22 May 2006 !!!

"When markets go up, there are no resistances; when markets go down, there are no supports”

Everyone is asking this question – Is the party over for bulls?

Before we answer this question, let’s review the last 10 trading sessions of Sensex –

May 08 Bulls beat bears by 102 pts
May 09 Bulls beat bears by 51 pts
May 10 Bulls beat bears by 98 pts
May 11 Bears beat bulls by 176 pts
May 12 Bears beat bulls by 150 pts

May 15 Bears beat bulls by 462 pts
May 16 Bulls beat bears by 51 pts
May 17 Bulls beat bears by 344 pts
May 18 Bears beat bulls by 826 pts
May 19 Bears beat bulls by 452 pts

Well, Series leveled 5-5, then why bulls are looking so depressed. Look at the way bears have beaten the bulls. It’s not the defeat that has stunned the bulls but the way they have been beaten.

How come suddenly, bulls that were playing with such great technique started losing. As in cricket, we say class is permanent but form is temporary; the same applies to India Story. “India Story” bulls have lost their form, and we can hope that they will find their form sooner than later. The only concern is that “Left ideology should not get chance to occupy Chief Selector position, else bulls will lose their position in the team”. We do not want to see another “Saurav Ganguly” episode. The fact of the matter is that Bulls have lost confidence, and the momentum is now with bears. Remember, everything in life is based on momentum. The period momentum gets disrupted; it takes lot of force to get it back. Now, here’s another statistics – It took just 7 trading sessions to come down from 12600 to 11000, whereas it took 28 trading session to scale the same height. It always takes more force to go up than to go down, and with confidence of bullsjolted, it will be a while, before bulls will be back. So, I put my money on the fact – Party is over for bulls for time being. I will be very happy if party resumes….

Is this a correction or trend reversal?

I don’t know. If you are 100% invested, you may hope it’s a correction. But What I understand, in correction, people book profits. They do not dump shares, at any cost. The most troubling part is the high volume selling, and the length of the bar in down direction. What about the money sitting on the sidelines? Well, Liquidity chases momentum; and the minute momentum is broken, liquidity dries out.

cont..

Hello NK,
Good write up---and good analysis---By the way--Thanks for sending the e-book---Have not got time to go through it till now---Will comment after going through it--thanks again--
Regards,
joy_mitali

continued from previous post...

Where this all leads to?

Predicting market is always fraught with risk. My objective is not to predict but to give indications of possible direction, and make you aware of the reason. Please note this is not based on any technical analysis. I can be terribly wrong also.

Phase *** Description *** Current Status *** Duration

I *** Sell Off – It’s instant, gives no time to react – lot of people think its minor correction *** Complete *** 2-3 sessions(May 11-12-15)
IIA *** Fight back from bulls – Bears defeat bulls comprehensively *** In progress *** 1 session to 1 month
IIB *** Panic Sell off *** In progress *** 1 session to 1 month
III *** Lack of Buying and Selling –There is total collapse in Volatility *** Yet to come *** 15 days to few months

We are currently in Phase IIA and IIB. It is a period of high Volatility. This is a period where there are cycles of sell off and minor fight back from bulls. This also can get nasty if it leads to panic sell off, due to heavy mutual funds redemption. This cycle can repeat till bulls get defeated comprehensively.

This can then be followed by period of inactivity – Where bulls and bears go in hibernation. This is the period, when you may see some smart sectoral moves beginning to appear. These sectoral moves may then provide leadership to new bull run. It’s not necessary that this period will be followed by bull run only. There can be bear run also, after Phase III. It depends on what the next trigger will be.

It can also happen that we directly move from Phase II A and B to Bull Run, if fundamental triggers for global equity market turn favorable.

We will see a next move when Valuation becomes attractive – Never buy this argument.

Valuations are never a trigger. They can be the reason, but not a trigger. This time also, when markets have plunged, the trigger has not been valuation. The trigger was US Fed policy on interest rates, threat of economic slow down in US and its impact on World economy, and metal melt down.

I saw some comments on TV that markets are looking attractive on the back that valuations have eroded by 15-20%. Please beware of these comments. Value buyers may want to see Indian markets even more lower from current levels, as Sensex PE is still at 19.42. Never buy the argument that markets will go up because Valuations have become attractive.

What the next trigger will be?

Lot of commentators has made comment that stability in financial markets can be the trigger. To me that appears unlikely. The news that “Global Cues are positive, and Dow Jones has closed in positive” will have very little impact on our market. But if US markets close in negative, it will have negative impact on our market. This is the irony we will have to live with in next few months. That’s what is called a “bear grip”.

The fall in our markets have started on May 11, after Fed’s policy announcement on Interest rates, and I guess the next trigger will also come from Fed’s decision only. Till that time, we may continue in Phase II and III.

We should now look at US and Asia for fundamental news trigger and not day to day closing of US or Asian indices. The positive trigger can be threat of inflation waning, or US economy strengthening or Global demand picking up for consumer goods, or Iran is ready to abandon its nuclear program.

Let’s look at the inflation which has been the driver of Fed policy decision

I have never been ardent fan of the way Central banks monitor and manage inflation. Government says inflation is in control but prices are climbing persistently faster than officially announced rates of inflation.

Just see the way, oil prices and commodity prices have risen in last couple of years, but surprisingly inflation around the world has pretty much been kept under control, as per Central Bank estimates. It’s beyond my comprehension. In India, Government has not passed on the cost of oil to consumer, and is now trying to put in price control on commodity prices. Similarly, Corporates, in other countries, have been unable to pass on increased energy prices to consumers on back of stiff competition, and low economic growth in their
countries, and have instead accepted reduced margins.

I would say this is postponing problem. The impact of oil price rise will eventually bite all economies across the world. The worry is that inflation shock can be sudden, and sharp. The expected rate of inflation in US is now at the very top of the band with which the Federal Reserve is comfortable. After the release of recent inflation numbers, it appears Fed’s aggressive stance on inflation may continue, and it would be interesting to analyze its impact on the world economy, and equity markets in general. Iran’s behavior on nuclear program can only worsen the situation by spiraling up the oil prices. So, a caution is needed, as India’s low inflation numbers are also artificially manufactured, and can create a sudden shock later.

cheers,
nkpanjiyar

Thanks. Regarding book, you are welcome. I assure you it will be a great read.

cheers,
nkpanjiyar

Hope that tomorrow bulls will back again and everything become normal like as it was earlier before 10 days back..........be positive always.

Nk

Great stuff ...as always...

regards

Karthik

Hi Nkp

As always It makes sense reading your writeup. Excellent analysis. Few would dare to disagree at this junture with you.

In a market place nobody is either bull or bear all are out to make money.It is also true that nobody can make money from market all the time. Law of averages. I would agree with you time span of one month oe so. for this phase to be over/strengthened.

Valuation part is also true.

A lot depends on external factors and not much is chaged in India.The arguments and counterarguments are foloowing the same old and often beaten path. So let us wait for whose party it is going to be.


Target for sensex is still intact. It may take a little longer to reach. Perhaps, perhaps not.
Pankaj

Karthik, Pankaj thanks for all kind words. Hope members would have taken action faster after reading this.

cheers,
nkpanjiyar

oh genious,
c'mmon...great stuff as always....


ganeshhity

hi all,

This article link on is it a trend reversal or correction was from yesterdays, business online. I am not sure if i can post this in this thread. but this is for those of us who have not yet read this one.

http://www.thehindubusinessline.com/...2102310700.htm

The return of the beast
http://www.thehindubusinessline.com/...05/21/stories/
2006052102340700.htm

vyas