Just another day- Firing, Blasts, Few killed, few injured

Even as I write this post, reports of terrorist attacks in Mumbai are coming from new areas. Of course, TV channels are having a field day beaming human tragedy with amazing enthusiasm. And yes we will have routine rhetoric from our politicians about such acts not being tolerated. But in end everything will be forgotten.

Now please don’t get me wrong- I am not blaming our police or politicians. The fact remains that men in uniform have risked their lives to bring situation under control when we all (less a unlucky few) are safely home and praying for well-being of our relatives. However there are thing about which police cant do anything. I am certainly not indicating that we should ignore basic security. The truth is that we need to value human life more. Of course we do have a large population and human life is cheap here. But that’s true only in purely economic sense. Acts of terrorism have much deeper impact on an society than simple loss of productive manpower. Safety and security are basic requirements of economic growth and terrorism can bring even strongest economies on its knees. It is time we take security seriously. Today even our busiest buildings lack a basic metal scanner. Aren’t we inviting attacks?

However, there is more to the story than what meets the eye. As a newly independent nation we have done amazing well to have avoided disintegration. The risk is we have started taking our nation’s unity for granted. While we do have political and geographical unity, there is hardly any trace of religious and economic amalgamation. As long as we are not able to bring economically marginalized citizens to enjoy the “shining India” there will be disrest. It is time we understood we cannot have a peaceful Mumbai as long as people go to bed Hungary in hinterlands. In all likelihood money spent to eliminate poverty and hunger will be as effective against terrorism as money used to buy latest arms for our forces. We will do well to listen to the warning signs before it is too late.

Catching a falling knife

Finally, Indian stock markets did correct themselves- unfortunately the correction is looking more and more like a reversal every day. The first sign appeared when the expected “correction” did not halt at 16000. Not only that, sensex has already made three successive lower lows after the peak. So technically we are certainly in a major downtrend rather than a correction.Sensex has already breached previous top near 15700. naturally now the question is where are we headed?

If you exited as suggested in previous blog, you have done wonderfully well catching almost a peak. What if you are still holding on to your losses? The first thing to do would be acceept that we have missed the peak now and it is wise to exit immidiatedly than to lose more money.

The question today is not weather the sensex will fall further, but the question is how far it will fall? Although many are betting on 15000 support, I would say that the first strong support remains at 14500-14000 reagion. Looks like the last two days rally is just a correction to the fall and should be used as exit option rather than to fool ourselves that the worst is over.

Given that that the valuations are looking much more reasonable today that few weeks back, I would tend to take 135000 as a good buying opportunity. But if that breaks than the focus shifts first to 12500 minor support and then to, well, 9000. That’s as pessimistic as it goes. I would personally buy at 14000, then at 12500 and then sell like hell and run for life! After all we are trying to catch a falling knife. Of course some people will always play russion roullette and enjoy rich returns if they turn out to be lucky. But that doesn’t make it a reasonable risk to take.

Time for shocks?

The current Bull Run has left even born skeptics like me wondering if expectation of a correction was result of faulty analysis. However, there still seems to be at least some rationale for remaining cautious rather than jumping on to buy stocks at these levels.

Though I normally stick to the simplest charts for analysis, today I happened to have a look at logarithmic charts of Sensex and Nifty. Surprisingly, all of seemingly unexplainable moves of the markets look very natural once we switch the scale from simple to logarithmic (A logarithmic scale plots percentages changes instead of absolute changes. For example, a movement from 200 to 210 will show a 10 unit increase in simple scale but only a 5 (10 is 5% of 200) unit change in logarithmic scale).

Looking at this chart, Sensex has hit the upper trend line of the rising channel. Even the Fibonacci analysis shows that the previous top of 19990 is 261.8% extension of rise from May 2003 to Jan 2004. Going by this analysis, Sensex has a strong resistance at 20000. The correction that begins from these levels should take it back to around 16000 in about a month. Nifty should fall to around 4300.



