slowly, such that investors are not even aware that price have started rising. A strong dollar with a weak American Economy may not be good news for India. This coincides with the fact that more time is needed for this bear market to end.

Wednesday, October 1, 2008

Better Safe than Sorry

Nouriel Roubini who correctly predicted the sub prime crisis is not optimisitic. He has written an article titled "The US and global economic crisis is becoming much more severe in spite of the treasury rescue plan. The risk of a total systematic meltdown is now as high as ever". This is a long title, and it sumamrises the views of Mr Roubini.

In India, volatility is going up. Historical Volatility (HV) has moved up to 46% from a low of 25% in late August. Volatility is mean reverting. This means, volatility comes back to an average value after reaching extremes. The current 100 period average is 37%. Therefore, a slight decline in volatility is possible. This could mean either a straight line trend, or choppy markets with small ranges - both will lead to a fall in volatility.

Trading is based on rules. Many emails and comments ask this question: how to trade ? The answer is: develop a set of trading rules. Rules should be identified for entry, exit, stop loss, profit target and trailing stops. (profit target and trailing stops are optional, but entry, exit and stop loss are a must). Once you make these rules, follow them with discipline. The profits come by using discipline to follow the rules. There are many ups and downs in trading (whipsaws). Accept that losses are part of trading. For short term traders, remember that most of your trading profits for a given month will come from one or two trades. You trade throughout the month since you do not know which two trades will give you the money.

Finally, 'Better Safe than Sorry'. Investors should wait for clear signs that the bear market is coming to an end. Once such signs are in place, then go and begin your investment. Till then, keep your cash wih yourself.