Webinar on Moving Averages and Trendlines

Below is embedded a video seminar (webinar) which talks about trends, trendlines and moving averages. In case you like this webinar, and want more to come in the future, please click on the comments form below and leave your remarks

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Credit Policy Gives Positive Boost

I must apologize for not posting anything on the site except for the webinar for the last two days. It was a busy few days for me since Saturday. Anyways, I am back now and, hopefully, should continue to be regular like always.

Yesterday and today morning was nervous for the markets. The RBI credit policy announcement was supposed to come out today and a major percentage of the market was expecting a hike in the repo rates to control the inflation. A hike in the repo rates would have been negative for the markets. Fortunately, the nervousness subsided and a thrusting upmove came about when the credit policy was announced and it was made public that only the CRR would see a hike of 25 basis points while the repo and reverse repo rates would be left untouched.

This upmove today was significant in the sense that it crossed the 200 day simple moving average (the green line) today. The 200 day moving average determines the trend in the long term. The price above the 200 day moving average indicates bullishness while it suggests bearishness of the prices are below it. This move should find some resistance near 5300 near the blue trendline, though, according to our earlier post, the target still remains 5441.

Cipla has broken through its upward sloping trendline with the Relative Strength Index (RSI) showing a stronger dip than the price. This may not be very good for this pharma stock. Consider closing long positions.

This is the weekly chart of Hero Honda. Now that this range has been broken, we can look at some nice upmove for this auto stock. Consider buying on a pullback to 800 with a stop loss of 725 for a target near 960.

Sterlite Industries seems to have broken through the line at which it was finding resistance. With a stop loss of 800, it seems to be a good buy at current levels for a target of near 1040.

Tata Motors, on its weekly charts, has been moving within a range of 600 and 840 for over a year now. Now that it is at the bottom of the range, it seems to be a good time to pick up this stock for a target between 800 and 840.

For all those lovers of Tata Power out there (I hope you are reading, Mr. GK), this seems to be a good time to pick up the stock (or hold it if already holding) when it has broken through its resistance line at 1360. With a stop loss of 1300, one can expect a target of near 1700.

Happy Investing!!!

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Mutual Funds: What Are They?

Do you invest in mutual funds? If you do, you know what they are and what they can do for you. If you don’t know about them, it is high time you should. This post gives you from the most basic to the technical aspects of a mutual fund.

Who Needs Mutual Funds?

With the markets rising, as they have in the past four years, everybody wants to take advantage of the markets. There are two or three options available. The first one, but not the easiest, is that you get yourself registered with some broker, set aside some money for buying stocks and you’re on. But most people, with long working hours and stressful jobs do not have the time to monitor markets and that makes one lose a lot of opportunities.

Some people do not have the knowledge or the aptitude for stocks but still want to take advantage of it. The most convenient option for them is to give the money to a friend or an Uncle to invest on their behalf. But these friends or Uncles are sometimes scared to invest on your behalf because they don’t want to ride the guilt of you losing money if one of their decisions went wrong. Alternatively, even if they don’t feel scared or guilty and some of their decisions do go wrong, which inevitably will (because nobody is perfect), you won’t hold them in very high esteem.

The third option, and undebatably the best for such people, is to invest their money with a mutual fund. That way even if the mutual fund loses you money, the only loss of relationship you have is that you won’t invest money in that mutual fund anymore. As it is, you have a lot of other options available.

The third problem that usually comes is that you do not have enough money to properly diversify your portfolio and we all know the advantages of diversification to get good low risk returns. To properly diversify her portfolio, the investor would need to invest at least Rs.2-3 lakhs.

What Is A Mutual Fund?

Let us understand this with a very simple example. Suppose there are 10 investors, each with a capital of Rs.50,000/- to invest. None of them has a big enough capital to properly diversify their portfolio. So, they make a syndicate and invest jointly because then the combined portfolio of Rs.5 lakhs can be well diversified. But the problems that usually come with such a syndicate is that you can never trust the person completely who is in charge of all the funds. Secondly, you will always feel cheated or will always suspect the division of the profits, specially, if the investment amount of each investor is different.

So, they appoint a person who they all trust, and who has the knowledge of the markets and they pay him to invest on their behalf, and who divides the profits equally and fairly among all investors after deducting his own expenses for the time and the effort he has to put in. That, in a way, is a small mutual fund.

But Mutual Funds AMCs (Asset Management Companies) have thousands of investors and have crores of rupees to invest. That gives the fund manager control over his investments and can stay invested in stocks for a longer duration (assuming that not all investors will withdraw funds at the same time). The fund manager has a full research team backing him and he himself is knowledgeable about the markets and the AMC ensures that all profits are divided equally among all investors.

How Are The Profits Divided?

On each day, except Saturdays, Sundays and holidays, a Net Asset Value (NAV) is calculated which is nothing but the value of all the securities held by the mutual fund in its portfolio. Any investor who invests into a mutual fund is allotted units. The number of units to be allotted is calculated by dividing the amount invested by the NAV of that day. For example, if an investor is investing Rs.50,000/- in a mutual fund and the NAV on that day is Rs.150/- then she would be allotted 333.3333 units (50000/150). Unlike shares, where only whole numbers can be purchased, units can be allotted in decimals too.

Since the NAV is calculated on each day, any investor entering on any day can be allotted the exact number of units based on the value of the portfolio on that day. Similarly, any investor exiting on any day can be given the money as per the value of the portfolio on the day of exit. The amount to be paid to this investor is calculated by multiplying the NAV of that day with the number of units held by him. So, in the above example, if our investor decides to exit on a day when the NAV is Rs.200/-, she would be given a cheque of Rs.66,666/67- (333.33333 x 200), thus making a profit of Rs.16,666/67- in the transaction.

