Has The Bottom Been Made?

A new feature has been introduced with effect from 3 Mar 2008. Now you can listen to an audio of all the posts written here. The link to the audio is at the end of this post. Click on ‘hear this post’ and a new window will open which will create an mp3 file and then read the post for you. Just make sure that your speakers/headphones are on. Now you can listen to the posts even in your car while driving to work, provided you have opened the page on your laptop. The biggest advantage is to the people visiting the site from their mobile phones. They can just click the link to the audio and the post will be read out to you. Great, isn't it?

Below is the 60 minutes chart of the Nifty. As seen from the chart, the Nifty comfortably breached the downtrending line which was shown on the chart yesterday. In yesterday’s newsletter we had discussed a number of negatives visible on the chart. Excerpts from that newsletter have been pasted here:

1. The Nifty is finding resistance near the blue downward sloping trendline which is currently near 4675.
2. The last pivot high was the high of the day today which is at 4734.
3. There is a very strong trendline near 4750 on the daily charts and that is more likely to push the Nifty back than the short term uptrend pushing it up.
4. The Relative Strength Index (RSI) has made a bearish head and shoulders pattern, though it has not been confirmed as yet.

Now lets look at each of the negatives one by one.

1. The resistance line near 4675 was broken on opening itself.
2. The pivot high at 4734 was also broken on opening only.
3. The ‘so-called very strong trendline’ also was not hard to cross and was crossed in the first hour of the day.
4. The head and shoulders pattern forming in the RSI was cancelled today.

So, all the negatives ‘went for a six’ today and we are left with positives alone. Is that a good enough reason to buy? Well, maybe it is. But, first of all, a little bit of analysis is required as to why the markets recovered today. Our markets were going down because the US markets were going down. There were fears of recession, which, to some extent, are still there. Because of the sub-prime crisis, the financial stocks in US suffered a lot. So much so, that JP Morgan lost 31% of its value in a period of 10 months, Goldman Sachs lost 39% in only half the time, Lehmann Bros’ stock prices came down by 52% in a period of a month and a half and the worst affected was Bear Stearns which lost 96% of its stock price. It was so badly affected that JP Morgan agreed to purchase it at only $2 per share whereas the price in Oct 2007 was $128.

Now JP Morgan has agreed to pay $10 per share as against the $2 quoted last week. This suggests that the financial stocks may not have been as badly affected as it was expected. This news made the markets bounce back a little. But have the recession fears gone? No, not yet. They will come back to haunt us again in some time. Bad news will, probably, keep trickling in in the months to come. But, for now, there are expectations that the concerns over a possible recession have stabilized.

Another reason why the markets were going down was because of concerns of the Yen carry over trade. Till a few months back, Japan had a no interest rate regime while the interest rates in US were in the range of 4-5%. This gave a very good opportunity for people to borrow money in Japanese Yen, invest in the US markets, earn a return of about 5% per annum and then return the yens interest free. Now, the interest rates in Japan have increased to about 0.5% and interest rates in US have gone down to about 2-2.5%. And the same thing is not very profitable now and with the interest rate differential decreasing and the dollar depreciating against the yen, people were in a hurry to liquidate their positions in the US and return the yens. The situation was so bad last week that a US dollar could only fetch about 95 yens. Now with the Yen to dollar ratio going back over 100, that also seems to have stabilized. So, as far as the US markets are concerned, the worst seems to have been over.

Looking at the India story now, we have seen that the GDP growth of our country has been about 8.5% and above. Sure, there are signs of this growth rate slowing down to between 7 to 7.5%. But that is still a very good growth rate, specially for an economy of our size. No other country having an economy of such size can boast of a growth rate this high except China. That is definitely a big positive for India. And this is likely to continue for a long period of time due to the demographics of India as explained in an earlier newsletter. Talking of the interest rates, US is now down to an interest rate regime of between 2-2.5% whereas India is still in the region of 7-7.5% with no likelihood of a rate cut in the immediate future. This differential is now more than 5%, a large enough differential. Now the yen case may happen in India also that the investors may borrow money in US dollars, invest in India, earn a return of 7-8%, and return in dollars with 2% interest, thus pocketing the differential. This is another reason why the money should now start chasing India. But this is all a long term story. We are still quite confident about the long term story being good for India. But what about the short term?

Yes, the markets did rise quite a bit today and in the process kicked aside all negatives. It did confirm the start of a new short term uptrend but is this the end of the bear market? Was this the bottom? Well, that can never be said with conviction until the next bottom is made. The next bottom will tell us whether this was the bottom or there are more bottoms in store. And yes, 4750 is again the level to watch. It has now turned into a strong support. Resistance comes between 5080-5100.

Nifty calls suggested yesterday would have made very good money today. A big move above 4900 tomorrow MAY signal the end of the intermediate term downtrend too. But we need to wait and watch the movement tomorrow, and more importantly, the next dip. As of now, since the short term trend has changed to up and there are chances of a possible bottom having been made, we should be buyers on any dip with a stop loss of 4480 (the previous pivot low). But be strict about the stop loss. We would not like to get caught on the wrong side of the market.

Happy investing!!!

Other Posts That May Interest You