Friday, October 22, 2010

Investing in Value

As an investor, equity shares offer the possibility of outperformance over a long term horizon. But the entry price is critical to achieve this target. When stocks are purchased during bubble periods, the investor can be confronted with many years of underperformance even when the broad market remains upbeat and the nation's economy is doing well.

Therefore, the best way to invest in stocks is to buy on a significant correction or buy stocks that offer value even in bubble like periods.

The trading approach is different. The day trader, swing trader or even the position trader who is looking to buy for days to weeks should be more interested in the trend and momentum, rather than in value.

What actually works out is a mixture of investing and trading. Investors buy overvalued 'hot' stocks for the long term, but actually expect these stocks to perform in the short term. (Okay, this is what a trader does sometimes, but traders look at a number of technical methods to enter which includes a clearcut exit strategy.)  Later, when some of these 'hot' stocks underperform, as they will, the investor is left holding the stocks, with the funds locked in for many years, and, also a sense of frustration.

The sensible way to investing is to buy only when you should, not to go with the herd. But in the market, it is often difficult to follow the easy way. What do readers say?

Wednesday, October 20, 2010

Volatile Markets are a sign of Distribution

Increased intra day volaility is a sign of distribution, when this volatility comes at the top of a rally. Now, distribution does not get complete in a day or two. It is a process rather than a single event. W will probably see sharp upswings as well as selloffs while market participants remain confused on the next move by the market.

As I write ths post, the U.S. markets are up, after a sharp selloff in the previous day. The Indian markets are liekly to see similar roller coaster movements.For short term traders, the strategy should be to buy during periods of despair and despondency (use technical analysis to determine the actual buy points) and sell when the impression seems to be that the rally will go on forever.

The focus seems to be shifting back to midcaps and small caps. This is all for the good, since mid caps are aavilable at relatively lower valuations when compared to the large caps.

Tuesday, October 19, 2010

All is well

I will be on Bloomberg-UTV on Tuesday 9 AM, Thursday 9 AM and Friday 3 PM.

The Nifty is now in some kind of a correction. In my reckoning, the Index needs to close above 6150 to suggest that the correction is over.

Corrections are inevitable, just like death and taxes! All markets correct, therefore investors who want to put money in the market should always wait for a correction before buying. What actually takes place is just the opposite. Newcomers in the market rush in to buy when theree is frenzy in the market - usually at the top.

Now, is this a correction? No. A correction should retrace at least 50% of the prior move, which gives us 6300 - 5300 = 50% of 1000 points, around 5800. (all numbers rounded off). A more realistic measure should start from 4900 which is the point from which this leg of the uptrend started. That gives us 6300 - 4900 = 50% of 1400 points - 700 points, bring the Nifty to around 5700.

I cannot say if the current down move will lead to such a correction. But a correction of this magnitude will come, time unknown.

Cheers.

Thursday, October 14, 2010

Just a little bit more - My Notes

Pi asks "Does the previous high act as resistance?. If a trader is bullish and buys at 5900, why should he suddenly turn bearish at 6350, previous high?"

My Notes: Markets have memories. Therefore, investors and traders who did not sell when 6350 was made in January 2008 (trader remorse), may be ready to sell out this time. In anticipation of such selling, other participants may also like to stay out when 6350 approaches. Now, all technical methods must be taken in context. In a trading range market, previous highs will be significant resistance since traders are not optimistic on the market anyway. In the current environment, 6350 may at best offer some minor resistance, because traders are sensing strong upside momentum, therefore new buying is likely to overcome trader remorse.

ilan has a number of questions:
What is decoupling and resilance? Most stock markets follow a common trend. Here, most international markets go in the same direction. When one market takes a different direction, it is said to be decoupled (similar to a train coach which is disconnected from the train). Because U.S. is the largest market, decoupling is compared with the U.S. The talk is that the Indian Market is decoupled, meaning it will go up even when the U.S. market does not. I doubt this. All markets are coupled, except for short term decoupling.
Resilience. "Resilience" is the positive capacity of people to cope with stress and adversity. This coping may result in the individual “bouncing back” to a previous state of normal functioning. Means: when the world markets fall, in India, we fall a bit then bounce back quickly - so our market is resilient.