NAV Calculation

A very simple example of calculation of NAV. Suppose I have a mutual fund in which 100 people have invested (each investing Rs.10000/-), which gives me a total corpus of Rs.10 lakhs. I allot a total of 1 lakh units, each unit at Rs.10/-. Next day I go out into the market and buy shares worth Rs.9.5 lakhs and keep Rs.50000/- as cash. Suppose the value of the shares after 10 days is Rs.10 lakhs (which has since increased from Rs.9.5 lakhs). Now, the total value of my portfolio is Rs.10 lakhs in shares and Rs.50000/- in cash, thus making Rs.10.5 lakhs. Dividing this by 1 lakh (the total number of units issued) I get an NAV of Rs.10/50- per unit after 10 days.

There is a lot more to know about mutual funds but, I suppose, this post is going to become very lengthy if I delve any deeper into it. I will write another post about mutual funds in the days to come, which will talk about what types of mutual funds are there, what are the costs, what mutual funds to buy and some common mistakes people make when investing in mutual funds.

Update: This article was also published on the business and investing page of Reuters.

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Nifty Downward Bias Continues

Today was again a flat day for the Nifty with a slight negative bias. No breakouts out of the range, just stayed within it but closed near the bottom of the range at 5000. As suggested yesterday, a move below 5000 could take the Nifty to a level of 4930-4940. There is another support at 4900 and the next one at 4830. We shall have to see which support the Nifty decides to respect, if at all it were to go below 5000. An upmove shall be productive only if it were to cross 5080.

But what I found interesting in this 30 minutes chart of the Nifty was that the Relative Strength Index (RSI) seems to be finding support at 40. This may be good for the market if it decides not to break down.

Today was also the F&O expiry day. That was expected to bring high volatility and choppiness into the market. But the kind of volatility that was expected did not come about. Maybe it was because of the low volumes and open interest this month which was caused by the nervousness in the markets.

As expected, our recommendations yesterday did not go right today because the broader market remained weak. That was what we had warned yesterday that though some buying signals were there, the reader has to use her own discretion whether to take the trade or not because we were expecting the broader market to come down.

No stocks being discussed today since the Nifty is showing signs of weakness and taking long positions now may hurt our financial health. We shall wait for the Nifty to give us a buy signal before taking any long positions.

Happy investing!!!

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Small Downfall Still Expected

As expected, the Nifty did go down today. During the day the Nifty did try to go up but could not go above yesterday’s close. It did manage to reach there but turned down again to close near the lows of the day.

Today we have the 30 minutes chart of Nifty with us. In the last 3 days we have seen that the Nifty has remained within a very narrow range. It may be consolidating within the range. What will happen after the consolidation is over is anybody’s guess. It has support between 5000 and 5010 and resistance between 5070 and 5075. This gives us a total range of 75 points. Once the Nifty decides to move outside this range then it gives us a target of another 75 points in the direction of the breakout. Of course, these targets can easily be overshot too depending on the momentum.

Let us look at the pros and cons of this range. The pros first. The Nifty had gone up about 450 points in the current rally, on the daily charts, without any meaningful correction. A correction/consolidation is healthy for the market. We want the Nifty to consolidate and catch up its breath before it starts running again. We don’t want it to keep running, become breathless and then collapse. So in that regard this consolidation will be good for the market and the results will be known once the Nifty crosses 5080.

And the cons? The latest rally, which was today’s rally, failed to reach its earlier highs near 5070-5080 and that signifies that there is weakness in the markets at higher levels. Another interesting observation on the charts is that it has made a small bearish/inverted head and shoulders pattern within this range. This pattern, though, has not been confirmed yet. A break below 5000 will confirm this pattern. The target for this bearish head and shoulders pattern will be about 4940. At this point, there seem to be more negatives than positives in the short term.

There are a few charts which are giving buy signals and have been discussed below. But one’s own discretion is required because we are expecting the broader market to come down a little. Please note that some of these stocks may be available at a cheaper rate in a day or two but the buying signals remain valid till the stop loss level is hit.

Aditya Birla Nuvo is showing some signs of improvement, as can be seen from this daily chart. What looks positive for the stock is the support for the Relative Strength Index (RSI) near 40, as marked by the circle. A move above 1500, which may or may not come tomorrow, should be positive for this textiles stock. A stop loss of 1375 will be prudent while waiting for a target of close to 1700, where it will meet the resistance line.

Arvind Mills, on the daily charts, has broken through its resistance line accompanied by huge volumes. This is bullish for the stock. The RSI is close to 80 and it is generally advised to wait for a pullback before buying. But seeing the chart, we can see that Arvind Mills has closed near the highs of the day without showing any signs of a pullback. Under these circumstances, it can be bought at the current levels with a stop below 50 for a target of between 65 and 67.

Hindustan Constructions has been moving within a narrow range between 110 and 140 since the last month and a half. It is now near the top of the range and may break out of this range. If it does it gives us a target of close to 170. A stop loss below 125 may be safe. But this stock should be bought only if it were to go above 140. Ignore the movements in the first 30 minutes as they are subject to volatile movements more because of global cues than because of technical or fundamental reasons.

Another very interesting chart of Jindal Steel. As can be seen from the chart, the price has been making lower highs while the RSI has been making highs at almost the same level, if not higher. This is known as a bullish/positive divergence when the price is going down but the RSI is going up. Now it is close to its resistance near 2300 after a pattern which looks like a double bottom formation. Not only that the RSI which was finding resistance near the line has broken through it which gives an indication that maybe the price will follow. Buy only if it crosses above 2300 with a stop loss of 2100 for a target somewhere close to 2750.

