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.