Is India an alternate investment option, like Gold? excellent question. I believe that emerging markets as a class have become an alternate investment. This means, investors in the USA think of allocations to Stock markets, emerging markets, gold, silver, bonds etc... now differentiating between markets in advanced and emerging economies. This means, it is not India but emerging markets that are a seperate class. It is always possible for money to flow out from India to Thailand, Brazil or similar.

Wednesday, October 13, 2010

Just a little bit more

I will be on Bloomberg-Utv on Thursday morning at 9 A.M , and Friday afternoon at 3 P.M.

The Nifty needs about 125 points to touch its highest ever levels. That's not much, just a little bit more from today's close at 6233.9.

Indian & World Markets, Nifty, Sectors & mid cap stocks of interest - these are toics that the anchors will generally talk about. If you have any ideas on other topics that I can or should discuss on TV, do leave a comment or email to me at sudarshansukhani at the rate gmail dot com.

Waiting for Infosys

As results season kicks off, markets do not seem to be unduly perturbed. Rather disappointing IIP numbers caused only a mild flutter in the market. In the USA, a weak unemployment report on Friday caused the market to move up - because bad news for the economy means more money printing, which means more money coming in the market, which means higher stock prices! Strange are the ways of the market, but that's the way it works.

Infosys reports on Friday, Oct 15. A bull market ignores all bad news. Therefore, short term traders should use any sudden dip as a buying opportunity. My own levels, which I had given on Bloomberg-Utv, were support on a closing basis at 6080 and resistance (also on a closing basis) at 6190. Between these two points, the Nifty is reallly in a narrow trading range.

Narrow trading ranges will eventually breakout, one way or the other. You just need to go with the direction of the breakout.

Tuesday, October 12, 2010

A look ar Rcom

Today morning on Bloomberg-Utv I suggested that Rcom (Reliance Communications) was a buy because of bullish chart patterns. I am giving below the chart which suggests a buying opportunity.


Here are some thoughts for investors from the blog, the Psy-Fi Blog:
A major part of overall portfolio capital returns will be generated from just a few super-stocks. In the event you get lucky enough to hit one of these the last thing you should be doing is trading it away. Selling your winners is the last thing you should ever do.

Monday, October 11, 2010

The Dollar Index impact on Stocks in India

MY BLOOMBERG - UTV INTERVIEW SCHEDULE FOR THIS WEEK


TUESDAY 9 A.M.

THURSDAY 9 A.M.

FRIDAY 3 P.M.

The Dollar Index is at 77, down from a high of 88.7 in June. At current levels, the Dollar Index may be approaching support, a well as getting oversold. Then, a rally could be on the cards. A rally in the Dollar Index means:
(a) A decline in the value of the Rupee. The Rupee/Dollar value may rise from 44.6 to 45 or even 46 (depending on the rally in the Dollar Index) There is a possible trade here.
(b) A rally in the Dollar Index could mean a rally in IT stocks - Infosys, Wipro and TCS. Also, to a lesser extent in HCL Tech.
(c) In the short term, FII inflows may decrease because of the adverse exchange environment.

This could mean: Gains in the Dollar-Rupee rate, Gains in IT Stocks, neutral to bearish impact on the broad market.

Reliance Capital

There was a comment which asked the outlook for Reliance Cap in the next 2 weeks. I cannot say what will happen in a short time but the charts look bullish. Here it is.

Sunday, October 10, 2010

An interesting TV Show at 7 PM

Boman Irani, my favorite Bollywood actor is the main part of a heavily advertised show, 'The Pitch' which starts at 7 PM today (sunday) on Bloomberg Utv.

If you enjoy Boman's humor(as I do), you probably want to watch this program.

Friday, October 8, 2010

Key Reversal in Gold, Silver

Both precious metals, Gold and Silver have seen a key reversal day on Thursday, Oct 7. Prices opened with an upside gap, moved further up, then suddenly began to fall, filled the gap closing near the lower end of the range.

A key Reversal day has limited long term significance. It does denote an excess of supply. Often it will become an intermediate top, but equally often, the reversal day is just a short term correction. When traders sense that a reversal day is developing, they should exit. It is no fun watching your gains go away as the market dips.