Petronet LNG has been in a narrow range between 60 and 80 for a better part of this calendar year. It now seems to have broken out of the range, while the volumes, though increasing, remain significantly low. Not the kind of volumes one would expect to see with a breakout. So, one can take a risk using her own discretion to buy near current levels with a stop loss near 74 for a target of near 100.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the fall today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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The Case of the Vanishing Strength

It was a mixed day for the Indian markets today. The markets opened on a weak note today and remained subdued for the next two to three hours. It was only at about 1pm when the markets turned in the positive but soon found resistance at higher levels and started coming down to close only 12 points in the green (Nifty) and 44 points up on BSE.

On the whole, it was a positive for the market that it recovered and closed in the green. What was not positive is the Relative Strength Index (RSI), which again failed to cross 60. It is marked by the blue circle in the chart above. The RSI, as the name suggests, measures the relative strength of the prices now with respect to its historical prices. Theoretically, RSI oscillates between 0 and 100 but 0 and 100 levels are rarely seen. RSI is considered to be oversold below 30 and overbought above 70. A lot of people prefer to say that RSI is bullish above 50 and bearish below it. I am one of the few who believes that RSI is bullish above 60 and bearish below 40. This is why I consider finding resistance at 60 a negative sign. All the strength visible on the charts now seems to be vanishing with the RSI not being able to cross 60.

There is another circle (green) marked on the RSI chart which shows that the RSI had found support at 40 in the beginning of the month. That was an early indication which showed that the prices could have broken out of the range. And that did happen. Today’s RSI is showing that the prices may fall soon, maybe as early as tomorrow. Today was the 6th consecutive close in the positive and it may show a red day soon enough. The last time we saw 6 consecutive up closes was in September 2007 (that time it was 11 consecutive up closes and that is actually quite a rarity). Such other occasions (6 or more than 6 up closes) were in Aug 2007 (8 closes), April 2007 (6 closes) and Nov-Dec 2006 (6 closes).

A downmove should find support between the 4900 and 5000 zone. However, if the Nifty were to fall below that there is a strong support at 4830 which should not be broken. A close below 4830 suggests bearishness. 4800 calls recommended in the beginning of the month could be sold off first thing in the morning. They are gaining about Rs.100/- per unit or Rs.5000/- per lot of Nifty (50 Nifties). No stocks are being recommended today since the market may come down tomorrow and things may be cheaper on Thursday/Friday.

Let’s take a brief look at the American markets. The Dow Jones Industrial Average (DJIA) was moving within a range between 11740 and 12740. Generally, too, there is a lot of resistance at 12740. A close above 12740 yesterday was bullish and that too with a gap. However, a problem with gap days is that the markets tend to close/fill the gap as soon as possible. If this were to happen as early as today then it would be considered a false breakout and we will come back into the range. A noticeable thing on this chart is that again the RSI has not been able to cross 60. But if this breakout is correct (we shall come to know in 2-3 days) then we have a target of about 13700 on the Dow. If that happens, our markets should also remain strong.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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Are We in Wave 3 of Nifty?

Today was a good day for the markets. All the negative news that was there in the markets failed to make the markets react negatively. Though, the CRR hike was already discounted into the prices, yet a slight negative reaction was expected on opening today. The market decided to take into account the positive global cues rather than the negative news. Not only did it open above 5000, it never went below 5000 throughout the day.

It was a good day for our analysis too. As recommended yesterday, Axis Bank, HDFC Bank and Reliance Petro went up while ITC came down. The only stock that did not go as per our expectations was Wipro which went up and then continued to lose money through the day. Sasken Communications and Tech Mahindra, recommended in earlier newsletters, did test our patience for sometime but are giving us good returns today. We just need to be confident of our analysis and not lose patience and the markets will surely reward us.

Today, the Nifty managed to break out of the range that it was moving within between 4500 and 5000. Not only that it also managed to cross the downward sloping trendline where it was finding resistance since the last 3 months. While the target for this range breakout remains 5500, yet there are a few areas of resistance in between. Two of them at 5115 and 5385 have been marked on the chart with the dashed brown lines. Another positive visible on the charts is that the Relative Strength Index (RSI) has also crossed through its downward sloping trendline, which has been in place for almost 7 months now. There is only one thing that may be worrying and that is that the RSI still hasn’t crossed 60. A move above 60 is a sign of bullishness and RSI below 40 is a bearish sign. Hopefully, if we have another good day in the Nifty tomorrow then this hurdle also should be crossed.

Elliott Wave Theory (EWT) was formulated by Mr. RN Elliott who said that stock prices, though the movements seem irregular, follow a certain pattern and in all time frames. He said that stock prices move in waves. There are two kinds of waves – the impulse waves (a set of 5 waves – 3 in the direction of the trend and 2 against) and the corrective waves (a set of 3 waves – 2 against the direction of the main trend and 1 in the same direction). There are a number of rules given for the recognition of the waves. It is not possible to discuss all the rules here (it would actually need a number of books to list and explain all the rules) but I will discuss a few basic ones.

In the first set of five waves, the impulse waves are numbered as 1, 3 and 5 in the direction of the trend and waves 2 and 4 are corrective waves against the trend. Waves 1, 3 and 5 are of the same length but one of them may be an extended wave. Wave 3 is usually the longest but never the shortest. Wave 4 does not come into the price territory of wave 1. There are a lot of other rules and even I can’t recall all of them off hand.

Applying these rules to our daily chart of Nifty, and assuming that our numbering is correct, then the target for wave 3 is between 5175 and 5180. But wave 3 is usually the longest wave but never the shortest. If it is the same size as wave 1 then we get a target of 5131. and if this is the longest, which means if wave 3 is an extended wave then it should be about 1.618 times the length of wave 1, whose length is 502.25 points. This means that wave 3 should be 812.64 points long and from the end of wave 2 that gives us a target of 5441. While we do not know where the Nifty will go but we should just be careful around these levels.

