Will this sharp recovery last?

Today’s recovery was largely unexpected by the bears. Infact, the NIFTY pulled back more than 130+ points from day’s low! As such volatility is found near market reversals, one has to very cautious. If such intraday volatility persists, one needs to be sceptical of building aggressive positions on the long side. This volatility might tempt you to trade but such trading can easily go wrong!

The only positive I see is that most of the market participants are still short on the market, so that might act as some cushion for the markets in the short term. 4800-4850 is the zone of resistance for the bulls.

Once this short covering is over and the volatility subsides, one needs to find stocks where real buying is happening. One such sector is auto where a stock like Ashok Leyland has continued to maintain a neat uptrend. Another sector is pharma where a stock like Dr. Reddy labs continue to climb higher.

It might look tempting to buy stocks like RCOM or Suzlon but there is nothing in their performance which indicates that the worst is over for such stocks.

Buy the dips or short the rallies?

Bulls come up the stairs while bears go out of the window! That’s what we have witnessed in the last few sessions. Gains for a few weeks have been erased in a few days. This is a classic bull market correction.

Technically, we have hit the supports of 4550 on the NIFTY and it is is very likely that we show some bounce from here. At the same time, if I am trading short term, I won’t see it is an opportunity to go long. I might see it as an opportunity to exit my dead stocks (real estate, telecom etc.).

We need a real sharp pull back above 4850-4900 in order for uptrend to resume again. Otherwise, this market can continue to slip or remain sideways. Watch for 4350 on the downside and 4850 on the upside.

Suzlon,RCOM and Unitech are good opportunities to sell on rallies. Same holds true for all ADAG stocks like Reliance Capital, Reliance Infra,Reliance power etc.

Value Investing Ideas

In one of my earlier posts, I had emphasised the fact that “value” and “momentum” style of investing can be complementary to each other. I have been sharing my philosophy regarding the “momentum style” on this blog for some time now. Now I have partnered with a good friend of mine to bring some “value investing” style of thinking to you. We intend to share our experiences and learning when it comes to value investing via www.indianvalueinvestor.wordpress.com. I hope this will allow you to combine two different styles of investments in your portfolios and achieve superior risk adjusted returns.

Markets- Pullback or deeper correction ?

Should I buy now or wait for markets to fall further? Should I exit now or hope for a pullback?

This is the constant chatter in our heads after every correction. When markets are going up, we never bother to look at our risk. We tend to get aggressive with our investments whereas in times of corrections we feel crippled by fear! It is difficult to eliminate emotions from investing but if we are aware of our emotions, it results in better decision making. This also means that investing without a method/philosophy will add to your confusions and will result in unexpected losses in your trading and investing.

Coming back to the question – Is the market ready for a pullback ?

If I look at short term, the trend is certainly down and till we get beyond 4900+ levels, any upmove will not impress the bulls. If that happens we might see resumption of the short term uptrend. Otherwise the markets will either stay sideways or will correct all the way down to 4550 and even 4350.

Talking of sectors- Telecom continues its downward journey at a faster pace. I won’t be surprised to see even lower levels in next 3-6 months before these stocks show some signs of bottoming out. There might be some sharp rallies but these might be short lived and investors will use these rallies to exit.

Metals have also undergone sharp reversals though the long term trend is still intact. This might result in some buying at lower levels by investors.

Pharma and FMCG are two sectors that are still showing a lot of resilience and might continue to outperform in the short to medium term.

Banking sector has also undergone sharp reversals and we might see many stocks not resuming their uptrend even after the correction is over.Therefore, it is necessary to be cautious about your picks.

Mid caps and small caps shall correct much more sharply in this phase. Some of the stocks have gone on real turnarounds while others have gone on pure speculation. It is important to identify this difference and book your profits in the speculative holdings. Such stocks can easily go back to Feb-March levels. Examples of such stocks are Suzlon,Unitech and RCOM. At the same time, one can find many stocks that have actually moved up based on real performance and are likely to be good bets in the long term.

We have lost 7-8 weeks of gains in a single week! Having proper risk management is therefore critical for a trader’s survival in such markets.

The future direction of markets in next few weeks shall solely depend on how much money is put into Indian markets by the foreigners. That will also decide if these markets remain a momentum play or turn into a value play!

NIFTY at 4850 – Bullish or bearish?

As  expected, the correction was unexpected and deeper. As the markets had failed to keep 4980 levels, a slide to 4900 was more or less expected. A slide below 4900 came because of certain surprises in the credit policy. Markets always find a reason to correct themselves and throw out the leveraged players.

Looking at individual stocks, there was a sell off in literally every stock- from banking to real estate to metals. Telecom stocks like Bharti continue to fall despite having fallen so much! The stock is staring at hitting 270 and 240, levels which might see some bottom fishing.

Coming to broader markets, 4780 is another critical level where some buying might emerge. The more difficult part is figuring out your “buys”. Right now FMCG, Pharma,Auto and banking look the best bets. Suddenly IT which is not interest rate sensitive is looking better.

The biggest risk to this market is the fear of interest rate rise. I had talked earlier about inflation in the Indian economy and how RBI might soon turn aggressive in  containing that. This is acting as a big trigger for the sell-off.

There is a lot of build up in the futures and options space as is evident by largest ever F&O volumes yesterday. This might put added pressure on the market as long unwinds happens at a faster rate.So you might see F&O stocks bearing a lot sharper corrections than non F&O ones. Technically a slip below 4780 will bring in more selling.

 

How to deal with sudden price reversals ?

Yesterday was particularly challenging as a stock like Punj LLoyd in which I had some trading positions suddenly reversed. The stock had  a gap down opening and slid 17% by the time it closed!

What can one do if one is faced with a situation like that?

