Markets do a YoYo- End flat

It is a dream time for day traders and a nightmarish time for the positional traders. The volatility has become so high that it is very difficult to carry overnight trading positions.

At the same time day trading systems have started to turn profitable. In the last one week, we have got so many wild swings during the day that skimming 80-100 points on NIFTY futures is actually not that difficult. Of course day trading is extremely difficult but I am sure many traders might be enjoying the conditions.

Technically we are still below 5300 and facing tough resistance at 5400 levels. On the lower side, 4950-5000 seems to be a good base. If that gets broken, then we can easily have a panic like situation again. Although my sense is that it might not be broken in the short term due to excessive “risk aversion” in the system.

Markets Ahead-Can they stage a sharp pullback?

Are we going going to head back to 4000 or pullback to 6000+ levels? This is a billion dollar question that is haunting every investor’s mind.

Don’t you think that we worry too much about the tops and bottoms rather than our risk exposure in the market?

Many of the traders focussed too much on the top and the bottom without caring about their leverage in the market . One has already seen a carnage that happened in compressed time frame of 2-3 days. This happened because every leveraged player wanted to get out at the same time! This is one of the ramifications of living in a world where information is accessible every minute and trading possible with click of a mouse! So as soon as first sign of trouble are seen, the panic sell is pressed. And if you don’t press the “sell”, your broker does it on your behalf because you can’t pay the margins!

Only investors who were early in the game and were in control of their leverage are still in the money. Rest all have lost their shirt. According to the reports I have been reading almost 65-70% of futures open interest in the last two months was from the retail side!

Partly brokers are to blame for this fiasco because they never educate their clients about the pitfalls of doing futures trading. For them it is a big business driver in terms of volumes, so they actually encourage the clients to dabble more in the futures. On top of that, it also serves our government as it results in more STT being collected. I feel that this is the reason why more and more stocks are being added to the F&O list. I don’t understand the rationale of having so many stocks in F&O list. How many portfolio managers want to hedge a Sterlite Optical, RNRL or Essar Oil? All of us know that these are speculative plays rather than any investment plays.

Anyways, in the end the buck stops at the investor. We have to stay responsible and disciplined.

Coming back to markets, we had played for a bounce back to 5400-5500 levels . Till we cross 5500-5700 again,the medium term trend shall remain down. One good thing is that people are extremely bearish and are not participating in a big way(evident from volumes). So this market might have already formed a bottom at 4500 and might not retest it again. 4950-5000 might be a good base for this market, so there is a chance of these levels getting tested again.

It might be futile to predict the next big move on NIFTY. This can turn either way! This might be a good time to focus on stocks that look good on the longer term time frames. At the same time, till intra day volatility comes down, this market might not attract many players again.

US Fed cut-What does it mean?

US Fed has cut interest rates by 75 bps. This might be seen as an attempt by the authorities to stem the fall in the US markets. At the same time it is an acknowledgment of the fact that “US is in a recession”. Many market participants expect a further 25 bps cut in Jan end meeting of the Fed.

Now this might not come as a surprise because Mr. Bernanke is doing his last bit to save the US economy. But history has shown as again and again that Govt action can do little to avoid the bursting of bubbles. The Fed is already behind the curve and one needs to watch as to how quickly can the US come out of this slowdown.

Currently US is facing the bursting of the credit bubble and it might take months (or may be years) for things to get back to normal. US economy runs on the “consumption story” but with US consumer getting into severe credit problems, things are looking very uncertain!

And if US goes into a deep recession, the news might not be so good for the global equities. The bull run in global equities which started in 2003 might finally come to an end.

I find it very difficult to digest the fact that India can remain “isolated” from a global recession. On top of it, if there is an economic slowdown Indian companies might be caught on the wrong foot because of massive investments being undertaken by the Indian corporate sector.

Imagine what will an Infosys do with those thousands of employees it is regularly hiring?

And do you think those employees shall be spending loads of money when they know that their jobs are uncertain?

In this uncertain world, things change pretty quickly . So wait and watch might be the best policy in the coming times. And be mindful of the RISKS of going too aggressive.

Gold might be better investment than the equities in the coming times. It might be a good idea to buy it on dips!

Why is market falling so much?

Just as the markets were going up for no “particular reason” for the last 2-3 months,the same way they are coming down for no “specific reason”.

“Greed” and “fear” are the only things which can explain these moves. In my earlier post, I had written about a bubble being built in many of the stocks(greed) and today was the day when that bubble finally decided to burst(fear).

This correction might turn out to be similar to the one we had in May 2006 especially in the small cap/midcap stocks. One must be prepared for a 50-80% erosion in value of many stocks.

Technically- 5000 is one important level that needs to be watched out. Below that a slide to 4500 cannot be ruled out. In short term, a bounce to 5400-5500 is not ruled out.

At the same time, I am not seeing any evidence of strong buying at lower levels. Neither did I see it today nor did I see it on Friday. FIIs are in a mess because of subprime issues, so they have no option but to sell their EM positions.

All what might happen is-exit on rise!

Things shall eventually settle down but its difficult to say as to how long will it take.

I feel that we need to be mentally prepared for difficult times ahead. We need to be patient and be ready with our strategy.

Market Outlook

With global markets getting badly hit, Indian markets are also slowly reacting to the global situation.

US markets are looking really bad and except for couple of odd bounce backs, it has certainly entered a medium term down trend. Infact it is looking ugly in the short term.

