Nifty May Fall to 3500, Started Looking Attractive

The Nifty opened today and started going up but like most of the days these days, the excitement lasted only about an hour or so before it started slipping down again. It made a low at about 3840 and started some recovery but soon after the European markets opened it started coming down again. The European markets were weak and at one point the FTSE was about a hundred points down but recovery in the late afternoon session (in Europe – by which time India had already closed) took all European markets well in the green (about a percent up) except FTSE which closed 21 points in the red. News on the international front is good today. Dow is trading 200 points up at the moment while the crude is trading below $135 a barrel. The American markets increased after results from Wells Fargo, a huge mortgage underwriter and servicer, which according to Bloomberg, came out with “better than expected” results after their profits declined by 23% and EPS was 53 cents a share against expectations of a 50 cents EPS. This was enough to make Wells Fargo jump 24% in a day. Compare this with Infosys results and the price movements, and we know how negative the sentiment in India is.

Seen above is the monthly chart of Nifty for the last decade. The indicators along with the price chart are the Stochastics oscillator (in green) and the Relative Strength Index (RSI) at the bottom. Never before in the history of the Nifty was the Stochastics down to these levels. Today was the all time low of the Stochastics indicator (5,3,3) in the last 16 years. As far as the RSI is concerned, it is only on one occasion in the last 16 years that it has went down below 40 (in September 2001) otherwise it has always found support at 40. Today the RSI was 44.43 and hopefully, this time too it may reverse from 40 (we assume such a long trend to continue until it is broken). The price chart shows a little more downside because the long term trendline drawn from the 2003 lows shows that there is support near 3500, which is in line with the target that we had calculated in yesterday’s post. Both the RSI and Stochastics show that the bottom may not be very far away.

Fundamentally too, the things are not looking too bad. According to the NSE website, the Nifty today closed with a Price to Earnings Ratio (P/E) of 16.33. At the same rate, assuming the price does fall to 3500, the P/E of the Nifty too would fall to 14.97 at current year earnings. Going forward, assuming that the earnings would grow at only 7% (the same as the GDP growth) per annum, the Nifty would then be available at only 13.99 times FY09E and 13.08 times FY10E. Today, it is available at 15.26 times FY09E and 14.26 times FY10E. Even during the Sep 2001 lows (after the Twin Towers crash) the Nifty was trading at a P/E of between 12 and 13 times earnings. Considering that the economic conditions may be better 6 to 12 months down the line, don’t these P/E levels of 15 to 16 times seem attractive? To me, they do.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Read the Full Post Here

Expect More Bounce in the Short Term

The Nifty opened flat, went up in the first 15-20 minutes after opening but soon started coming down. The support at 3882/3878 was soon broken and it took the Nifty to make a new low at 3848 before it started moving up again. And what a rally it was! A 200 point rally in just 2 hours of trading (between 1PM and 3PM) ensued without any correction whatsoever. On the 5 minutes charts, there were only two candles during that period which had a low lower than the low of the previous candle. In the last 30 minutes the Nifty did display some resistance near 4100.

I have attached the 30 minutes chart of the Nifty today which shows the fantastic rally that took place today. There were no complaints from the rally today, except that it fell just short of confirming the uptrend. As we can see from the charts, the rally stopped exactly at the resistance line. Thankfully, the Relative Strength Index (RSI) has given an indication that the rally may go past the resistance line. It has done so by itself going above the line that was providing resistance to it. A confirmation using the trendline technique will come if the Nifty were to cross this resistance line. If we are using the Dow Theory then a short term uptrend would be confirmed only if it were to cross its most recent pivot high which lies at 4325 as shown by the dashed green line. But one should remember that would be confirmation of only a short term uptrend. An intermediate term uptrend would be confirmed only if the Nifty were to cross 4680.

