Will IT stocks be our saviours?

IT stocks which have been in a downtrend for quite a while now seem to be getting into an uptrend. With rupee hitting new lows against the dollar, things are not looking that bad for the sector.

This might be the beginning of a new uptrend in the sector.

Infosys and Wipro looks a lot better to make an upmove.

Bull market uptrend or bear market rally?

It looks like the world is still debating if this is a bull market uptrend or a bear market rally. We are working with couple of “what if” scenarios and so far we have been long on this market from the 4950-5050 levels. Infact a timely entry has ensured 5-10% gains in many stocks.

Infact in the beginning of this rally I was not too sure if this was a bull market uptrend or a bear market rally but analyzing deeper, I am finding this more of a bull market uptrend. So I’d advise people to play for even 6000 in the next 1-2 months if you really want to take this low risk trade. At the same time, I’d watch for 4950-5000 on the downside. Any break below that will invite fresh shorting of this market and shall confirm a bear phase.

So ride the uptrend till you are proved wrong! 5400 level on NIFTY is a good place to book partial profits.

And keep yourself away from a lot of expert advice. An expert takes time to reverse his/her decisions whereas markets do so almost in a hurry.

Stick to large caps-especially IT,construction and banking sectors. In auto, check a stock like Hero Honda or Ashok Leyland- look very interesting.

Why “buy and hold” strategy carries more risk?

Most of us hear the advice- “Buy XYZ stock and hold it for a long time”. These advices are more rampant when markets are down and the current stock prices are usually below your purchase price. This is because no “buy and hold” expert wants to acknowledge his/her mistake . So till the stock price gets above the recommended price, you can continue to increasing the holding period ( From 1 year to 3 years to 5 years to even 10 years). Some might even recommend to buy even more while the stock continues to fall! I don’t blame them-after all their job is to offer you some hope in bad times.

There are couple of things which I have observed for “buy and hold” investing. One thing which often gets quoted in favour of “buy and hold” is that it is not possible to time the market. Of course, I can’t pick tops and bottoms but one can’t surely pick a few uptrends and avoid a few downtrends.

Secondly-people often quote the famous Warren Buffet while advocating “buy and hold” strategy. Now can you be as patient as Warren Buffet in holding a stock like Coca Cola for last 10+ years without generating any significant returns. He holds Coca Cola for its “brand value”. Mr. Buffet can afford to “own a business”and influence the way it is run. Can an ordinary investor emulate that? How many “buy and hold” investors can stay on cash like Mr. Buffet did from 2004-2007 (during the great bull run) ?

I feel that “buy and hold” carries a lot more risk for a normal investor.

From the recent memory take a stock like JP associates. The stock went from 150 in June-July 2007 to 500+ in December 2007, only to fall back to 200 in January 2008.

If you consider a “buy and hold” investor who bought at 150, he would have made 30% on his investment but his drawdown from the top would have been 60%(risk). And those who bought at above 200-250 might have experienced a negative return.

Now lets take the case of picking a few trends. Even if a trader bought at 170 and sold at 400 or even 350 (not at the peak of 500), he/she would have made a return of more than 100% (in 6 months) while having a drawdown of just 20% from the peak (your risk). Doesn’t it offer a better risk/return profile?

Another advantage is that “buy and hold” guys never know when to cut their losses . They are so blinded by their hope and conviction that they sometimes miss the real picture. Take the JP associates example again. When do you think will the “buy and hold”investor bail out? Add to it the psychological pain of seeing such huge drawdowns (50-60% sometimes) in “buy and hold” strategy. It shakes your confidence and affects your mental ability to seek superior performance in the markets.

On the other hand, if you are trading the momentum you are always prepared to cut your losers(again not easy!) and get the best out of your winners.This results in better risk adjusted returns.

The only word of caution is that you don’t want to be over leveraged while trading trends. This is because one bad reversal can ruin your trading account!

“Buy and hold” is more about the future and I feel future is unknown. Do you know how stock markets shall look like in next 10 years? Would they still be generating 20% per annum returns or will the returns shrink to 5%? Is it a good idea to hold a stock for 10 years when you don’t know its future?