Sensex


The analysis is based on long term chart from 2003 to date. So the expected movement will take some time and patience is required to benefit from the fall. A closing above 20300 invalidates this analysis and a close above 20600 (3% above 20000) should be taken as a breakout, resulting in further gains before a correction sets in. However as long as Sensex closes below 19990, I would expect a correction.

Note: Charts created using data available on NSE and Yahoo Finance website with help of AOI Trade (http://www.aiotrade.com/). This write up is only for educational purpose and not intended to be professional advice.

Hold on chartists

As expected, markets pulled back nicely from the correction that started at 16000 and reversed at 14000. No surprises there. However, the shock was that the Bull Run did not stop at expected levels. It shot beyond the resistance to stage what many are already referring to as a “breakout”.

Technically, the rally should have petered out when Sensex reached the resistance level at upper trend line around 16500 (Nifty 4750). Not surprisingly, the Sensex gave every sign of weakening, including formation of well known “dodgy” pattern on 19th September. However, enormous liquidity was unleashed into the markets due to certain global events. The FII inflows not only pushed the markets beyond the resistance, but also did it more or less convincingly. This has left chartists who were short in a precarious position. The question is- Is it a false move? Or is the breakout real?

The breakout looks very convincing technically. The volume spurt on 20th September confirms the strength of the breakout. Also, Sensex ended the week on a very bullish note on 28th September (The opening and low were same. Check out candle of this day).

However, those who are short need not panic yet. As previously mentioned, the upper trend lines are never sacrosanct in a bull run. It’s lower trend line which actually holds firm. So, no matter how grim the situation looks, the markets are bound to give better exit options from short positions.

To sum it all, expect a quick fall to 16500 levels. Markets are just waiting for a trigger to fall. Next support is at 15900. If the breakout is false, we will see Sensex break this support and touch 14600. On the other hand, if 16500 holds, the markets will bounce back again from that level. The rally that starts from there will take Sensex slowly to next target of 18000 and then to 20500 in medium term. As of now, all we can do is to wait and watch the 16500 closely.

Bears on prowl

The sensex has finally shown some clear weakness after defying global trends for many sessions. The support at the top of 7th February 2007 (14562) was breached with a clear gap and the sensex did not cover the gap during day’s trading. This shows clear weakness in the market.

However, charts have not yet formed any clear trend reversal pattern. We can expect the markets to bounce back before completing a trend reversal pattern. The bounce back is likely to start from near the trend line levels of 14300 (or slightly lower levels). Normally, such a rally should touch upper trend line around 16500 (depending on slope of rise). But upper trend lines are never sacrosanct in upward trend and bounce backs may falter much before that level. It would be wise to leave some gains to the market instead of trying to squeeze out every point from the rise.

However, any show of strength should not be taken immediately as continuation of bull market. Rather it would be advisable to use new highs as opportunity to exit risky stocks (with high beta). It will be safer to have only conservative stocks in once portfolio till there is a clear signal.

Bull Market coming to an end?

Indian stock markets have seen an impressive rally since April 2005 (Sensex 6154). With Sensex trading around 15000, investors are naturally wondering if they should stay put instead of booking profits.

Fundamentally, Sensex is trading around a P/E multiple of 20 while historically Indian markets have been valued at P/E of around 14. Have the things changed so dramatically? I doubt it.

Globally the party seems to be coming to an end. US subprime loan defaults are threatening to spill over to other markets. Countries like India that are overly dependent on foreign funds may feel the heat if that happens. At the same time Chinese inflation scenario is looking very bad with expectations that the inflation may be highest in 10 years. Also, the strengthening rupee is playing spoil sport to the IT sector in India. Although the restrictions on ECB is likely to provide some reprieve to this sector, with enormous liquidity in the market RBI may face a tough time controlling rise of rupee and inflation at the same time. If RBI buys dollar to support rupee, then the excess rupee that comes into the market may cause inflation to go up.

Technically, there are two clear warning signs. First, the markets have been ignoring the red flags in last few days and performing against fundamentals. Second, the there is a marked increase in volatility. Both these things happen when market is peaking and gullible public is entering the market whereas shrewd experts are quitting. In the climax of every rally, the euphoria muddles market’s vision and people rush to buy and sell stocks at the most insignificant news while ignoring real warning signs. This creates a very volatile markets far removed from fundamental realities. Now, we are certainly witnessing such markets. In fact we may be very close to end of the bull rally.