But why did the market bounce back today? Why were we not expecting a bounce back? Well, the answer is that’s what happens in a capitulation. The capitulation day makes the market so negative that everybody is expecting it to go down. All investors are bearish, all analysts are bearish, all charts are bearish and there is a lot of pessimism around. Though, there are signals available that capitulation is coming, yet the market decides when it has capitulated completely. As mentioned in yesterday’s post, capitulation like symptoms were visible, but I personally feel the market hasn’t completely capitulated yet. Of course, that is my personal opinion and I could be wrong too. I support my reasoning with the logic that a capitulation is much sharper and lasts much longer than what was seen in the last 3-4 days.

The main reasons why the markets went up today, in my opinion, were mainly political and also valuation based. It seems certain now that the Samajwadi Party (SP) would provide support to the government on the nuclear deal issue in case of a Left pull-out. It also seems certain that the government would not fall even if the Left pulls out and that the nuclear deal might go through. While this rally is just discounting the positive developments, we should see a big rally when the nuclear deal goes through without the government falling. Looking at the valuations, Nifty, which was trading at a P/E (Price to Earnings Ratio) of over 28 in early January was down to 16.66 yesterday (based on current earnings – Forward P/E would be even lower). The Nifty Midcap 50 Index was even more attractive. The P/E which was close to 25 in January was down to only 10.15 yesterday. And a P/E of 10-15 times is a very good level to pick up stocks. But fundamentally speaking, high crude prices and inflation still remain areas of concern.

So, what do we do? Is it a bear market rally or the beginning of a bull market? We don’t know for sure right now and the best thing to do would be to follow the market and wait for it to tell us what to do. We should go long in the short term if a short term uptrend is confirmed (with proper stop losses, of course). More positions for a longer term can then be added when an intermediate term uptrend is also confirmed. In case the market comes down without confirming an intermediate term uptrend, we would know that it was just a bear market rally.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Read the Full Post Here

Mutual Funds - Do's and Don'ts

In the past few weeks I have written two posts on mutual funds, namely “Mutual Funds – What Are They?” and “Mutual Funds - Part II”. After those two posts I felt as if there was still a lot more that regular investors need to know about mutual funds. And that is why I am here. I will be writing about some things that an investor should remember/know before investing in a fund. Also, I notice, that there are a lot of myths associated with mutual funds which I would like to clear here.

Things to Remember

Diversify: Remember to diversify your portfolio. Invest in 3-4 different funds out of which at least 60-70% of your money is in well diversified funds. DO NOT put all your eggs in one basket. Do not invest all your money in only sectoral/thematic funds.

Portfolio of the Fund: Before investing your money, see the portfolio of the fund you are investing in. Make sure that about 80% of the fund’s total corpus is invested in fundamentally strong blue chip companies and only about 20% is invested in opportunistic/risky stocks. Once you have examined the portfolio, you should have conviction in it. Growth can sometimes be painfully slow but over the longer term, blue chips are more likely to outperform than any other class of stocks. All information about mutual funds is available on the internet and a screenshot of the portfolio finder section on one such site is given here.

Past Performance: While past performance is no guarantee to future performance, it acts as a good indication. A fund which has consistently performed well in the past is also likely to do so in the future. Odd spikes like an annualized return of 70% in 15 days or 30 days is not a very reliable indicator but a return of 30% annualized in a period of 3 or 5 years is usually a good indication. Invest your money in funds showing good consistent growth rates. A screenshot to check the past performance is shown here. Also important to look at is the rating of the fund given by various rating agencies.

Choose Undervalued Funds: Mutual Funds can also be overvalued or undervalued and NAV is not the deciding factor. A fund may have an NAV of 20 and still be overvalued as compared to another fund which may have an NAV of 200 and be undervalued. The important factor is the Price to Earnings (P/E) of the fund. Funds also have P/Es and a fund with a lower P/E will be considered as undervalued as compared to a fund with a higher P/E. Compare the fund’s P/E with the P/E of the benchmark index, namely Sensex or the Nifty. P/E of a fund is nothing but the weighted average of the P/Es of all individual stocks in the fund’s portfolio. If you go to this site you can see various attributes, of any mutual fund in India, like the rating of the fund, fund facts, NAV, risk and return and the portfolio of the fund. The P/E of the fund can be found in the portfolio section, as can be seen in the screenshot with the portfolio write-up.