I’d say- just get out! And that’s what I did . Taking a loss is never easy but that’s how this game is played.

One might ask- what if the stock bounces up again? My answer to that would be – what if the stock slides even more?

The future is not known, so by cutting my loss I can think clearly and focus on making the next strategy. I might take countertrend trades at lower levels or wait for enother buy signal to emerge before I jump again.

On the other hand, by leaving my position in the hands of the market, I’d be feeling more pain.

Markets are in a corrective phase and it will force you to make some hard choices!

Stock Watch – Asian Paints

Check out how Asian Paints has been trending up nicely. Even after I talked about the stock back in July- August, the stock is up a decent 25-30%  from 1300 levels to hitting new highs at 1700.

Why do stocks go down despite good results?

A reader asked me :

“I have 100 L&T at Rs.1660. I cannot understand even though its performance for Q2 is good, this scrip has come down to Rs.1558…!!! Why? On what basis the market is traded?”

Analysts have this funny way of “explaining the stock moves”. If the stock moves down on good results, it is said that expectations were “missed”. On the other hand, a stock moves up even after bad results because of “better than expected” results. How do you define these “expectations”? Even if you look at broker reports, there is wide range of these “expectations” because all of them are based on different assumptions and estimates.

Now most of us know how good these “predictions” are. A recent example was the forecasting of UK GDP – “GDP fell 0.4 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a 0.2 percent increase, according to the median of 33 forecasts in a Bloomberg News survey. None forecast a contraction.” The best of the best couldn’t predict the direction of UK economy!

Also you might have observed that markets are good at pricing these expectations in advance. Many stocks have already doubled or tripled in price since March in expectations of good results. So why  do we feel surprised if stocks fall down after delivering good results? They simply failed to meet the ever growing expectations.

This is also the reason why ” market news” is not very important but how the market reacts to that “news” is much more important. A bullish stock might continue to go up despite negative news while a bearish stock might continue to go down despite good news!

If you select your stocks solely based on news flow, you might be in for nasty surprises.

NIFTY Outlook

As expected, the correction was sharp and NIFTY tested 4980 on the downside. It is a bit difficult to say if this correction will take us to 4900 or if we will stay in the 5000-5200 range.  If we close today on a strong footing, then the chances of taking out the previous highs become very strong.

The best deal would be to stay in the range and then move up sometime in mid November to have a go at 5400-5600 range. If we break below 4750, then there would be a serious damage to the current uptrend.

It will be prudent to book partial profits in scrips where we have seen 20-30% gain in last 1-2 months. Banking stocks for instance have moved up very sharply in last month and one needs to add these only on sharp corrections. In the long term, these stocks might go even higher.

Talking of stocks- DLF had a spectacular move up and down.I booked some short term profits but am still riding the stock for slightly longer term gains. Cairn India is another stock that I feel is ripe for some good moves.I am also accumulating RIL (although very small quantity) at the current levels.

I am also finding a lot of mid and small caps that look ripe for some big moves in the future. If you stick to quality and do your research, there is still money to made in this space. At the same time, one has to be very cautious while picking stuff in this space.

Another point to keep in mind is that stocks never go up in a straight line. Corrections are part of the game and one needs to learn to live with them (however painful they might feel).

If you still feel uncomfortable with corrections, read this old post of mine and have the right perspective -” Do you want your stocks to go up everyday?”

Market correction -How deep can it be?

As I said earlier, if you are a short term trader, then any close below 4980-5000 is not a good sign for short term momentum.It will be a good sign to scale out of your short term positions and observe the next moves. 4900-4920 is the next level to watch.

If you are a slightly longer term or medium term investor, this might present you with an opportunity to accumulate stocks that you might have missed out in the last rally. This is a momentum market and adding momentum stocks on sharp corrections is a strategy that usually works well.

Markets will do everything to throw out the greedy and non disciplined players out of the system.Patience and discipline will see you through.

Value and Momentum Everywhere

Investors have always searched for strategies that prodce abnormal returns in different asset classes at a lower risk. I recently read a recent paper titled Value and Momentum Everywhere which clearly states that:

• Value and momentum both deliver positive abnormal returns across markets and asset classes.
• Value (momentum) in one asset class relates positively to value (momentum) in other asset classes, and value relates negatively to momentum both within and across asset classes.

This negative correlation is very much evident in Indian context. When momentum strategies work, the value strategies perform negatively. (For instance right now, it is very difficult for value investors to find value ). Similarly back in Oct 2008, it was all about value when NIFTY went below 3000. The momentum effect was negative during those times.

This is an important distinction to keep in mind while investing.Which strategy do you believe in?

A combination of the two might be less risky as is evident from higher Sharpe ratios of a combo portfolio.

Nifty at 5100 -What lies next?

The ways markets have been rising, it seems that the majority of investors have “missed” this rally and are slowly beginning to participate. This means that the chances of an extended rally quite bright. At the same time, this rally is going to become more and more “stock specific”. What you might notice is that while the markets move, your portfolio remains stagnant/underperforms if you are in wrong stocks.This is what I have witnessed after analysing a lot of  portfolios sent to me for  free evaluation.(If you need an opinion, just send it across to me)

As a strategy, I am focussing a lot on identifying momentum picks for short term rather than taking a lot more long term bets. This is a time to make some quick money and then conserve your cash for some longer term investments at a later stage.

I am also turning neutral on IT stocks and keeping a close watch on pharma stocks. Both of these sectors have given us spectacular returns and it might be prudent to reduce position size in these sectors.

I am also turning overweight on oil and gas as we witness another bull run in crude oil. Couple of weeks back I had recommended Cairn energy to my clients and it has yielded handsome gains.We continue to look for more stocks in this sector.

As far as short term is concerned, 4980-5000 is a good support for the indices. So 2-3% correction is never ruled out.