Balrampur Chini has made a double bottom pattern, which is also known as a ‘W’pattern (because it looks like a W) and has gone through its neckline. Not only the price, even the RSI has made a double bottom pattern. This gives a target of 130 for this sugar stock. A stop loss of 90 should be safe.

Bharat Electronics (BEL) has made a higher bottom and has now crossed its most recent previous high, which seems to suggest that the downward trend is over in this stock. While no clear pattern is visible, as such, which could give us a target but with a stop loss of 1120, a target of 1475 is possible, with a slight resistance around 1310. 1475 is a Fibonacci Ratio of 38.2% and we’ll talk more about that in the weekend newsletter.

Bharti Airtel has broken through its downtrending line and should now move northwards. With a stop loss of 775, a target of 990 cannot be ruled out. Again the only worrying fact is that the RSI is still below 60 and that today’s breakout was not confirmed by a spurt in volumes.

I-Flex Solutions has broken through its downtrending line and this breakout, unlike Airtel, is accompanied with volumes. Though, RSI now is too high and may require some cooling off before we enter the stock. Consider buying below 1250 with a stop loss of 1120 for a target of 1750.

Happy investing!!!

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Above 5000, Expect a Target of 5500

Before I start with anything else, I must thank all my readers for their continued support. I have now posted 100 posts on this blogspot. It is all because of your continued support and readership that this blog is still a success. I hope that my source of inspiration – my readers – continue to extend their support to me.

Last week was a good week. The markets were closed on Monday on account of Ram Navmi and they were closed again on Friday because of Mahavir Jayanti. So, we were working only on Tuesday, Wednesday and Thursday. I, somehow, liked this three day week. I hope there are many more to come. And now on Sunday evening, Monday blues are already catching up with me.

In terms of market movement too, it turned out to be a good week. The Nifty ended all three days in the green, thus ending the week with a net gain of 180.60 points. Maybe the market too likes three day weeks. We just have to wait and see how Monday goes. If it is a down day then we’ll know that ‘Monday Blues’ don’t affect only the humans.

On account of news, it was a mixed week. The inflation figures that were declared on Thursday this week instead of Friday showed that there was a slight drop. It dropped to 7.14% as compared to the 7.41% the week before that. The RBI Governor decided to increase the CRR (Cash Reserve Ratio) by 50 basis points in two steps to 8%, which is expected to suck out approximately Rs.18500 crores of liquidity. It was surprising that the decision was taken in spite of the marginal drop in inflation but, more than that, surprising was that the decision could not wait upto the credit policy announcement on 29th April. This may suggest some harsher decisions to be announced on April 29th.

While a CRR hike of 50 basis points was expected, no change in the repo rates is expected at the moment. Even though the hike was expected to some extent, the market may still react negatively. There is a view in the market that even though a repo rate hike is not expected at the moment, the CRR hike itself will have an automatic upward pressure on the interest rates. There is also a view that a CRR hike wasn’t necessary and is not likely to contain inflation to a great extent. A major part of the current increase in inflation can be attributed to the increase in the prices of metals, the prices of which are not governed by or within India and the only way to address that issue is to have restrictions in place so that the supply is increased. That explains the reason why steel exports were banned last week.

Let’s get to the technical analysis part of the newsletter. Seen above is the daily chart of Nifty. We can clearly see that at this level, the Nifty is not only finding resistance at the top of its range but also from the downtrending line which has been in place for the last 3 months. This is likely to be a strong resistance. The CRR hike has come about at an inopportune time. This will add to the pressure that the Nifty is facing at 5000 levels. Maybe the time to cross these levels has not yet come. Maybe we’ll have to wait some more.

However, all is not lost yet. Even at the top of the range the Relative Strength Index (RSI) is nowhere close to the overbought levels (above 70), which suggests that there is still some scope left for the prices to go up. Secondly, there is a positive divergence between the price and the RSI visible on the charts. Positive divergence means that while the price is making lower highs, the RSI is continuing to make higher highs. And another positive at this time seems that the RSI has broken through its upward sloping trendline. And not to forget the influence of the global markets which all looked happy and strong on Friday (except China). Maybe, after all, this may be the time to go up. Wait and watch. Above 5000, the Nifty is looking at a target of 5500.

Axis Bank has broken through the downward sloping trendline with a big spurt in volumes. One may consider buying near 800 with a stop loss of 740 for a target between 1000 and 1020.

HDFC Bank has made a pattern of fan lines. In fan lines, in the beginning, a stock finds resistance near a particular trendline. Once that trendline is crossed, it does not change its trend immediately but now starts finding resistance near another downtrending trendline. When this trendline is crossed, it yet again finds another trendline. These are called fan lines. In technical analysis, it is usually said that once a stock crosses the third fan line, it should get a good and a quick move. Notice the spurt in volumes on breakout of the third trendline, which was absent during the previous two breakouts. One may consider buying between 1360 and 1380 with a stop loss of 1270 for a target near 1650.

ITC has a history of finding resistance between 210 and 215. Notice the presence of the two doji candles (having the open and the close at almost the same levels) which signify that this maybe a top to remain for the next few days at least. Also, notice the absence of strength in the RSI because of which it is not able to decisively go through 60. This may be a good time to exit ITC.

Reliance Petro had been stuck inside a narrow range for over 3 months now and has now come out of that range on the upside. Because of the negative news of the CRR hike, a dip to 180 is possible. It might make sense to pick up this stock near 180 with a stop loss of 165 and a target of somewhere between 215 and 220.

Wipro, on its daily charts, seems to have made a bullish head and shoulders pattern. A move above 465 should confirm this pattern. While the stop loss is a little deep at 400, it could be bought above 465 for a target close to 570.

