Sunday, January 16, 2011

How to interpret the fall: A different take of it

Every time we look at charts to interpret the rise and fall of the market. Today, lets try something different. Lakshmi Ramchandran (Reigning the Nifty through Technical Analysis) and myself have taken the Top 10 index heavy weights which constitute the 50 pc of the Nifty composition and seen how they have performed in this fall.
Time permitting Lakshmi will publish Bank Charts on her blog.
Banks have been badly butchered. SBI down 28 pc, ICICI Bank down 21 pc, HDFC Bank down 18 pc. Even ONGC in the midst of a crude oil bull run down almost 20 pc. What are the implications of this? Technically, 20 pc from top the bull market in that stock ends.
1. Something is very very wrong in the economy. The similarities with Jan 2008 are scary. Same level tops, give or take a few days, the fall has been calibrated this time, but that does not mean too much as critical levels gone. During Jan'08, the picture was the same, economy wise, people were buying cars (I bought one too in March'08), spending as if no tomorrow, hiring in full swing in IT, but the markets tanked. 6 months later, the jobs vanished.
2. A lower top is in place. What does this mean to the lay man? We went from 6339 - 5690 - 6181 - 5640. We broke previous low of 5640 and the high 6181 did not breach 6339. This is a very bearish sign.
3. The sectors taking the knock? Banks. Banks are engines of the economy. They are a proxy on the health of the economy. How do banks make money? They borrow from depositors and lend to borrowers. I happened to take a low at money supply in December. Year on year, the deposits had a lower rate of growth and lending rate of growth had increased. What does it mean? People want loans but bank's cash reserve is down.
4. How does RBI increase cash with banks? They cut Repo rates SLR, CRR. There is a catch here. Inflation is spiraling out of control. If they cut rates, how do we tame inflation? RBI Credit policy on Jan 25th will have to hike rates.
5. If you do you are damned and if you don't you are damned too. I would hate to be Subbarao now. In Jan 08, YV Reddy was ahead of the yield curve, Subbarao is behind the yield curve. Simply put, rates should have increased earlier.
6. Charts say everything. Market has bulls, bears, pigs, cats, dogs, operators and everybody else. Charts capture everything. Bank charts will make interesting reading.
7. Its easy to do Post-Mortem and tell the world we told you so. How do we play the markets?
Lock in Fixed deposits at current rates. Invest in G-Secs, Gold and crude oil proxies. The markets can do what they want. As long as we make 16 pc a year (Twice the G-Sec rate we are safe).
8. Those who want a thrill can buy banks for 5-10 pc gains as per charts and get out.
9. Its all about sentiment. Onion prices and Petrol hikes spook people. Those who have money stop spending. The shops begun to look empty. The news spread and voila, recession, slow down here we come.

Rs 1 lakh compounded at 16 pc over 20 years equal to 19.5 lakhs. 19 times of current capital of yours in 20 years one can retire from the day job of 9-5 office like Lakshmi did. Smart investors are like Lakshmi.

Tailpiece: SBI and ONGC down 30 and 20 pc respectively. Blue chip government companies. What is wrong? That we dont know yet.


  1. hi, nice analysis and interesting to read. The way banks stocks have gone down, it looks scary. Though I have short position in sbi and have made handsome profit, but market crashes make the general mood to be "sad".
    Could you also make a guestimate of the bottom. I believe similar to last top, the bottom should also be near to last bottom. what you think?..

    Thanks and Regards,

  2. Dear Lakshmi,

    Charts toh post karo.

    Dear TK,
    Its a futile exercise guessing tops and bottom. I tried it last time. When we see value and have money we buy. Thats the only thing.

  3. honestadviser has given sell call on 5th nov, you are behind the curve by whopping 2300 points.

  4. Thanks Saee for the feedback. Maybe you are better off following honestadvisor.

    All the Best!!

  5. Very good analysis indeed.I would like to know few things about open interest,put/call ratio`s and how do they affect markets.Can you throw some light please.


  6. dont you think that two players "infy and tcs" are more dependent on dollar value and "icici or hdfcbank" are in the same domain(though icici depicts more institutional activities)AND when the dollar rises our industry gets effected. Is this not making a contradictory view. Rather than that cant we go for reliance industries(9.81), tatasteel(2.27) and tatamotors(2.39) and SBI(3.97) and bhel(2.01) removing infy, "hdfcbank or icici" and tcs,
    Please answer me as your calculation about 1l invested for 20 years going for 20l seems to be more mouth watering.
    Also I have computed NIFTY returns for past 10 yeara ( and it shows 1400% returns.
    Zohar Batterywala
    Please surely make me understand.