Many people ask me to recommend a stock they can hold for the next 10-20 years. Although I personally like a stock like Reliance which is in long term uptrend but I am not too sure if it shall stay that way for next 10 years. What if oil falls back to $30/barrel? Will Reliance stay at these elevated levels? What will a buy and hold investor do if Reliance stock reverses sharply in case of such scenarios?

Thats I why I feel uncomfortable giving such “buy and hold” recommendations. To me they appear more risky as it involves a lot of guess work.To me a simple”buy and hold” offers no real edge to the investor.

Market Strategy for investors

The global markets have bounced with S&P in the US crossing the critical resistance of 1405 level. This might be encouraging for the US bulls ad we might see further upside momentum.

Indian market have held firm for last couple of days and clearly trending up. It is very difficult to say as to how long will they move up. As the house is divided on this being a “bear market rally” or “bull market uptrend”, the volatility might begin to pick up. Personally, I like this skepticism. I am also seeing many stocks that are ready for a good 10-20% bounce .

This is not a “buy and hold” market. This is a market where trader shall make decent money. Infact my gut feel is that coming times shall be really bad for “buy and hold” investors.(especially we actually stay in a range)

If you are a passive investor it is better to preserve your cash and live for another day to fight it out later. It might not be prudent to expect 2003-2007 like upmoves in this market. During last 4 years it was more about your putting your money into equities rather than any stock picking skill.By any stretch of imagination, we might not go from 20,000 to 100000( in next 4 years)like we moved from 3000 to 20,000! If it does happen, that shall be real party.

This market might move both ways to give a lot of money to smart traders.

Is the worst over for Indian markets?

Today’s move might have taken a few bears by surprise and now everybody is trying to know if this is a “resumption of long term uptrend ” or just a “bear market rally”.

Let me throw some data at you and see what we come up with.(Rather than a mere guess!)

A close analysis of past market cycles(about 15 years) might provide some answers( with the benefit of hindsight). This might be useful for people who have just seen the 2003-2007 period in the markets.

• Dec 1994-Jan 1996: Nifty fell from 1250 levels to 810. A drop of almost 35% in 12 months. The intermediate rallies were never more than 10-15%. So it was a clean downtrend.
• Jan 1996- June 1996: NIFTY rose from 810 to 1200 levels in 6 Months. A gain of almost 50% in 6 months. Intermediate corrections of not more than 15% are observed.What needs to be observed here is that market failed to take out the previous market high of 1250. So this might have counted as bear rally for many market participants.
• July 1996- Dec 1996: NIFTY fell from 1200 levels to 780 odd levels- a drop of almost 35%. The in between rallies were never more than 10-15%. So it was a clean downtrend.
• Dec 1996 - Aug 1997:NIFTY rose from 780 levels to 1300 levels. A again of almost 80% in 8 months with deepest correction of about 30%. This time market took out previous high of 1200 and 1250 but it turned out to be failed break out.
  
• Aug 97 -Feb 98: NIFTY fell from a high of 1300 to 940. A drop of almost 28%. The bear market rallies were again limited to 10-12% range with one or two rallies giving close to 20%.
• Feb 1998- April 1998- NIFTY went from 930 to 1250. A gain of 35% with no significant corrections.
• April 1998- Dec 1998- NIFTY fell from 1250 to low of 800. Again a 30-35% fall.
• Dec 1998- Feb 2000 - This was the IT/dotcom mania. The markets rose from 800 to 1800 in almost 1 year. A gain of 125% with intermediate corrections of not more than 20%.
• Feb 2000-Sept 2001- This was the last bear market we had in our markets. NIFTY fell from a high of 1800 to a low of 850 (53% fall) in 18 months with intermediate rallies of 25%.
• Sept 2001- Feb 2002- NIFTY rose from 850 to 1200 levels again in 6 months. Almost 30% gain.One can consider this as part of bear rally.
• Feb 2002-April 2003- A fall back to 920 levels from 1200 levels. A loss of 25% with intermediate bear rallies giving as much as 20% on the upside.
• April 2003 - Jan 2004- Beginning of current bull run. NIFTY went from 920 to 2000 levels. A gain of 100%+ with intermediate corrections of not more than 10%. A clean uptrend.
  