Happy investing!!!

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Understanding Price to Earnings (P/E)

We have just seen a bear market and will now, hopefully, see the beginning of a bull market. But was it really a bear market that we have just seen? Practically speaking, a bear market is one which makes people lose a lot of money and makes people lose confidence in the markets. That has happened, so yes, this was a bear market. Technically speaking, a bear market is one which makes a pattern of lower highs and lower lows. So, while a pattern of lower highs and lower lows is visible on the daily charts, it is still not there on the weekly charts. So, we can say that, technically, we are still in a bull market.

When a bull market starts, blue chips are the first ones to go up. After a while the blue chips become expensive and then the midcaps improve and finally, when even the midcaps become expensive the demand increases for small caps. But why does this happen? Just because a blue chip or a mid cap stock has gone up, would you buy a small cap? The reason most people give is that they are better off buying a larger quantity of the small caps rather than a small quantity of a blue chip.

Let’s say you are of the view that software stocks will do well and want to invest in some software stocks. If you have Rs.20000 to invest, would you rather buy 12 shares of Infosys at 1650, which is giving you over 20% growth, or would you prefer to buy 150 shares of Ramco Systems, which is a loss making company for the last five years, at the price of Rs.136/-? Are you more comfortable buying a quality stock which is expensive or would you rather buy a loss making company which is cheaply available? Would you rather buy a Sony Television for Rs.25000/- or would you buy 5 televisions assembled by your next door neighbour for Rs.5000/- each?

Well, when you want to make money, you have to buy quality stocks. Even 12 shares of Infosys are more likely to deliver better profits than 150 or 200 shares of a company which has been making only losses since the last five years. Does that mean that you have no choice? In fact, you do have choice. When you are selecting a stock first zero in on to the sector/industry you want to invest in. Once you have decided the sector, look at the top 10 companies in that sector. Look at their last five years profit statements. If they have been giving good returns consistently in the last five years, then buy the cheapest of the lot. But how do you decide which is cheapest? The price? No, by way of price, company X may be cheapest of the top ten. But that still may not be the cheapest. The cheapest is which has the lowest Price to Earnings Ratio (P/E). We work on the assumption that similar companies in the same industry should have a similar price to earnings multiple. P/E is the current traded price divided by its Earnings Per Share (EPS). EPS is calculated by taking the profit before interest, depreciation and taxes and dividing it by the total number of equity shares issued.



Let us understand this more deeply. Let us say there are two companies A and B. For convenience sake, let us keep the numbers small and easy to understand. Let’s say A is a large company and has made a profit of Rs.1000/- this year while B is a slightly smaller company and has made a profit of Rs.800/-. Let us say company A has issued 1000 shares and B has issued 400 equity shares. So, the EPS of company A will be Rs.1/- per share (1000/1000) while that of company B will be Rs.2/- per share (800/400). This means that company B is making a profit of Rs.2/- on every share while company A is making only Rs.1/- on every share. So, while company A is making more profits on the whole, it is making lesser profits on each share issued.

Let us look at the price in the markets. Company A is trading at a price of Rs.40/- per share, company B is trading at Rs.50/-. Let’s calculate the P/E now. Company A has a P/E of 40x (40/1) while B has a P/E of 25x (50/2). So while company A may be larger and is making more profits in money terms its price is 40 times its earnings while company B’s price is only 25 times the earnings. This shows that even though the price of A is cheaper, company B is cheaper in terms of P/E. So, from this example, it is clear that it makes more sense to buy company B rather than company A.

So, that is all about EPS and P/E. While I have made every effort to make it as simple as possible, I know a lot of the readers will find some grey areas in this article. I encourage you to please post your comments by clicking on the comments button below in case you still have any doubts regarding these terms.

Happy investing!!!

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Greed And Fear: When to Use Them

Greed and Fear are two emotions which you should concentrate on eliminating when you are trading in stocks. These are your worst enemies. If not eliminate them, at least use them at the right time. Warren Buffett once said that we should be greedy when others are fearful and fearful when others are greedy. Everybody, or rather most, displayed greed in the year that went by and I was fearful all that time. Fearful enough not to invest any fresh money into the markets but not fearful enough to liquidate my portfolio. I did some portfolio churning but seeing the value of my current portfolio, it seems that wasn’t enough.

I know of an investor who had invested about Rs.15 lakhs (Rs.1.5 million) in the markets (mostly in equity based mutual funds) and had made a profit of more than Rs.5 lakhs. He wanted to buy a car out of those profits (after already having purchased a refrigerator and an LCD TV). His wife had asked him to take out his profits and buy a Maruti Suzuki Esteem or a Swift but he wanted to stay invested in the markets for some more time and then buy a Honda City after his profits increased to Rs.8 lakhs. Perfect example of greed. It was greed that ‘killed’ him. Today, he cannot even afford to buy the Tata Nano (the one lakh car) out of his profits. Thankfully, unlike most people, his capital is safe but all the profits are gone.



Most of us, me included, have seen our portfolio values reduced by 40 to 50%, and some even more. We have lost our confidence in the markets. We have learnt the hard way that markets can never give us anything but can only take. Whatever the markets give us is taken back by them and in much larger proportions. We have understood that we can never be successful in the markets. We are fearful. All of us. No, not all of us but most of us. Because I am not. I am being greedy these days. Being greedy because everyone else is fearful. This is the time to pump in additional capital in the markets.

In the market only those make money who are smart. The rest always lose money. The smart people buy when the markets are down, when there is a lot of panic. And they sell when there is a lot of hype, lot of greed, lot of expectations. They are the contrarions. The ones who do opposite of what the others do. And it is the contrarions who make money.

