Sunday, September 14, 2008

Difficult times probably not over

Writing on the morning after bomb blasts rocked Delhi, it is not easy to be optimistic. Of course, this is not a good approach to trading. We really need to rely on the charts for our road map. But, with charts, the trader should consider the environment in which the charts are developing.

For the Nifty, Friday's decline was not bullish. The index has broken down from the 4250 - 4650 range. Depending on how you define the range, the best we can say is that it is on the lowest support line of the range, at 4200. There is a clearly visible bearish head and shoulder pattern in the Nifty. A close below 4225 (approx) will confirm this pattern. If confirmed, we have a target of 3800 approx - whch happens to be significant support. Now, a pattern does not have to go down to touch its target. But the probability of doing so is quite high.
More worries about the head and shoulder. Reliance & Bharti Airtel have already broken down from similar bearish H&S patterns.
The Environment. Almost all world markets are in a bear phase. Thus, the intermarket relationships are quite bearish. In India, there is likely to be poltiical upheaval in the next few months. This weekend, a firesale is going on in the USA where one of the largest investment banking firms, Lehman Brothers has to get financing or face difficulties. If financing is available, then Monday may again see a relief rally in Asia (maybe not since the Asians are slowly getting wiser than the West). A relief rally is not going to change the down trend. Difficult times are ahead.


Shashank Jogi said...

For all those hyper-optimisitic people, here is something to curb your enthusiasm.

-Over the last 5 years, we have seen an abnormal increase in the wealth of asset holders - stocks, real estate, etc. -
-On average, the value of stocks and property has gone up 4-5 times. In the same period, the Indian economy has about doubled in nominal terms.
-The market capitalization of all stocks on the NSE has gone up 8 times from Apr 2003 till date and had gone up 12 times at the begining of the year.
-This meant that the market cap:GDP ratio went up from 0.25 in Apr 2003 to 1.5 in Jan 2008 and stands at close to 1 now.
-IPOs notwithstanding, never in the history of stock markets have high values such as 1.5 been sustained.
-Even during the 2000 tech bubble, the ratio for India was only 0.8. In the May 2004 crash, this ratio was 0.42.
-Even after the correction, the Nifty PE is still 18.14, P:BV at 3.79 and a dividend yield at 1.31%, hardly cheap!
To cut a long story short even after the correction, stocks are not cheap (in general) as many 'experts' would make you believe. Please have a look at valuations in Apr 2003 to see what cheap really means.

Add to this various factors:
-A large above-potential GDP growth which is now reverting to mean.
-A large influx of capital from foreigners that pushed growth and stock valuations higher.
-Low interest rates that kept interest costs down and borrowing cheap.
-To sustain high growth rates, India needs a lot of capital from abroad. Our own savings (with high government borrowing) is not adequate. Given the massive issues finance companies are having in the west, money is unlikely to come in a hurry.

Trees dont grow to touch the skies. No asset class is a perpetual money spitting ATM machine and over time, returns revert to mean. So above-trend returns revert to mean with below trend returns. We are in such a phase when returns from assets are likely to be below trend, even negative.

When price momentum is up, prices tend to move up, away from 'fair value' (the exact value no one knows). When this gets over, it works the other way round. Some trigger is required to break the momentum. It was provided early this year.

So we can expect further declines in prices till cycle completes and stocks become cheap again. Please dont get carried away by the India Growth Story however compelling it seems. Remember how billions of dollars were waiting on the sidelines waiting to come into India in Jan this year. Remember how India was supposed to be de-coupled from the developed world, India being an internal consumption driven story. India was indeed coupled through capital flows.

Needless to say that for a trader, the ticker is God and if it says 'going up', traders should follow it. But the ticker right now is saying 'going down'...and exectedly so.

shivangi said...

hello sir,

could u plz tell something about gaps as i have read everywhere that some gaps are very so how to identify these gaps and differentiate them from normal gaps.


ART OF TRADE said...

Dear Sir,

I have been reading your blogg every day. I agree with your opinion that nifty may test 3800 level if nifty trades below 4200 support and Some other major stocks also showing Head and shoulder bearish pattern. Icici bank, bank nifty and Bombay dying,Idbi etc.,

madhu hegde,sirsi,

desidata said...

previous lows on the nifty seem to be a good point to enter for a 1year time frame...or better only once the nifty is 175-200 points from the low of that particular week...i.e now,ge in only if the nifty sustains above 4400-4435 and trail,this could be called as trading the bounce..or else sip below 4000 in lots not expecting the nifty to go below 3600 in the worst case as the valuation will become compelling and we can expect a rise from that level...major negatives in the form of govt,oil and hence inflation are expected to give reliefthough eanings downgrades seem to be a worry which is not yet anticipated by in small ranges now.