Every trading strategy should have a reentry mechanism. For Silver, I will wait for a dip to 33000 support. No hurry.

Thursday, October 7, 2010

Silver exuberance

I will be on Bloomberg-Utv on Friday, Oct 8, at 3 PM. Do check in if you can.


Just a few days ago, I mentioned a bull market going on in Gold, and, Silver. In the past 3 days, Silver has moved up dramatically, almost becoming a bubble. Today, the metal opened with a gap on the MCX, then went on to touch 34800. Just 3 days ago on Oct 4, it was at 33000. To me, today's gap up and the price level seemed like a blowout. I have been long in Silver. It was really a positional trade, but today's price action and the really absurd price told me to sell and exit. Which I did. I am giving below the 60 minute chart for MCX Silver (courtesy: Trend Analyser, http://www.technicaltrends.com/) . Note the consolidation around 33000, then the breakout, the multiple long range bars and today's gap up. Readers analysis and comments are welcome.


Small Dip, what lies ahead?

I will be on Bloomberg-Utv on Friday, Oct 8, at 3 PM. Do check in if you can.

The Nifty took a dip today, breaking down from a minor support level that came at 6150. While an intraday trade taken after the break was profitable, the question is: was this just a one day wonder or is there a trend behind this break?

Markets do not give direct answers to our questions. We have to make our trading plans, then stick to it. If the market wishes, we make money, otherwise we go through minor discomforts (minor, because we have our money management routines).

If a swing trader is short or wishes to take a short position, the stop is somewhere around 6185 - the mid point of the trading range. So with limited risk, the trader can go with market flow. A more conservative trader can wait for break of the second level of support which is at 6100.
Was it possible to go long at the close today, assuming that today's dip ws just a one day dip? Yes, it was with a stop below 6100.

Here we have seen different ways of taking the trade on the same day. All of the traders could make money if they have discipline.

When Nifty is in a range

The 60 minute chart for Nifty Futures, given below has a trading range developing after a sharp rally.


For Nifty Traders, movements inside the range are unlikely to give much gains. A breakout above resistance or a breakdown below support should provide the momentum for further price movement.

Then, the first strategy is to wait patiently for the futures to emerge out of this range. Second strategy: For all of us, anticipation can lead to more gains. Here, anticipation means taking a position inside the range in anticipation of  breakout or breakdown. If our direction is called correctly, we get a head start in terms of entry. A third strategy is to buy calls and puts, then close the losing leg. (If the market goes up, sell the puts. If the market goes down, sell the calls). A fourth strategy is to step down in terms of time frame: trade the 5 minute or 15 minute chart for the smaller trend. If prices break out from these range levels, shift your trade to the 60 minute time frame. This is similar to anticipation.

Which one is best? There is no 'best' in Technical Analysis. All strategies will make money if you follow them with discipline, money management. What do readers say?



Wednesday, October 6, 2010

Secondary Reactions

The priamry trend is up. There is no confusion about it. Traders have two methods of riding this trend: (a) Buy when this trend was detected and wait till the end of the bull market becomes visible. (b) Buy when a secondary correction is complete,  ride the up move, then exit when the next secondary correction is starting. This is the way of the trader.

While it is easy to identify the primary, the secondary corrections are much more difficult to detect. What may appear to be the start of the correction could turn out to be a minor dip. If the trader decides to ignore these corrections and simply ride the bull market, he may find that a correction which was ignored was actually the beginning of a bear market!

Secondary reactions or corrections are the difficult part of trading. Richard Russel writes "Coming with little warning, they serve to correct the primary swings, as well as to dampen the enthusiasm of the amateur trader. They are caused by over-speculation and technical weakness in the price structure. "

Russell gives out "The danger signals of a coming secondary reaction".

1. Volume becomes excessive with little or no movement in the Index
2. One sector declines pesistently while another sector advances.
3. Following a decline, one or more sector Indices fail to make new highs.
4. One Sector makes a new high, while other sectors refuse to confirm.
5. The Index remains in a line (about a 5% range) for two weeks or more, then break it on the downside.

My Notes: The Market has not shown any of these patterns, so far. But, it is wise to keep such patterns in mind. 