I once had the pleasure of meeting Mr. Madhusudan Kela, the head of equities of Reliance Mutual Fund, at a seminar to be followed by dinner. After the seminar when everybody assembled for dinner and went straight for the soups and salads, Mr. Kela made his way towards the desserts counter. When asked why he was starting with desserts, he came out with the reply, “Being a contrarion has just become a habit for me.”



Just last fortnight I was talking to a client who was asking for advice on what to do. And I told him that since the markets were in a panic now, it seemed to be the time to invest some additional money. He was scared of what would happen if the markets were to go down further. And I told him what I write in my newsletter. That we can never hope to catch the bottom. The best we can do is to buy close to the bottom. We can invest in times of panic and maintain the last bottom as the stop loss. We only lose a little that way. But we make it all up when the markets start going up.

The most common excuse for people at such times is that there is no money to invest because they did not get a chance to liquidate their portfolio when the market was at a high. I understand that. I have been in the same boat. But invest whatever you can invest in these difficult times. This is the money that will actually make money for you. It is today’s greed that you exhibit that will give you the confidence to be fearful when you see greed all around you.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the financial situation today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

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Infosys Up, Markets Down

Nifty, after breaking through the 4630-4830 range, opened on a high today with but then failed to maintain the heights. As mentioned yesterday, a bout of profit booking set in because market participants are still scared of the markets and are happy with small profits. There is a lot of resistance to be expected between the 4950-5000 zone. On the way down 4830 and then 4630 are good support levels. Buying for the short term could be done at these levels. A move below 4730 will change the short term trend to down.

As suggested in earlier newsletters, a trend in Nifty can develop only if it goes above 5000 or, God forbid, below 4500. As of now it seems as if going below 4500 is a remote possibility. On the daily charts the Nifty has made a doji pattern which means that the open and closing price were very close to each other. This represents indecision. And since dojis are normally found at the end of short term trends, and since today’s doji was found near the top of the range, we may expect the Nifty to come down for a day or two. It may then decide to find support near 4830/4630 and then reverse or continue its way down to 4480. Let us wait and see what it decides to do. A move above 5000 could take it up to 5450-5500.

Let us look at Infosys Technologies. Two days ago it closed at a price of 1421.90. Tuesday morning it came out with its results which were not brilliant but just in line with the expectations. Considering the hostile conditions in which Infosys was operating, such normal results may be called brilliant. Anyways, in the results, it confirmed that in accordance with its guidance of an EPS (Earnings per Share) of 81.5 given last year, it has actually delivered an EPS of 81.56. At a price of 1421.90 and an EPS of 81.56, the Price to Earnings Ratio (P/E) is 17.43x. For next year Infosys has given a guidance of an EPS of 92.30-93.90. And as is its reputation of exceeding its guidance, it may be able to deliver a growth of 17-19%, lets take it as 18%. At 18% and with the base at 81.56, next year’s EPS is likely to be 96.24. At an EPS of 96.24 and a price of Rs.1421/90- the P/E is only 14.77 which is very cheap. Just to maintain its current P/E of 17.43, Infosys would have to be priced at Rs.1677/-. This is the main reason why we saw it jump in the last two days.

In a year or two, the situation in the US should be better than what it is today. As the situation improves, the P/Es will have to be rerated. At 17x what is expensive today may even be cheap at 25x when the situation is better. Considering that the situation does not change drastically but only becomes a little better, we can easily expect Infosys, a market leader, to be trading at 22x its earnings. With an EPS of 96.24 and a P/E of 22, Infosys would have to be trading at Rs.2117/-. Since the markets always look into the future and assuming that Infosys again gives a guidance of 18% for FY 2009-2010, then the EPS in 2010 would be 113.56 and with an EPS of 113.56 and a price of 2117, it gives a forward P/E of only 18.64x which is not, in any way, stretched. It is very reasonable. So 2100 maybe the target one may be looking at a year from now.

But what do the technicals say? Look at the daily chart of Infosys above. Two good days have pushed the price decisively out of the range between 1400 and 1550. This range breakout gives us a target of between 1650-1700. On the other hand, it has also broken out of its downtrending line and has come back in an intermediate uptrend. The target of this pattern is close to 1950. So, with a little bit of resistance between 1650 to 1700 it may go up to meet its target of between 1900 and 1950. It’s a buy now with a stop loss of 1520.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

Update: This article was also published on the business and investing page of Reuters.

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Smaller Range Broken, Bigger Range to Continue

There was a breakout today. The Nifty, finally, decided to break through the shackles of one of the ranges within which it had been arrested for the last 10 days. The fact that this breakout has come with a range expansion is a confirmation that the breakout was genuine. Range expansion means that the difference between the high and the low of the day was higher today than it was in the last 10 days. The 10 day average of the true range was about 130 till now but today the range was well over 200 points.

But what does this breakout signify. Well, technically speaking, not a lot. Except that the top of the smaller range (4830) now becomes the support and the top of the larger range (4970-5000) is now the resistance. As mentioned in yesterday’s newsletter, a clear trend for the Nifty will emerge only if the boundaries of the larger range are broken through, upwards or downwards. This breakout is definitely a good sign for short term investors as it confirms that the short term trend is now up and that fresh short term long positions may now be entered into whenever there is a small pullback to 4830 or in its vicinity.

Any upmove now should find resistance between 4970 and 5000. A sustained move above 5000 (2-3 days close above 5000) should be a signal that the intermediate trend has also changed to up. That should be a good time to buy. Once we cross 5000, I will tell you more reasons to buy, signs of which are visible now, yet it is too early to discuss a possibility which may not (I said ‘may not’, not ‘will not’) happen in the near future.