• Jan 2004-May 2004- NIFTY fell from 2000 to 1300 levels. A fall of 35%. A swift correction!
  
• May 2004 -May 2006- NIFTY went from 1300 to 3750 levels. A gain of 190% with intermediate corrections of not more than 10-12%.
  
• May 2006-Jun 2006- NIFTY fell from 3750 to 2600 levels.A loss of 30%. A swift correction!
  
• June 2006-Jan 2008- NIFTY went from 2600 to 6350 levels. A gain of 145% with intermediate corrections of not more than 20%.
• Jan 2008 - Present- Nifty fell from 6350 to 4450 levels. A loss of 30%. Bull market correction? Bear market? What?
  

Can we draw any conclusions from the above data? It is a little difficult but let me give it a shot.

Bull Markets:

Bull markets look a lot more simpler.They usually give more than 50% from the bottom.

Normal bull market corrections are not more than 15-20%.

In case the corrections exceed 30-35%, they are usually a swift ones (May 2004,May 2006).

And most important of them all, in a bull market markets take out the previous highs!

Bear Markets:

They are much more tricky.

From the past data it looks like bear markets are much more painful and markets fall more than 35% from top. Before 2000-2001, many of the downtrends gave a 30-35% downfall.(may be because markets were in a range) Only in 2001 did we fall more (55%).

Also bear markets rallies can extend up to 25% with 15% being the average.

Coming to present situation:

Before we begin ,one more thing one should notice is that “Future is never exactly like the past”. Before the current bull run, we had not seen gains of 188% in a single upmove! Similarly, markets can easily fall more than 55% in bearish conditions.

This is all about working on some probabilities. And hence the reason to manage risk.

Does it look more like 2000-2001 or May 2004 or 1995-96?

Right now we have had 30% correction on top. This certainly means that we might still NOT be in a bear market. Also as the correction was again swift, I won’t call this a bear market yet.

Does that mean that we are in a bullish zone? Again till we take out the previous high of 6350(a distinct characteristic all of the previous bull markets), one can’t say that we are in clear uptrend.

So as of now, this looks more like the 4450 to 6350 zone kind of market. Theoretically this is a big zone to play with-almost 35-40% in between.

So if we break 6350 on the upside with the current uptrend, the current rally shall be termed as a bull market correction while if we break 4450, the current upmove shall be construed as a bear rally. Even if this is a bear rally, this can extend almost 30-35% from the bottom. But,one needs to be less aggressive in his/her approach till we are sure.

Carefully observe the 1995-1998 period market moves(many 30-35% moves on the upside and the downside with an average of 6 month duration) and not just look at 2003-2007 period.

My own sense is that the current upmove might surprise many participants. The answer lies in the investor psychology. Many players have been hit hard (big and small) and they won’t dare to venture again. Smart players who have the capital and who were quick to react last time have the courage and the capital to make the best of the current uptrend.

One can position himself keeping these facts in mind. Don’t go after various definitions of bull and bear markets. If you are still listening to TV experts, it time to stop listening to these “equity strategists”. Just know what your risks are and then decide to play this market from the long/short side.

Please let me know if you can draw any other conclusions.

Stock Watch- Glenmark Pharma, Aban Offshore,Rolta

Glenmark pharma remains my favourite pick in the pharma space as it continues to trend up nicely. Watch out for the stock.

Similarly Aban Offshore is one of my favourite stocks in the oil exploration space. We had traded the stock last time from 3000 to 5000 and it seems that the stock is ready to make some explosive moves in the coming times.

In IT ,Rolta looks promising once it crosses 330-340 levels.

Still I would be cautious around 5050 levels. We need a strong momentum on the upside to really take a dash at 5300 levels. One good thing is the abundant “scepticism”,so that might limit the downside.

For aggressive traders,there are many good short term trading opportunities. If you are good in managing your risk, you can make some decent money.

Time to buy CIPLA?

Cipla- which has been in a downtrend for a long long time is finally coming out of its slumber and has been trending up nicely. Infact at one point of time, I had made good money shorting the stock!