Indian markets though relatively strong also look set to reverse the medium term uptrend which has prevailing right from September . 5800-5820 shall be level to watch out for.For any close below that, it might be good to take your profits home and then wait out the turbulent times ahead.

Looks like the party time is over in the short term! It is not a coincidence that our market top has come at the time of mass euphoria for the Reliance Power IPO.

Educomp Solutions- The great wealth creator

Educomp is one stock which has created great wealth for investors in a very short period of time. The stock’s IPO came in beginning of 2006 at 150 bucks and now 2 years later the stock is at 5000 bucks. That is more than 30 times returns !

The stock remains one of my favourite stocks and continues to trend up well.

Moral of the story- Stick to your winners and they can easily become “big winners”.

The problem is that we tend to stick to our losers like Infosys and hope for a recovery in them

Reliance trends up while INFY trends down

Whereas Reliance Inds is going its best to take the markets up, Infosys is doing its best to pull it down! Two opposite trends trying to neutralize each other!

Once can make money on both of these by going LONG on RIL and short on INFY .

Mid and small caps are also correcting after their parabolic rises in the last 2-3 months. Large Caps are looking relatively better and look set to regain their lost momentum.

The moves are now becoming more and more “stock specific” which is good for the overall health of the markets.

IT continues its downtrend, Cement looks bad

Infosys continues to haunt investors by falling more every quarter. Interestingly, the stock had generated a short term sell on my systems last week only which told me that the results were not going to be a major surprise!

So should one buy Infosys now? As a trend trader, I can only go short on the stock rather than trying to pick bottom for the stock.

1535-1540 is some level where Infosys might try to bottom out. Below that expect sub 1500 levels on your favourite IT stock.

Cement is another sector which is looking bad. ACC, Grasim,India Cements etc. – all look set for lower levels in the short term.

Auto and pharma continue to be laggards and is not showing enough promise.

Capital good space ,though in an uptrend has lost short term momentum. With o many funds launched with “infrastructure” theme, this was more or less expected!

Banking is the only sector which is showing renewed momentum and might move up steadily. The same is true for the brokerage and financials space.

Looking at the markets, my sense is that slowly this might evolve into a “stock specific” market rather than sector specific. The “low hanging fruit” in the markets might be gone. So lets be ready to work hard for our returns!

Stock Watch- Aditya Birla Nuvo

Check how one of our older stock ideas-Aditya Birla Nuvo is trending up nicely. We have also traded the stock in the last couple of weeks for some nice short term gains (almost 30%+). Keep an eye on the stock. This is the time to stick to quality. Avoid those circuit hitters!

Know your exits!

These days every trader is struggling with the problem of plenty. Almost 85-90% of the stocks are going up. Check out any small cap stock below 100 bucks and you will find parabolic price rises in almost all of these. It seems this rally in penny stocks shall continue for some more time. It is the “domestic speculator money” that drives the prices of these stocks in collusion with the promoters.Therefore, such stocks might be least affected by the FII actions.

I have myself traded stocks that have gone 2-3 times in a matter of weeks and still continue to rise sharply. At the same time, most of us can easily make out that this is reaching bubble like proportions and such high price levels cannot be sustained. Therefore, it is important for every trader to avoid over leveraging and know his/her exits.

If you don’t know what are you are getting into, you might end up being a helpless spectator when this uptrend reverses.

Ask those who have seen the 1992 or the 1999-2000 bubble in the Indian markets.

Meet a “Ten Bagger” in less than 6 months!

When I first spotted this stock back in June, it was just like another penny stock at 17 . Today six months later the stock is at 191. That is 11 times its price!

The stock is VB Desai Finance and please look at the chart below. In December alone, it has moved from 90 levels to 190+ levels.

The only way you can make money in such stocks is through trend trading. A “buy and hold” never works here!Right entry and right exit are the key to making money.

For your information- the stock had moved from 2 to 32 during 1999-2000 and then fell back to 1 in 2001!

Welcome 2008- NIFTY hits a new high!

2008 has been welcomed with a new high on the NIFTY! The uptrend is continuing as expected and everything is going up!

I have been meeting a couple of market veterans and many of them have been confused by this sustained upmove. This is one of the longest uptrends Indian markets have seen and many people are finding it difficult to come to terms with it-especially the old timers!

On the other hand, the newbies are rejoicing. People are slowly getting gung ho about equity markets and those who earlier experimented with mutual funds are slowly turning to being active investors in the stock markets. And the markets have not disappointed them either. 100% gain in 1 -2 weeks is also not unusual! Even I had recommended some penny stocks to my clients and was surprised to see their sharp upmove.

As I had written last time, the scene is similar to Dec 1999 or May 2006.Technically, I am still to see signs of any crash but the beauty of crashes is that they surface from nowhere. And let me tell you many stocks fall as much as 70-80% during such corrections.

Infact, technically I am playing for 6600 on the NIFTY now but at the same time we are being extra cautious about the quality of stocks we add. This market can easily lure you into entering “cats and dogs”. The problems with stock markets is that the “moment” a retail investor starts to gain confidence, the markets behave in a manner to shatter that overconfidence.

And I am sensing that “overconfidence”. The other day I was talking to a guy-a  guy who runs a restaurant but watches CNBC rather than MTV during market hours! He told me stories of stocks he bought at 60 paisa and now the stock is 4 bucks! He also told me how trading futures is a “zero loss” game because he never cuts his position and the stock always rebounds above his buying price!All I could do was offer a smile to him and nod at his ignorance

So all I can suggest is-do NOT drop your guard.In other words-assess your RISK constantly.

May this year bring a lot of wealth for all of you!