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.

Stock Ideas – Deccan Chronicle

Print media stocks have really picked good momentum. I’ve had the first look at Deccan at around 100 levels and the stock has quickly climbed to 150 levels. The stock looks a very decent bet in the medium to long term with targets of 200 and 250 possible on the stock. The newsprint prices have fallen and the company has increased ad rates. This might be one of the reasons for change in sentiment on the stock.

Market Outlook

When the current  up move started in July, I had written that the current move can really surprise on the upside. I also had a 5150-5350 target in mind for the current move. Usually, I don’t have fixed targets but these are the areas where I focus on risk reduction and evaluate my positions.

Rather than being a runaway rally, this rally has been very steady and has been characterised by regular profit booking at each higher levels.Also another good feature has been the fact that not all stocks have participated. And on top of it, the scepticism about this move is still evident.

All this makes me believe that we might trend even higher in the short to medium term (may be 5500+). The key is to be in the right stocks because if you are in dead stocks, you might not be able to take advantage of this momentum driven rally. If you are a value player, then it might be prudent to remain patient and sit out.

And as I said earlier, this is also a time when you pay extra attention to risk. Catch the big moves but understand when to get out. Don’t just focus on what and when to buy, focus on when to get out. We get  blinded by these large moves on the upside. Read this post written in Jan 2008 just before the market crash.

Does broker research add any value?

Someone asked me for some fundamental research on  JSW Steel after seeing my BUY recommendation. Suddenly I thought about checking as to what other analysts have said about the stock in the recent past.

Luckily a found a research report by Angel broking written in May 2009 after the company’s Q4 results. The price was quoting at 400 odd levels and their analysis made them issue a SELL with a 12 month target of 285!

And where do we see the stock 4 months later? Almost double the price at 900!

This makes me doubt the quality of research done by these brokers. You can be off target by 10-15% but to be off target of  400% is awful.

This is not an isolated case. Similarly PINC research had a HOLD on JSW Steel in May 2008 at a price of 997, after which the stock fell to a low of 170.

This makes me wonder the usefulness of these analyst reports in making profitable  investment decisions.

So next time you take these decisions based on these research reports by a sell side brokers, be careful. They might look very convincing but ask yourself if they are adding any value.

What is your opinion? How do you find your investment ideas?

Would you pay an investment advisor?

I was recently talking to a private banker and he was cribbing a lot about abolishment of entry loads for MF investments.

I was actually happy to hear about his pain. These commission based structures in the financial services industry have reduce the who idea of investment advisory to that of mere “selling”. Earlier as a distributor, you could pocket 2 lakhs of commission of a 1 crore investment. Now the same client is asking- why do I pay you 2 lakhs for just 1 hour of meeting? What is the value you are offering?

Private bankers/MF distributors have no answers to such questions. Many of them don’t even understand the markets and are just keen on selling products where they can make  maximum commissions. Many don’t even understand risk and return equations and are pure snake oil salesmen in the guise of financial advisors. So they themselves don’t know their value in the ecosystem.

Also, we need a change in the investor attitude. Investors just focus on making money without fully understanding the risks. And sometimes our attitude is that of “penny wise and pound foolish”. I recently had a client query who said that my products are too expensive for him. I just asked him to check his brokerage account and calculate the brokerage he had paid for the month. I also asked him to calculate his portfolio under performance for the month (with respect to benchmark). He did some numbers and found out that he had actually paid 10 times my fee as brokerage only and if we add his under performance/losses the number became 20 times the fee!

So we fail to see the big and long term picture when we invest. Infact, I have tried to save my clients  a lot of money by shifting their brokerages and help them negotiate better commission on their trades. The value of my services lie in generating good investment ideas but I  try add more value by reducing the cost of transaction for my clients.

I feel that investment management  industry  is soon going to undergo a major change as customers demand value.I believe that in future the clients will only pay for “value added”. At the same clients the clients needs to be aware of the value addition done by any investment advisor.

I am eagerly waiting for the day when insurance commissions” shall be abolished in India. These advisors have sold insurance products as investment vehicles which is so inappropriate. Again it has been driven by “commissions” rather than client’s interests.