This might be a good addition to the portfolio with a medium term targets of  250-280. 200-210 are good supports for the stock.

Back after hibernation..

I was not able to post during the last few days due to some personal reasons. Now I am back again with my observations.

Fortunately markets didn’t do much during the last month by sticking to the 4500-5000 range. The recent up moves have been encouraging but I’d still wait a bit before taking a trend reversal call. I think we’d know by the end of this week that the current move is part of bear market correction or is it the continuation of a bull rally. Watch for 5050 levels.

Talking of sectors-I’d pick two - Pharma and Oil. Check out stocks like Ranbaxy, Sun pharma which are in the beginning of a long term upmove. In oil sector watch out for Cairn Energy or RPL. The above stocks look very positive. With Oil in a sustained uptrend at $117, it is not surprising to see oil and gas stocks on fire!

IT stocks are also beginning to look interesting and many stocks have generated short term buys.

If you have observed the market behaviour for past few months, you’d have observed the “power of trends”.

Most of the money is made riding these trends rather than picking tops and bottoms. “Buy and hold” just increases the risk and results in massive drawdowns. Many stocks have suffered a 60-70% correction in this downtrend (even so called fundamentally good stocks!) and might never recover again. So use the bounces to get out of them.

So lets wait for an uptrend to appear.And this time do not make the mistake of crossing your “risk limits”.

The world is complex!

Seeing all the financial turmoil which is happenning makes me feel that world is not as simple as we think. Old assumptions and old correlations don’t always work. Take a recent example:

When Fed cut rates for the first time in Aug/Sept, our markets did a wonderful rally. What was the reason given- excess liquidity!And now Fed is on a rate cut spree and still people are talking of “inadequate liquidity”! The same markets are viewing the “fed cuts” as negative because it means more problems are in store.

Clearly the financial markets are driven more by sentiment rather than “logic”. The Fed is trying its best to improve the sentiment but it can’t cure all the problems of bad debt. The US economy which was fueled by debt has to take it on its chin and people have to experience pain in this phase of transition. All these rate cuts shall only delay this pain but won’t eliminate it completely. The US consumer has to finally learn the importance of savings and the meaning of financial literacy. A nation can’t run on a credit card forever.

US recession is a done deal now but we need to see how the current credit market problems and a US recession impacts global economies in the coming months.

Now the problem with India is that we have heard so much of “India growth story” in the last couple of years that we refuse to consider the possibility of big slowdown! Even when IIP numbers come at mere 2%, we call it an aberration rather than trend reversal! Another example of confirmation bias.

Even when inflation is on a rise and RBI can’t cut rates, we remain optimistic about super duper growth. Even our FM tends to put all the blame on the “global sentiment”.

We can’t view the current situation through the lens of the past. Who knows things might have changed? Remember US stock markets started to fall much before all these problems came into limelight. May be the markets have a hint about the coming quarter results and are adjusting to them in advance!

Coming back to equity markets- certainly we are in a bear territory. This doesn’t rule out couple of sharp bounces but till we consolidate and move up again,it still remains very risky.

On the investment side-the world is witnessing a move to “real hard assets” like gold. With rising inflation and falling currencies, I won’t be surprised to see Gold hitting new highs in the coming times. Anybody for $2000/ounce Gold? May be I am too bullish!

Trends,trends everywhere..

Dollar has been in a downtrend, oil is on an uptrend and so is gold. Equities are on a downtrend!All this is displaying the power of trends.

So what all do we need to do- just be on the right side of these trends. Don’t try to be extra smart by fighting these trends .These trends can really accelerate in the coming times.

Did you see how a bank like Bear Stearns got sold for just $2 dollars/share when it was trading at $170 an year back? In 1 week, it went out of business.

This raises a bigger question-Will a Citibank follow in the footsteps of Bear Stearns? Things are moving fast and the risks are way too high! And if you think this is just “America’s problem”, didn’t you believe in the power of globalization?

Stay away and let this market find a bottom. Be ready to miss a few opportunities but don’t be adventurous with your money.

Of course those of you who invested in gold might be having some real good time!Enjoy the ride in gold and commodities like crude.