Monitor Your Performance: Once you have done the above things and have invested the money into mutual funds of your choice, just sit back and relax. All you have to do is to come out of your slumber at least once a month and see the performance of your funds. If your funds are not giving you any returns or have returns much lower than the broader market then it may be time to change your fund. A good way of comparing the returns of your fund is to compare it with the returns of the Nifty or the Sensex (if your fund is an equity fund).


Some Common Myths

Dividends Give Extra Money: All dividends are tax free. So, all the money that you get from dividends is tax free. That is good, but then why do I say that dividends giving extra money is a myth? Let us understand with a simple example. I have invested Rs.20000/- in a fund at an NAV of Rs.150/- and the fund has now declared a dividend of 20%. Since the dividend is on the face value, which happens to be Rs.10/-, I would get a dividend of Rs.2/- per unit. I had only 133.3333 units with me (20000/150) and I would get a cheque of Rs.266.67 as dividend, which works out as 1.33% of Rs.20000/-. At the same time the NAV would also come down by Rs.2/-. So, effectively I’m withdrawing a small amount from my own funds, contrary to the notion that I had that I was getting something extra. I can’t put these Rs.267/- to any productive use. Had I left them in the mutual fund and withdrawn after 20 years, they probably would have become Rs.10000/- which would both be substantial and at the same time could be put to some productive use too. Some people instead opt for dividend reinvestment option so that the dividend amount can be used to purchase additional units in the same fund so that the money remains in the fund. But on this purchase you have to pay an entry load of 2.25% again thus paying Rs.3.55 as charges. So you end up withdrawing Rs.266.67 and reinvest only Rs.263.12. In my opinion, it is anyday better to let your money stay invested in the growth option.

NAV is Immaterial: A lot of people I have come across prefer to invest in funds whose NAV is lower, rather than investing in high NAV mutual funds. That is a myth. They do not want to invest in a scheme having a history of 8 years and whose NAV is Rs.200/- per unit but they don’t mind investing in a similar scheme with a similar portfolio having an NAV of Rs.25/- per unit with negligible history. The NAV, as mentioned in the earlier post, is calculated as the Sum of the Value of all stocks held by the fund and then divided by the total number of units issued by the fund. Thus, two fund schemes having exactly the same portfolio with equal weights will deliver exactly the same return. Let us assume that both the schemes talked about above earn a return of 28% in two years. And if Rs.20000/- were invested in both today then we would be issued 100 units in the first scheme and 800 units in the second. The NAV of both schemes 2 years hence would be 256 and 32 respectively. The value of the first scheme would be Rs.25,600/- (100*256) two years from now and the value of the second scheme would be …. Any guesses??? Yes, Rs.25,600/-.

NFOs Give Better Returns: NFOs mean New Fund Offers. All NFOs are priced at Rs.10/- and that is an arbitrary figure. They could have very well priced it at Rs.1/- or Rs.100/- or Rs.1000/- and it would have made no difference to them. As mentioned in the point above, the NAV does not matter but it is the performance of the fund over a period of time that matters. And why would anyone want to invest in a fund with no history rather than in a fund having an excellent three year track record? In the 1980s and early 1990s, all shares in the equity markets were also issued at Rs.10/- or Rs.100/- depending on the book value of the shares. Irregular pricing (at discount or premium) or via the book building route was not there. So, it used to make sense in those days to buy shares in the Initial Public Offer (IPOs) at Rs.10/- and sell it in the markets when they listed for Rs.50/-. Nowadays, most IPOs are so heavily overpriced that it does not make sense to invest in them at all. Holders of Reliance Power IPO shares would vouch for it. These days almost 90% of the IPOs do trade below their issue price within 6 months of listing. An NFO at Rs.10/- is neither overvalued nor undervalued. In fact it has no value at all till the time the NFO closes and it constructs a portfolio. This is exactly the reason why the NAV is declared 30 days after the NFO closes, because till that time there is no portfolio, hence no change in value and hence no NAV. It is a total myth that at Rs.10/- the NFO is highly undervalued.

