24 May 2006 !!!

"A lot of people understand the market sell-off that occurred last week may have deeper legs and we may see a longer correction" (John Person)

It was a great day for bulls. Markets bounced back sharply, and closed at the high end of the trading range. After many days, newspaper will post a positive headline on the market – “Bulls beat bears by 341 points”. Unfortunately, that will not be the case with the cricket – Tendulkar pulls out from West Indies tour; and India gets second successive defeat from West Indies. But I am still very bullish on Indian cricket team, and I think this is a minor correction, and Indian team will come roaring back to defeat the West Indies team. Is that the case with the equity market as well?

Was this a bounce back or a signal that correction is over?

Well, if you read the quote above, it fairly sums up my understanding of the market too. After such a steep correction, a strong pull back was expected. But even after this strong bounce back, I am still bearish on Indian markets. Please read this news in all major newspaper - Deccan Air IPO refuses to take off”. Remember in bull market, even a bad company gets fully subscribed multiple times, at any valuation.

I know lots of people are very relieved after yesterday rally, and recommendations have again started emerging. If market rallies again today, you will see a poster “Happy days are back again”. Anyway, I am still bearish, and think every rally should be sold. Interestingly, FIIs were net sellers yesterday.

But what if I am wrong, and market resumes its bull run? I may miss an opportunity of picking a stock in such a fantastic correction or sorry, crash.

I prefer to be wrong than sorry. Anyway, nobody knows what market will do, and hence investing in market at regular intervals is the best strategy. But don’t get greedy of just putting everything in the market after this crash for spectacular returns. There is a theory called "Bull Trap", and you may know this term only after it hits you badly.

Please, note, I am not saying – Don’t invest. I am just saying don’t go overboard. I guess the best way to describe action in next few days would be – “Recovery”.

Recent experience can be dangerous in financial markets. I repeat this statement for new entrant.

In bull markets, you tend to ignore correction, and sit on your position, especially leveraged position, assuming market will bounce back, and you will be ok. Why we saw such a steep correction or crash in last 5-8 trading session is because of denial from short term traders that market can crash. They thought eventually market will bounce back, and they will be ok. The good news is that market has bounced back but the bad news is only after making them bankrupt. This I am talking of people who have been in the market.

Now, let’s talk of people who completely missed out the last Bull Run. They saw, how market rallies once it starts running. Hence, they may like to board on the bus immediately with whatever they have. This is the money waiting on the sidelines, we have been hearing since last few months.

Generally, when markets crash the way it has done in last 5-8 trading sessions, it creates lot of nervous investors. These are the people who didn’t got an opportunity to exit from the market in this crash, and they will use every rise to de-board this Bull Run bus. Hence, I fear we may again see a strong downslide, purely on technical terms, which can get accelerated by bad global factors. This is not to scare you, but to make you more watchful in the way you should be investing. Don’t be greedy and you will be fine. It may also happen, that market may have a run away rally from here, and I may prove out to be wrong, but that’s ok. My objective is not to be right but to make sure you do not get trapped in this market. This is called a "Bull Trap", which gets created by new and stubborn bulls who venture out after a strong crash assuming previous trend will resume immediately.


cheers,
nkpanjiyar


To be continued...

continued from previous post...

Margin pain is out of the system. Markets should run. What pain are we talking about?

Is pain the outcome of the problem, or pain, itself, is the problem? I got confused after listening to some market experts yesterday, that margin pain is out of system, so there is nothing to worry, and market may see upside. Let’s first understand what margin pain is. It’s buying shares on loan. When market slides, broker/lender demands more money to maintain your position. Exchange has a real time risk monitoring system, and if broker fails to provide additional money, they force the broker to liquidate the position. Since, it takes time for broker to collect money from clients; they sell other stocks in the portfolio to make up for the margin money. In a downward market, this kind of forced selling accelerates the selling process, and creates a strong panic in the market. It’s complex to understand, if you are not aware of this. Let’s come back to the question of is pain the problem or pain – outcome of the problem. It’s interesting and let’s understands this.

Let me first recap the events of last 10 days -

§ US Fed decides to increase the interest rates, and keep the option open for future interest rate rise. It says the future rate rise will depend on data. (May 10, 2006)

§ Equity markets worldwide get nervous, and emerging markets and commodities get the first bear punch. Indian markets too get the first taste of decent correction after a long time. (May 11, May 12, May 15)

§ Indian equity market then on back of India story rallies handsomely, after a steep correction, and close up by 300 points (May 16, May 17)

§ CBDT (Central Board of Direct Taxes) known for perfect timing comes up with draft circular on taxation. This creates a nervous sentiment in the market.