I never realized that to bring the market out of the pits, results from a company like Infosys Technologies would be required. With all the doom and gloom around, even a little bit of stability in American markets could not pull our markets up. A company like Infosys, a company in a sector which has grossly underperformed the rest of the market for many months, delivered results in line with expectations and the markets were very happy with that.

But what was so good about the results that the whole market suddenly gained strength. Well, it was not the results, it was the sentiment. The fact that the results were not bad, in itself, was a big sentiment boost for the market. But how good were the results? Infosys delivered a profit of Rs.4659 cr. against a profit of Rs.3856 cr. in FY 2006-07 and sales of Rs.16692 cr. versus Rs.13893 cr. in FY 2006-07, a jump of over 20% year-on-year in both the topline and the bottomline.

This was expected to be a bad year for Infosys and the expectations are no different for the coming year. But Infosys has given a guidance of an EPS (Earnings per Share) between 92.30 and 93.90 for the next year versus an EPS of 81.56 in the current year. At 93.90 it means a jump of over 15%. A company like Infosys, which has been known to announce results better than the guidance, is likely to show an earnings growth of 17-19% in the coming year. Well, if those are the expectations from a bad year, imagine what they would be in a good year. And if this is for a company which operates mainly in the US and has borne the brunt of the US recession (with decrease in onsite sales and a falling dollar), imagine what the results will be for companies which are virtually unaffected by the US recession. It is this realization that changed the direction of our markets (despite weak global markets) and changed the sentiment.

I have been saying since a long time that the US recession should not affect India much but unfortunately, it took the market a long time to realize that. All I would say is – better late than never. Maybe happier days are back again. But it won’t be very easy. The confidence of the market has been shaken up badly and there will be bouts of frequent profit booking and a small drop in the markets may lead to panic like situations. But those are the times, one should be looking forward to, the times which can give us many good opportunities to invest.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the rise today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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Closer to a Breakout

The apex (end) of the triangle has been reached. Above 4800, the Nifty should have broken out of the triangle. And it did and stayed above 4800 for about an hour or so. But it did not give us the kind of ‘explosive’ move that we were looking for. If it does not then we shall consider this to be a false breakout. If it does go above 4800 tomorrow, which seems improbable at the moment, then we shall again be looking for that ‘explosive move’.

The world markets are in a bad shape. The Dow Jones was down about 2% while the Nasdaq was down about 3% on Friday. The Asian markets, which were all in the green on Friday, reacted sharply on Monday with the Nikkei (Japan) and Hang Seng (Hong Kong) down in excess of 3%, the Singapore Straits almost there, and the Indonesian markets down by 1.4%. The Chinese markets were the biggest losers and the Shanghai index lost almost 6% on Monday. The European markets, at 6pm IST on Monday, were down about a percent each.

The triangle remains valid between the levels of 4700 and 4770 now. Any move outside these boundaries, without any explosive move, will mean that the triangle is not valid. In all probability, unless the American markets do well on Monday night and the Asian markets do brilliantly on Tuesday morning, Nifty will open between 100-150 points down. This means that we shall be looking at an opening figure of around 4650. And that is already outside the limits of the triangle. So either an explosive down move may come which may take us all the way down to 4480 or we should find support near 4630. If we do find support at 4630 then that invalidates the triangle pattern.

But what is it if it is not a triangle. Let us look at some other scenarios as well. For that refer to the chart above. This is the daily chart of the Nifty. You can see two blue rectangles here. These are the two ranges that the Nifty is moving in. One is a broader range between 4480 and 4980 and the other is a range within this range between 4630 and 4830. One interesting point that comes to mind is this smaller range is exactly in the centre of the bigger range. The mid point of both these ranges happens to be at 4730. So, 4730 is a key pivotal point below which the markets remain bearish and above which they turn bullish. So, if the triangle is not valid then we are looking to move between these two ranges. A move outside the broader range only will signify a clear trend for the Nifty.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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Renewable Energy: Stocks of the Future

Update: This article was also published on the business and investing page of Reuters.

It was another day for the Nifty within the range. Volatility of the Nifty is now very low. Now the range is only 120 points wide between 4680 and 4800. We should see a breakout soon enough. A breakout out of this contracting rectangle should take the Nifty back within the broader range of 4620-4950. A move outside this broader range will give us a real movement. There is no use of making predictions about the direction of the breakout. The market will tell us which side it will break out towards. We shall position ourselves to buy in case of a breakout on the upper side.

Since the long term trend of the Nifty remains up, we should plan to buy on every dip. A dip is a rare occasion in a bull market. Luckily, we are getting these opportunities every third day now.

Yesterday, we had discussed that the fundamentals of the economy are still strong and that the markets have essentially crashed because of low liquidity, heavy speculation and problems in the USA and not because of any fundamental reasons of our country. And as the problems in the USA settle down, we should see some recovery in our markets too.

Today we shall discuss about the energy sector. Let’s start with oil. We know that oil is present only in limited quantity and there are only finite sources of oil available. There are sources which tell us that the production of oil has already peaked out or is likely to peak out in this decade. And also that for the last several years the world oil consumption has been more than the oil production and the demand is still growing. With growing demand (approximately at the rate of 1.4% per annum) and reduced production, we are eating into our reserves and according to the NATIONAL CENTER FOR POLICY ANALYSIS (NCPA) the oil available shall only last till the year 2056, but with better conservation and the use of substitutes we may actually scrape through to the year 2100.