Timing the Market Can Save Money: This is, probably, the biggest myth of all times. It is impossible to time the markets. You may be successful in catching the exact highs or the lows one or two times but will be wrong in the remaining 8-9 times. If you have conviction that markets will do well in the next two years then today is the time to invest. The key point is the ‘time in the market’, not ‘timing the market’. This article will help you more to understand about investing for the long term. And since timing the markets is impossible, the best route to invest at the cheapest rates is to continue investing small amounts for a longer time, in short – follow the SIP route.

I hope that clears all doubts regarding mutual funds. In case you still have any questions, you can post them in the comments section and I’ll answer them there. And if there are too many questions, I’ll probably write another post answering all the questions.

More tomorrow.

Read the Full Post Here

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!!!

Read the Full Post Here

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.

Read the Full Post Here

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!!!

Read the Full Post Here

'Boom, Doom and Gloom'

We have a new widget added on the world markets page today which gives the latest market prices of Indian ADRs listed on the American Markets. Click on the World Markets link to see. We are adding new content to our other pages every now and then. Please keep visiting them to see what's new. Very soon we are going to have a page on IPOs and on Futures and Options too.

Anyway, back to the markets. It’s all looking gloomy right now. The intermediate trend of the Nifty has been down for the last three weeks now. The short term trend had turned positive for a short period of time but that also has become negative now. The Nifty has now confirmed breakdown from two patterns. One is the channel breakdown, the one which is represented by the smaller circle or by the two uptrending

blue lines. This was a 450 point wide channel and it broke through the channel at a level of 5170-5180. Considering that the breakdown is also of the same magnitude it gives us a target of 4720-4730. The green lines shown here at 5035 and 4900 are just minor supports inbetween.

The second pattern that we are talking of is much larger and much more ‘horrifying’, to say the least. This pattern is the inverted flag pattern and is shown within the larger circle on the chart. In this sort of a pattern there is a clear trend in place (could be an uptrend or a

downtrend) and then prices consolidate within a range (which could be a straight or a rising or a falling rectangle or could be a rising or a falling wedge) and then the prices break out of the consolidation and continue the previous trend which was in place. The ‘horrifying’ thing is that such patterns are formed approximately half-way between trends. And if this indeed is half-way then the target for the end of the trend is, hold your breath, 3820.

We have been saying that we are in a long term bull market and that we should be buyers on every dip. The definition of a bull market is that we (rather, the chart) should be making a pattern of higher highs and higher lows. And the converse is true for bear markets. We have three trends which we usually talk about, namely the short term, intermediate and long term trends. Generally, we watch short term trends in the 30-minutes charts, the intermediate trend on daily charts and long term trends on weekly/monthly charts. We are already in a short term and intermediate term downtrend because a pattern of lower highs and lower lows is visible both on half hour charts and on daily charts. We have a very good support at 4600, which is from an upward

sloping trendline drawn on the weekly charts. The moment this trendline is broken that would be the first signal that a long-term bear market may be approaching. The actual confirmation would come when the previous low (which is at 4002) is broken. That is why we say that till the time 4600 is broken, we should remain buyers on dips.

But this may call for a change of strategy now. We are predicting the target for the flag pattern to be near 3820 which is well below both 4600 and 4002. If this target is achieved, we would no longer be in a long term bull market. That is why, we should now modify our strategy. Our strategy should be that “I am in a long term bull market which is true as long as Nifty is above 4600. I will assume that the long term bull market will continue to be a buyer on dips, but with a stop loss of 4600.”

We should not take any positions against the trend, which is why we are not talking of any buying opportunities right now. Life is full of ups and downs and so are the markets. Like in life, markets also see successes and failures (of patterns). Patterns do fail occasionally and this is one occasion where we would like it to fail. We would define failure of this pattern as a failure if (a) it fails to reach its target or (b) if it crosses 5650 on the upperside or (c) it comes back in the range of 5200-5650, in which case we can again wait for a pattern breakout/breakdown. As much as we may hope for a failure, one should be cautious as hopes rarely turn into reality in the markets. And the markets have their own minds. It may decide to go where we expect it to go (3820) or it may still decide to convert our hope into reality. Let's see what the market decides to do.