§ The inflation data comes out in US and warns of inflation risk. Since, Fed said that it will raise rates based on data, the nervousness of the market rises. Global melt down begins. Indian equity market gets the hardest knock, and downslide begins.

§ The traders here on back of recent experience chose to ignore the global meltdown initially. But when market started sliding faster, the pain started worsening. Suddenly, pain became so louder and shriller, that Finance Minister has to come up with life saving drugs to save the market (May 18, May 19, May 22)

§ After taking a pain killer, now market is feeling better and has rallied by 300+ points. Now, it has to be seen, how long the market can run on pain killers.

But the issue is whether pain was the problem or something else. The problem – A view is emerging that Global equity market especially emerging market is a risky asset class in current economic context. As pointed out by AMITBE many times, now Smart money is moving out of emerging markets to safer investment avenues like Treasury bonds. This uncertainty may prevail till Fed June 29 meeting.

So, the problem still persists, and hence logic says market will be nervous till clarity emerges in global economic context. Markets will not run only because pain is out of system. Do not use recent experience and aggressively invest, else you may again need strong pain medications.

What should I do?

Invest is small doses in good quality scrips. Use this rally, to get out of cooked stories based on real estate and other vague ideas. Monitor the global trends to look for fundamental trigger. Eliminate the feeling of left out, and have a moderate expectation with the market.

Global equity market today seems on a recovery path, which is good news, and it just needs some doses of positive fundamental trigger to rally.

Outlook for the day:

I love the phrase – “I am cautiously optimistic”. You would have heard this phrase many times before. Do you know what it means – “I don’t know”.

This is the irony of being an expert – you cannot say “I don’t know”. Then how can you be expert if you don’t know. So, this is a good phrase to hide behind, if you have no idea what’s going on in the market.

Well, I will not say, I am cautiously optimistic. I am bearish over short term; but feel that yesterday momentum may carry on the back of recovery worldwide in equity market. But let me also caution you, selling may emerge anytime, and it can be again fast and ferocious.

Factors on which market will vote today:

§ F&O Expiry – roll overs

§ FII – Net Sellers yesterday

§ Petrol, diesel price hike in 3 days

§ Financial Sector reforms must for 8% GDP growth – P Chidambaram. I agree Sir. Please initiate the process.

§ Reservation is on – A bill will come soon in parliament – Every second person that will come out of our prestigious institute will be on back of reserved seats – Merit doesn’t matter – A great economic logic coming from none other than our Finance Minister and Prime Minister.

§ Emerging market recovery worldwide. I just caution you to be vigilant and be out with umbrella, as dark clouds still exist, and heavy downpour cannot be ruled out anytime. Orderly correction are things of past and all corrections in this market will be wild and dangerous.

cheers,
nkpanjiyar

NB - With inputs from like-minded friends.

hi nkp

I was waiting for this post.
who can dispute with you conclusion.
You said it.

So market is not in trading mode. and not in investing mode either for some time. to come. I agree that end of first quater will provide some direction to the market. My guess will be as good as of any.

so advice wait.

well I am optimistic but not an expert.

Great summary of events to my rambling parallels



Pankaj

NB: You should also invite unlike minded to provide agitated comments.

Hi NKP,

Good writeup.

Srini

good, in depth reading

All are most welcome to comment. Thanks Pankaj for all kind words.

cheers,
nkpanjiyar

I am still getting the feeling that few members didn't understand the seriousness of matter. Few still preach to buy this, that and so on with target, stop loss etc. How detrimental will be the consequences of thier free tip! they don't know?

A very plain calculation goes like this:

We have at present 8896 members. For simplicity plz take 8900 members. Even 10% members read these tips and even if 5% acts then about 45 members has done so. If on average they make loss of Rs 2000/- then total loss they will be incurring of Rs 90000/- in one single day just bcoz of wrong tips at wrong time by one person. More the number of person give tips, more will be the unnecessary damage.

Had if given a chance to moderate posts at this point of volatility and uncertainity, I will definitely delete such tips and invite more of a healthy and practical discussions.

I am very uneasy coz of someone had made loss by buying in these days inspite of several reminders. May God help them.

cheers,
nkpanjiyar

Hi Nkpanjiyar,
You have already made it clear.Still people who are holding stocks after this decline,perhaps fell in love with their stocks.And those who are still not opening their eyes,let them be so.Market itself is a good teacher.
No pain no gain!
Good write up !
Disciple.