Tuesday, October 5, 2010

Gold Silver

Silver and Gold - Both precious metals are sparkling. But these gains did not happen overnight. These metals were in a trading range for many years. Then came a breakout and a number of rallies with sharp corrections in between. Each correction is an entry opportunity. Even now.

Rajvir asks: "Mr Sudarshan, do u know something else other than BUY ON DIPS ?"

Actually, rajvir, I also buy on breakouts, but I do not discuss this strategy on TV or this blog because I worry that amateur investors may rush in to buy at the very top. Buying on dips has the safety of low risk.

I am grateful to Rajiv Malik and KK for their affection towards me, which they have expressed through this blog. Thanks a lot!

Today's Times of India carries an advertisement that is selling some Canadian trading software with 100% accuracy. If this is correct, why are they selling this product at all?

As I write, the U.S. markets are on a big rally. This should have its affect on Indian markets tomorrow. No need to take short positions. Either go with the flow, or watch.

Today, I mentioned on Bloomberg Utv that PSU's may be developing as a theme. Just like PSU Banks, 18 months ago. BEL, Gail are just two names. You may like to do research in this sector, maybe identify some PSU's which are really dark horses.

Follow the Trend

I will be on Bloomberg UTV on Tuesday, October 5 at 9 AM (morning). Have a look.

The trend is up, therefore traders should position themselves to buy on dips. Apart from the Nifty, it is possible to trade in individual stocks - equity, futures & options. The basic rule remains the same, identify the trend, if it is up, then buy a breakout or dip. The market is in an uptrend, therefore most stocks will qualify for buying.

If you wish to buy, then hold for a few days to weeks, and sell out, you are a swing trader. You should be looking at equties mainly to buy, take delivery and wait for the appropriate exit. When you take the trade, identify a protective stop loss.

How do you identify the stock? Use a trend mechanism - higher highs, higher lows OR a rising moving average OR a trend indicator which is in a Buy. The reverse holds true for stocks to sell.

When you follow these simple rules written above, the biggest benefit is that you do not go against market flow.

based on the ideas mentioned hre, some stocks that may outperform are: BEL, GAIL, SRF, TATA CHEM. I have positions in Tata Chem. I also intend to track the others for low risk buy signals. No rush!

Monday, October 4, 2010

Mid Day Musings

The Nifty is currently trading at 6168, up 25.90 points. This is at 1305 hours. The market has given up a lot of its early morning gains. For the day trader, today qualifies as a choppy day - frirst the market moved up, triggering a buy. Then, it moved down, triggering a sell. Today's failure to sustain new highs should not be taken as a start of a bear market . We need to have a sense of proprotion. After a blistering 900 point rally (from 5350 to 6250) the Nifty is going to see dips and corrections. In the context of the rally, an intra day decline of 60 or 70 points is no big deal (of no importance).

Fo all those who are waiting for a market decline, here is a thought: all markets correct. a correction is not a decline or a bear market.

Sunday, October 3, 2010

Both are Free but only one is a trading help

Thanks to advances in technology, two different trading resources are easily accessible and free. The First is business TV, which is available on your TV screen, and, the second is also freely available, but less used - this is the internet.

Business TV is great fun, but does not help in your trading. If at all, it can become a major barrier in your success. The Internet is actually a help in your trading because it forces you to think. Since the Internet requires you to read, it needs application of mind, which leads to stimulation of the brain, your thinking process - all contributing to better trading .

Remember, on business TV, trading tips are available by the Kilo. When tens of tips are handed over to the viewer, at least some of them will be successful - this is due to random chance rather than any skill. For all the tips that you receive, ask yourself: is it possible for anyone to offer day trading tips where the trade will be successful in two or three hours?

The Making of a bull market

While prices are rising, most people do not believe the rally is for real. Eventually, bull markets climb this wall of fear and fear changes into assurance (It is not going to go down) - this is the first sign that the trend is becoming mature and may begin faltering. This process seems to have started. 'Everyone' is convinced that new highs will be made, while I hear targets of 7500 for the Nifty expected to be hit, soon enough.

Quick Thoughts Again

As I begin another post, I realize I have some more time to do the things I want : Write, Trade, Share(Teach) and spend more time with the family.
Lot of More's!