Yet, we must remember that markets never follow our dictates. Even if we are right in our assessment of end of the bull market, it may take its own sweet time before confirming our opinion. Resistance to fall or even upward movement is something which an analyst can never rule out.

So where does that leave an investor? The answer is given by Dow’s theory. A rally is assumed to be in existence till a clear sign of reversal is evident. As long as the markets continue to make higher tops and higher bottoms, the trend is upward even though the warning signs may be there. Till date the markets have not shown any clear weakness. Sensex made its first significant bottom around 8800 in June 06 not falling below the previous top of 8770 of October 05. In March 07 it made another bottom around 12400, again around may 06 top. Naturally, the top of 14650 made in Feb 07 must be considered a strong support till it is evidently broken. (Note that a clear break requires both price and volume confirmations). So, it will be wise to stay invested if you are already in the market. Further, a rally from this support point should be considered a good entry point for those who have missed the bus. But, as pointed out earlier, the rally may not last for long. So, on breaks below the support of 14600 it may be wise to exit the market and re-enter later at a lower price.

Always remember, “It takes buying to push the prices up but they can fall on their own.” So when you have made profits do not hesitate to convert it to real money at the slightest weakness. Markets fall much faster than they rise and if you hesitate even for a short time during a fall, all your paper profit may be wiped out quickly.

Note: I do not have a professional charting software. So the values given here are only general markets levels. precise support and resistance maybe slightly different from values given here. Though, that should not make much difference to a genuine investor.

Disclaimer: This article only comments on general market conditions. Investing in equity markets is inherently risky and you should seek professional advice for specific guidance or in case of any doubt. I have no exposure in equity markets.

Booming economy, Sleeping RBI and Consumer Suicides

The controversy over harassment by loan recovery agents just doesn’t seem to stop. The situation is so bad that even the ICICI bank page on wikipedia (http://en.wikipedia.org/wiki/ICICI_Bank) has links to several instances of use of “goondas” by the bank. There are horror stories of people being kidnapped and even driven to suicide because of harassment by the bank. Such instances not only discourage individuals to take loans but also create an atmosphere of general distrust of banks. This, obviously, is extremely bad for any economy because it diverts funds away from its most productive uses.

The reason for increasing number of such instances may not be obvious at first but dig a little deeper and it all falls in place. First of all, our economy is booming. This means some banks want to garner huge market share any which way before the saturation sets in. This includes compromising on loan quality and pushing loans to people who really cannot afford them. No wonder then, some banks have credit card activation rates (First time use of a credit card that has been sold) of as low as 30%, forcing them to offer “cash back” on first purchase.

Second, as always, RBI is yet to be stirred out of its deep slumber. Simple measures like getting a copy of schedules of charges signed by customer when opening an account can be of great help to harassed public. How many of us really know charges levied by our bank? Of course almost everyone has one or two experiences of being cheated by sales agents about charges. Yet, RBI fails to take any notice of them.

Third, our criminal justice system is hardly anything to rely on. Individuals just can’t hope to win a legal battle against banks who keep a coterie of lawyers on payroll just for the day when some unfortunate victim takes them to court. Even if some individual shows courage to complain against these banks, what chances he has of getting a verdict in his lifetime?

These factors make India a fertile ground for unscrupulous elements opening banks and looting innocent customers who have no reprieve.

But how does one protect oneself against such harassment. I think its wise to abide by age old wisdom- “live within your means”.If you genuinely need a loan, make sure that you can fulfill your commitments even in worst possible scenario. Then, if you are sure you can afford to take the loan, ignore offers of loans from banks with bad reputation and head straight to good old public sector banks. After all, some documentation and patience is surely better than being driven to suicide…

http://timesofindia.indiatimes.com/articleshow/msid-1315099,prtpage-1.cms

…or being murdered…

http://timesofindia.indiatimes.com/India/4_loan_recovery_agents_arrested/articleshow/2148758.cms