What are the Markets telling us: Fundamentally and Technically

The markets have fallen about 14 pc from the top. Now, what is the market trying to tell us. Lets have a fundamental and technical check of the markets. The markets are always ahead of the real economy. The situation we see in the markets now will reflect on the ground 6 months later.
1. The job market in the Sales and marketing sector has begun to dry up. This is an actual experience shared by someone I know. This implies companies have already begun to cut down on hiring. The Marketing budgets are usually the first to be cut.
2. Another of my associates works in a reputed broking firm. He is saying that broking volumes have shrunk to half the normal size and they are looking at cutting costs. Trading volumes are low means a lack of trader interest. Broking firms usually are the first to reflect the changed realities.
3. banking stocks have been taking a pounding. Bank reflect the economy. Certain high value acquisitions like ENAM takeover by Axis have happened. Fundamental wisdom suggests that such kind of sky high valuations happen at the peak of the markets.
4. There bull markets and bear markets. Bull markets peak when there is optimism all around and there are no worry clouds on the horizon. The perfect recipe which was prevailing.
5. Open the Economic Times and look at the number of stocks making 52 week highs and 52 week lows. The number of stocks making lows vastly outnumber the number of stocks making highs. This shows that the market is badly damaged.
6. The market discounts everything. The results and all have factored in, then why is the market not rising? The hiked loan rates on auto and home loan is going to hurt the vast middle class, those with 2 salaries and living on EMI culture.
7. The Mutual funds are stuck with KYC norms which means lot of new inflows into the market are stuck. There have been net purchases by domestic institutions of 4229 crores and selling by the FIIs of 7300 crores.


Technicals:
1. The markets have comfortably breached the 200 ema for 2 days now. The last breach came when we hit the low of 4786 in May'10. In the whole bull run, the market has breached the 200 ema only twice and the cuts are getting deeper.

2. Lets look how the market is placed in terms of % deviation between the close and 200 DMA. Its very close to the support line touched in May'10 but still some distance away which indicates some more downside before a technical bounce.

3. If we take 50 DMA, then the fall still has to touch the support line again indicating some more downside.

4. If we take the difference between 5 DMA and 20 DMA, we still have to reach the support zone. This means a further fall of 100-200 points before we get some kind of a bounce.

What do we do?
Use every bounce to get rid of longs and book profits on the portfolio. A sharp technical bounce is well round the corner. If you notice the period Jan-Mar-08. There was a bounce back which helped clean up the portfolio.

Lock into Gilt funds. Start a SIP into any good long term Gilt fund and wait out the storm. Good times are followed by bad times. Now is the time, to protect one's capital and wait for the perfect buying opportunity. One needs to prepare a wish-list of fundamental good stocks and start SIPPing into them.

Markets: Where are they headed to?

Lots of news flow this week. Results, rumors about Rate Hikes, cabinet reshuffles, it was the full monty. What is in store in the next truncated week with expiry as well as the RBI policy?

1. Its going to be fun. The RBI policy is just 1 day to expiry. Expectations are 50bps rate hike. Anything less markets should rally.

2. The fall will come in the next series. The Bollinger Bands are opening up indicating downsides to 5488, after a pause.

3. A lower top is in place. By this, I mean 6339-5690-6188-5624. The up move will be corrective only.

4. The indicators like Stochs and MACD on a shorter time frame have turned up and this means there should be a corrective up move. Targets could be 5836, 5902 and 5968.

Summary: Watch 5600 on downside, short below it and go long above 5718. In between stay out.

Cabinet Reshuffle

First look suggests Manmohan Singh is looking at elections in 2014.

Young and dynamic performers given good portfolios. The corrupt or perceived to be corrupt are being sidelined by given side portfolios. Prime example is MS Gill Statistics Ministry.

NCP cut down to size by promoting Praful Patel and moving him from plum Civil Aviation to Heavy Industries.

Immediate impact:
Murli Deora removal may affect a certain business house to which he is perceived to be close.
Flat or maybe upside. I feel no major influence on markets.

Follow-up on How to Interpret the Fall

I had spoken about the various stocks and how much each fell to find a co-relation between the fall and sectors.
Lakshmi has done a follow-up on charts. Here is the link.
http://vipreetinvestments.blogspot.com/2011/01/underperforming-outperforming.html

Here is an interesting Panel Discussion that readers in Mumbai may want to attend:
With the purpose of spreading awareness among Market Participants, in association with Eco Ashram, we are organizing a Panel Discussion on the topic “Stock Markets or Rigged Casinos?” on 21st of January 2011 at "Y. B. Chavan Centre, Mumbai" from 5:00 P.M. to 7:00 P.M. The event is called "NATIONAL ECONOMIC DEBATE".