Your comments on this post are most welcome. Please click on the comments link below to post a comment.

Happy investing!!!


The following article has been written by Col. Mahesh Sharma of Surakshit Securities who shares his view on the markets.

IS IT REALLY ALL DOOM AND GLOOM???

All markets, particularly the Stock Markets, run on sentiments. In the middle of January this year history was made when the largest ever IPO by an Indian company (Reliance Power) was fully subscribed in less than a minute. By the time the issue closed it had been oversubscribed 70 times, which itself is a record for an issue of this magnitude. Yet, just three weeks after that we have had two IPOs, including Emaar MGF, which had been floated by a large Gulf based developer in collaboration with an Indian company, being withdrawn from the market. Such is the effect of sentiments in the market.

When the sentiment is good markets tend to ignore bad news and when the sentiment turns negative even the good news is overlooked. In today’s newsletter, we have seen the technical view of a chartist. Markets have a habit of over-reacting. In a positive sentiment there is irrational exuberance and we look for means to justify the extended valuations by discounting cash flows of future years and talk of embedded values getting unlocked. And when the sentiment turns negative we have a scenario of excessive pessimism with analysts calling it ‘doom and gloom’. The reality lies somewhere in between these two. And sooner, rather than later, the market will revert to the mean.

Let us take a rational view of what is happening today. Between 18 Jan, when there was almost a mad reaction of over 10 lakhs new demat accounts opened in a few days so that people could apply for Reliance Power IPO, and last week, when there were no takers for the IPOs of Wockhardt Hospitals and Emaar MGF, all that has changed is the sentiment. Yes, the market has lost nearly 1300 points on the Nifty, but, has there been any change in the fundamentals of the market?

We have, perhaps, a little more clarity of the American economy and it is likely that they are heading for a recession. However, the US Administration and Fed Reserve are fully alive to the situation and will do their best to ensure that suitable remedial measures are taken to protect the US economy. We have seen aggressive rate cuts by the Fed Reserve in January and there will be more to follow. Our Reserve Bank has refused to follow suit and is adopting a policy of status quo as far as the interest rates are concerned. This has led to a sharp differential (475 basis points) in the interest rates of the two countries. This is only likely to increase further when the FOMC meeting takes place next in Mar.

Water tends to flow where it has least resistance. Similarly, money tends to flow where the returns are better. The returns in Emerging Markets are likely to remain better than in US. And, within emerging markets, India, which is less dependent on exports to US and is growing largely on domestic consumption, is likely to continue to grow at over 8.5% in the next two years, at least. So, whether they like it or not, there is no choice for the US funds and institutions, but to invest in India. And, once the liquidity returns, one can imagine what it will do to the stock market, which after the recent correction is at a much healthier valuation. We have all seen what liquidity did to Indian markets in 2007, where even at a PE of 25, analysts on the media were crying hoarse to justify the rich valuations. And now, when we are down to a more reasonable PE of 17-18 times FY09E earnings, the analysts are predicting as if there is no tomorrow. All one has to do is to have conviction and start buying into fundamentally good companies, which are more oriented towards domestic consumption. So, all those retail investors and even some institutions who felt they had ‘missed the bus’ can safely think of ‘boarding’ the bus now that the valuations are more attractive.

Can the markets go down further? Yes, they can. I am not saying they will not. But then, we do not have to buy at the lowest. When the markets turn around, they may again lead to a sharp recovery. Though, I must admit that we are more likely to have a slow and gradual improvement rather than a V-shaped recovery. Nevertheless, there is not going to be too much of a difference between buying now and buying then. So, looking at things in a different light, this seems to be the best time to buy.

Good Luck!!!

Read the Full Post Here