To protect our future generations from going back into the stone age, we shall have to look for alternative sources of energy. A lot of countries are now taking steps to shift to alternative sources so that we could reduce the consumption of oil and make it last longer. Warren Buffett once said that If a business does well, the stock eventually follows. Alternative energy is one of those concepts which will continue to do well, at least in our lifetime. So, it may make sense to buy stocks which are into renewable energy like Suzlon (wind power), NTPC (thermal power), JP Hydro (Hydro and thermal power), Neyveli Lignites, Webel SL (Solar energy) etc. Buy them today and hold for long term. Your children could become crorepatis with these stocks some day.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the article today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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Fundamentally Strong Reasons to Buy

Today’s movement did not help the markets much except giving us a day in the green. The markets are still stuck within a range and there are concerns amongst some circles that the markets may break down below the range rather than breaking out upwards. All that is very true. The markets could break down either way. There were some positive signals in the short term charts but those too seem to have fizzled out.

Stocks, or the markets as a whole, cannot be down forever. There has to be some value buying at some level. Agreed, that the GDP growth rate is slowing but it’s still a very good rate of growth. Agreed, that the inflation is rising and that the growth may become still slower but we will be able to control the inflation and the companies will be able to show good earnings despite inflationary pressures. And then the value buying will emerge. The smart money always buys first. We have to ensure that we become smarter and buy with them, if not before them.

Presented below is an analysis of the value and the fundamentals in the Indian markets, which I had received from someone in an email. The source is unknown so cannot give credit where it is due, for the same. The last leg of the recent bull market was driven more because of excess liquidity, leveraging and rumours than because of fundamental reasons. The same situation had been last seen in Feb-Mar 2000 when the markets rose because of the dotcom bubble. After Mar 2000 we saw a huge bear market which lasted almost three years. Is it going to be the same this time too? Let us do some number crunching and look at the fundamentals then and the fundamentals now.

In 2000-01, the markets were trading at a forward P/E (price to earnings ratio) of 35 times while this time they are trading at 16 times. The savings and investments (as a percentage of GDP) which were about 24% that time are now about 35%. The GDP growth that time was 4.35% and now it is 8.73%. Inflation was growing at 7.16% in 2000-01 and is now 4.21% (and is now catching up). What is important is the earnings growth which was (on an average) 4.43% 8 years ago is now between 17-20%. The rally, which at that time was mostly in the Technology, media and telecom sector is more broad based now.

The last 10 years data reveals that while the Sensex now is only 4.1 times of the Sensex then, whereas the total earnings now are 7.5 times of the total earnings then (of the BSE 500 stocks). The EPS (Earnings Per Share) has been showing a growth of more than 30% in the last two years and an average growth of about 25% in the last 5 years. Assuming that the EPS grows by 20% in the next three years, by 17% in the three years after that, 15% in the next block of three years and then by 12% in 2018 and if the P/E ratio stays at 16 times then by 2018, the Sensex should be trading at a value of 63485 in the year 2018. The following table shows what the value of the Sensex should be in each financial year upto 2018 at various P/E levels between 12 and 22, if the EPS follows the growth pattern shown above.

Sensex at 87292 at a P/E of 22 in 2018 is unbelievable. But you never know, with the kind of growth India has been witnessing, that may be very much possible.

The above exercise just goes on to prove that the fundamentals of our country and the Sensex are still very attractive. We should now start to look for buying opportunities whenever they come. A day when there is a gap down opening or a lot of panic should be a good day to start. Buy good blue chip stocks which have excellent fundamentals but have been badly beaten down by the street. These companies, over a period of time, will definitely outperform the broader market.

I remember the time nine years ago when I was doing my MBA and I remember our Portfolio Management professor showing exuberance (and a pleasant shock) over the Dow touching 10000 the previous day. And at that moment I was wondering whether I would ever see the Sensex at 10000 in my lifetime (Sensex was only about 3800 in those days). And I thought that even if I did see Sensex at 10000 some day, Dow would probably be somewhere near 50000 at that time. I didn’t have an idea that when Sensex touched 20000, Dow would have been languishing at 14000 levels. Well, that is history. Lets see what the future holds for us.

Happy investing!!!

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Range Bound Markets Continue

On almost a daily basis, we are seeing one or two up days in the Nifty followed by one or two down days. This happens within a range. We have also been observing since the last three weeks that the Nifty has been making higher lows and lower highs, signs that it is going inside a contracting triangle. This triangle has been drawn in the 60 minutes chart shown below.

This triangle will be broken soon, especially since we are now approaching the apex (end) of the triangle. A move below 4650 or, on the other side, above 4830 will signify the end of this triangle and that will bring us back in the broader range between 4480 (and more recently, 4625) and 4970 which has been shown by the dotted brown lines. Assuming that this triangle is broken out on the upside at a level of 4830 then we get a target of approximately 5450. But before that we would still have to cross 4970. So, while a target of 5450 is possible but some amount of resistance should be expected near 4970.

Why have we been stuck in this trading range for such a long time? If we remember correctly the market fell sometime in Jan and now it is April. We are in the 3rd month now. Well, to be precise 77 days (calendar days, not trading days) have already gone by since we made that low of 4448 on the Nifty. I actually did an analysis of the major falls that we have seen in this bull market which started in 2003. The markets have seen major lows in May 2004, Jan 2005, June 2006, Mar 2007 and now Jan 2008. The last four times the markets came out of the consolidation the quickest (39 days) in Apr 2007 and the slowest (161 days) in June 2005. On an average the consolidation lasted for 81 days. So, that suggests we should soon be out of this range, maybe another week or two. The other occasions have also seen corrections of more than 30% but they were slower. This time we lost about 30% in a week. And a longer consolidation/base-building is expected.

We are going to be stuck in a range. It often happens that the markets may move out of a range just to get into another range. We should only buy when the markets are giving us a signal that a move out of the range is likely and that the probability of a profitable trade is higher. Of course, if the market moves against us we can get stopped out too. Getting stopped out is always possible but that is a risk one has to take if one intends winning the game of profitable stock trading.

Happy investing!!!

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