The Panelists are Dr. Ajit Ranade (Chief Economist, Aditya Birla Group), Shri. G. Anantharaman (Former Whole-Time Member, SEBI) & Dr. R. Vaidyanathan (Professor, Finance & Control – IIM, Bangalore).

The discussion will be followed by release of the book, “Sense, Sensex and Sentiments – The Failure of India’s Financial Sentinels” written by Shri. M.R. Venkatesh, Chartered Accountant.

For more details, contact:

Anuraag Gupta
Profound Consulting Pvt. Ltd.
502, A-Wing, Delphi, Hiranandani Business Park, Powai, Mumbai - 400076
Telefax: 022 25704357
Cell: +919892832789; anuraag@nedindia.com

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.

How to play the Crude Story: ONGC v/s Cairn

Crude oil prices have shot through the roof and are trading at 92 dollars per barrel. How do we play this rise?
I had done a guest post for Subhankar's blog, here is the link:

http://investmentsfordummieslikeme.blogspot.com/2011/01/oil-is-on-boil-how-can-investors.html

Interesting 10 comparative returns on Gold, Silver and Sensex

Below is a 10 year study of CAGR (Compounded Annual growth Rate) by Haresh Soneji (hareshsoneji@gmail.com).
It is a eye-opener.

Stick to Basic Moving Averages (Post by Shail)

In this series of articles we will take you through some basic technical indicators and how they have performed in last four years, during these four years we have seen Indian stock market touching all time highs and then correcting to about one third of their peak value and again gaining to late 2007 levels.

Part one of the series is dedicated to a very common yet powerful indicator class called Moving Average, which is more popularly known in two derived forms Simple moving average(SMA) and Exponential moving average(EMA) latter as the name suggests gives more weightage to recent values. Historically it has been proved that 20 days moving average, which is average of 4 weeks of price of the stock or index under study, is a significant support and resistance for market and it can be very well used to make trading decisions.

This study has been done taking into account following considerations most important of all is the trader here is a part time trader who can invest 1-2 hrs every day for trading. Investment capital is adequate to buy 2 nifty contracts (roughly `50000), and invested in current month’s nifty futures, rollovers have been done during contract expiry whenever required.


Let’s begin our study and follow two simple rules:
1. Buy nifty futures whenever spot price (Close price) moves above 20 EMA
2. Sell nifty futures whenever price (close price) drops below 20 EMA

Note: Reader can conduct similar study by taking 20SMA as well.


The charts shown below from jan-2007 to dec-2008 and jan-2009 to jan-2011 shows trading opportunity and the nifty points earned following the rules listed above. The total of these comes to approx 15020 points, considering two nifty contracts traded the total earning comes to `1502000. These returns for some may look exuberant but this is how our stock market has moved in last four year

Reader can conduct similar study on other index like bank Nifty, which will give similar results. This may look fascinating to the reader but is possible only when the indicator is followed religiously i.e. trading decisions should follow the market and not expects market to follow your trades. One more important point to notice here is to wisely close the position to get maximum return with lesser number of trades this can be achieved with the knowledge of momentum indicators which we will study in next article of this series.

January Tops

Last year I had done a study how we get Tops in Jan and Feb and its best to wait to enter the markets if we are fresh investors.
I am re-posting the link here for your benefit and adding a update for last year.

http://money-manthan.blogspot.com/2010/03/2-years-back-we-had-done-statistical.html

Last year the market topped on Jan 6th at 5310. The bottom Feb 8th was 4675. A fall of 12 pc.

So, hold your horses, if you go by history.

Thanks Vishal for prodding me to dig into this.

January: Historically not a very good month

January historically is associated quite a few times with significant tops. Lets look at the images below.


1. January as Compared to the last trading day of December has given just 4 positive closes. Out of these only in 2001 and 2006, the closes have been substantially higher. In 2001, March was a month of heavy correction and in 2006, May was a month of total collapse in the markets.



2. In all the years, the low has always been below the close of December. So except the market to go down at least 1 pc below 6134.

3. The highs of Jan have always been higher than December close. This means expect the markets to cross at least 6200 once.

To sum up, a high higher than December closing, a low lower than December closing and a closing which has been higher than December closing only 4 out of 10 times.

On a daily basis, the Bollinger Bands have been expanding indicating a upward bias.

Also, have a look at the signifance of 5 day low ema. In a uptrend the market never goes below it. This comes to 6037 for now and could be a stop loss for longs.