Therefore, always ask the right questions before you buy your next financial product. Understand the risks involved.

What are your opinions about this issue?

Market Outlook

NIFTY was on a corrective path last week and ignored all the positive triggers from the global markets. Even the bonus news of RIL failed to enthuse the markets. One might have wondered as to why is that happenning.

Bull markets are usually sustained by sector rotation. so the rally started with IT and auto and then joined by pharma and banks. Now the next in line should have been likes of RIL and Bharati/RCOM but the baton was never passed to them. Infact, telecom stocks pulled out of this bull run and RIL is struggling with negative sentiment of cases with RNRL on gas issues. On top of that, profit booking has started to kick into Banking, IT and auto sectors.

So the net result is a temporary stalling of this upward journey.

My sense is that the rally will now be “stock specific” especially in the midcap and small cap space. So we might observe that while broader markets not making big moves, individual stocks continuing to rocket.

The current range for the markets is 4800-5100 and it might be good if we spend some time here. It is a little difficult to say if we shall hit 4800 but chances will brighten if we slip below 4900.

I am keeping a close eye on some real estate stocks and some of them might actually pick up in the coming weeks.FMCG sector is also a decent bet for the coming weeks. Infact, I had picked ITC for my clients last week and the stock has done well for short term traders.

What drives the market trend?

As the markets have run up so much from their lows in last one year, there are many worried investors which are questioning this rally. To determine the future direction of markets, we have to consider three time frames and what are the factors that influence them.

In short term, markets are clearly driven by sentiment trends (read greed and fear). and if you are trading stocks in the futures segment, then those moves become even sharper due to short covering or stop loss triggers. Short term players are usually on heavy dose of leverage and can’t afford to take many adverse moves. So emotions play a critical role in this time frame. Right now, the short term battle can be won either by bulls and bears.

In medium term, it is the liquidity that drives the market. The current rally in the Indian markets have been driven by the FII money which started to pour in 2009 (already $12billion+). Currently, the trend of FII flows is up and might remain so if the US growth slows down and investors turn to Asia in search of better returns. In nutshell, this trend is determined by global macro trends and flow of money.

In long term, the stocks usually follow their earning trends. So if you wish to hold stocks for long term, you need to pick stocks that have a good earning potential. Currently the earning cycle has just ended its downturn and we might see resumption of a long term uptrend.

My observation is that we usually confuse between our investing styles. We buy stock for short term and if we see a loss, we turn it into a long term bet. The trouble is that stock which usually move very rapidly in short term are many times never good bets in the long term.So if you hold them for long term, you stand to lose a lot of money.

So it is important to understand our time frame and your strategy while investing. Without that, we are like lost souls in this big universe! In fact, most of my work with my clients is in the area of  helping them evaluate and understand their investment styles.

We have to remember that investing is a hard game( although looks so easy), so one always needs to learn and train oneself. Sometimes we get too much focussed on making money that we miss the big picture. And let me tell you, watching more TV channel or reading 5 newspapers won’t do that.

Do you think more information is a blessing or a curse? Read this.

Market Outlook

NIFTY has been crawling up in a perfect manner. Every higher level is inviting profit booking and fresh shorts. This implies that the game is still balanced and there is no one-way opinion in the market.

Telecom has dented a major blow to the NIFTY and has been a major cause of slide of the indices. Also profit booking has been witnessed in banking counters like SBI. reliance has been a laggard and is failing to cross the 2200-2230 levels which are acting as major challenge. With the 1:1 bonus news, some action is anticipated in the counter.

IT sector is also witnessing some profit booking because of stronger rupee.

Overall, the picture on large caps is mixed. So the market might just consolidate for next  few days. At the same time, if FII liquidity remains strong as it has been, I won’t be surprised to see some upward bias even in the short term.

Sugar as a sector is back in action and one might see some explosive moves in this sector. Reliance Inds might finally show some moves on the back on bonus news. This might be a good sentiment booster (atleast thats what management hopes for).