Starting October 1, I will take a break from CNBC-TV-18 (10 years and 10 months!). I needed some rest from a hectic work schedule. I will be available on Bloomberg-UTV for few times a week. My first appearance should be on Tuesday, October 5 at 9 AM. If you have the time, do tune in.

This post was about King Canute, king of England. He was walking on the sea shore reflecting on his weakness and age. His courtiers in an effort to curry favour praised him as a king with God-like powers. The king did not believe them but said, "If I have such powers then the tide will stop coming in when I command it to do so". He did command but the tide continued to come in.

This story has a significant connection with trading. Markets do what they want, and, traders cannot control the day to day action of the markets any more than King Canute could control the tide.

Traders can control their own actions. This is what the focus of all trading should be! Disciplined rules for entry, exits, position sizing, stock selection will give a profitable trading career.

Interesting thoughts from the WSJ

An article in the  Wall Street Journal makes interesting reading.
[As an aside: how do I reach these articles? I subscribe to a number of RSS feed from blogs on investing / trading. The blog posts refer to mny external inputs which lead me to such articles...]

The author says "Last week I was in London, visiting one of the best investors I have ever known. Peter handles money on behalf of a small number of rich clients.
He shuns publicity (and requests that I don't mention his last name). He's been managing money for 40 years. Ten years ago he told me to sell the Nasdaq and buy gold.

Over dinner, as he reflected on a long career, he told me that as he has gotten older he has learned that good investing is even simpler than he used to think. He has abandoned most of the sophisticated tricks he tried to use as a young man. He sticks to value, and he runs against the herd.
Right now? He likes some blue-chip stocks, as they are reasonably cheap and no one else seems to be interested in them. He's avoiding fashionable emerging markets. And he's been quietly building a position in Japan. Why? "Everybody hates it," he says. "Twenty-year bear market. It's cheap. And your typical fund manager would rather suck a lemon than invest in Japan."
Most people's reaction to this is probably to shrug and forget about it. Japan is so over, after all. Why would you want to invest in Japan? Nobody wants Japan.

Hmmm.

End of Quote

My Notes:
Last year, at the beginning of the bull market, I started talking about PSU Banks. It was quite unfashionable. But events have justified this view. Now, everybody is talking about PSU Banks. Hmmm.

Saturday, October 2, 2010

Where is the bubble?

Rajv Malik is not happy with my bubble comments. He writes "for quite some time you and several others have been saying is that this is a bubble like situation and it will burst. but despite that the market has gone up by several hundred points and all those who took you and some other analysts very seriously missed the bus."

I have highlighted this comment since this probably reflects the thoughts of many traders.

I have said we are entering a bubble. I stand by this statement. My opinion is that investors should always enter on a correction. I have also suggested that traders can make the most money in bubbles, so they should ride it. We never know in advance when this will burst, so continue till it stops. So, when Rajv says he missed the boat, which boat is he talking about? If he is a trader, then there have been many opportunities. If he is n investor, then he would be well advised to wait for a correction. Dips do not come on demand. You need lot of patience to invest in a low risk environment.

This also means that we are not bearish. Far from it. The end game for a bull or bear market can continue for months. Traders should go with momentum, which is UP.

Friday, October 1, 2010

Just a Little bit More

A stunning 100 point rally in the Nifty saw the benchmark index close at 6175. The all time highs are at 6357.10.  So, all we need is just a little bit more.

Meanwhile, the U.S. markets are continuing to remain in a range - no 2% rally there! We must have become decoupled, such that the Nifty can sustain a trailing four quarter PE of 25.54 (this is still lower than the PE of 28.29 recorded on January 8, 2008 which was the day on which the high of 6357.10 was recorded.). What this means is that a bubble that is building up has some more room to go before it actually bursts. But the day of reckoning is coming. Why? Well, a well known indicator has given a signal today. I went for a haircut, and, the technician in the saloon said that he is going to invest Rs 1500 per month in shares and he is not worried about ups and downs in the market. He will just keep on putting the money. It seems that the stock market rally is slowly influencing the retail.

Bloomberg-Utv has an interesting website: http://www.bloombergutv.com/ where trading calls given by analysts on different TV channels are recorded. This is interesting since you get a number of trading ideas from many TV channels at one place. Have a look.