Buying on Dips

Hai all , posted below is an extract from this web page
http://www.elliottwave.com/features/default.aspx?cat=emw&aid=2427&time=pm


Are You Buying When Markets Dip?
5/30/2006 1:13:24 PM



They don’t just say “Sell in May and go away…” for nothing. May is never the friendliest time for stocks – but in 2006, it’s been a particularly mean month. Europe’s major bourses shed 10% or more across the board – and you if you think that’s a lot, consider how investors in Europe's smaller markets (like Russia) must feel, whose RTS index lost 26.9% since May 10!

But even after the declines, Europe’s gains this year are still on track to meet or even beat the “standard” 10% annual return chased by your average mutual fund. Add to that the rock-solid growth numbers European stocks posted over the past three years, and you’ve got some really impressive performance, May declines notwithstanding.

Besides, in all fairness, these declines weren’t completely unexpected. Many European analysts went on record calling for a 10% correction – sooner rather than later. And how could you not? In any market, there will be some valleys between the peaks. “Hiccups” along the way are to be expected – like the 600-plus point plunge the British FTSE 100 took in May. European indexes haven’t had a decent correction in over three years, so the May “hiccup” could be just that.

It’s this “normalcy” to the May declines that makes it tempting to call them “just a correction.” And then go ahead and load up on “cheap” European stocks. After all, if it’s just a dip in a bull market, it could be a perfect moment to beef up the old portfolio. In the good old bull market days of the late 1990s, for example, “buying the dips” was a very popular investment strategy. It worked like a charm back then, because every dip was followed by another rally to a new high. That is, until the larger trend reversed in December 1999.

During the December 1999-March 2003 bear market, “buying the dips” was suicidal because every counter-trend rally was followed by a new, deeper decline. Since March 2003, however, every dip has again been followed by a stronger bounce, and “buying the dips” is back in favor. But given the maturity of Europe’s bull market – three solid years – a wise question is, how much steam does it have left in it?

That depends on whom you listen to, but here’s what Elliott wave patterns say. On May 17, most European bourses suffered 3%+ declines in a single day. The FTSE 100 fell 2.92%. Notice in the chart below that the form of its decline shows an unmistakable five-wave drop – a telling sign for any experienced Elliottician:



Notice also that the FTSE has a long history of making an early exit in front of major meltdowns. At the end of the bull market in 2000, for instance, the FTSE exited the scene 15 days ahead of the Dow, which started its bear market on December 30, 2000. This time the FTSE diverged lower on April 21, 19 days ahead of the Dow.

Only time will tell if the FTSE is again leading global stocks into a major decline. But as Tom Denham, editor of our European Financial Forecast Service, puts it: “The current juncture is a difficult one. Buying European stocks now would be a little like trying to catch a falling knife. You might succeed, but there is a good chance of being cut.”

How do you avoid getting “cut”? Know what the larger trend is. “Buying the dips” is a valid strategy, but it only works if you’ve timed the larger trend correctly. Timing, once again, is everything…

hai , www.ameinfo.com/87164.html
see this website for bear market report
bye
ravi

How to Spot Stock Market Trends
From Ken Little,

Like a boxer, the stock market usually tells you what it’s going to do before it happens if you pay attention to the signs.
A boxer will jab with the left hand several times, forcing the opponent to dodge away to their left, and then the boxer will come across with a big right hand punch.

Okay, it’s not a great analogy, but the stock market will send you signals about what direction it is heading if you pay attention.

Most, but not all, stocks move with the overall trend of the market. I’m not talking necessarily about one-day bumps, but general upward and downward trends – bull markets and bear markets.

Market Direction
For this reason, it’s important to have an idea what the general trend of the market seems to be and what the market is telling us about future trends.
You can get a good idea of where the market is headed with just two pieces of information: Price and volume. When you put these two together, you get a picture that tells whether there are more sellers in the market or buyers.

Volume tells you whether there is movement in the market and price tells you which direction.

We use the big three indicators: the Dow, the S&P 500 and the Nasdaq, to provide one of the indicators – price - to help us decide whether the market is going to continue its current trend or trying to reverse course. For more information on these leading market indexes, see this article.

Volume Indicator
The volume indicator comes from the daily sales volume. Both of these indicators are available online from many different sites including: *****! Finance.
If the market has a high-volume day and prices (of the indexes) are up, you are probably looking at mutual funds and institutional investors buying, which is a sign of an up market trend.

On the other hand, a high-volume day with lower prices could mean a downward trend with the big players backing out of the market.

You need to use some common sense when watching these indicators. For example, if you have three or four days of high volume and rising prices, it is not unusual to hit a high-volume day where the prices fall off.

You’ll usually hear the talking heads on television refer to this as “profit taking.”

Change Coming
If you begin to see the down days too frequently in a market that has been moving up, it may be a sign that it is about to reverse course or stall.
Mutual funds and institutional investors are the volume buyers and sellers that move the market. When they began moving in a direction, that’s where the market goes and you can see it in the price and volume numbers.

A market that shows sharp price movements in either direction without corresponding volume increases is sending false messages that should be watched carefully.

What does this mean to you? Don’t swim upstream. The obvious forces of supply and demand (except when something extraordinary occurs) drive the market. When there are more buyers (higher prices on higher volume) than sellers, the market is trending up.

When there are more sellers (lower prices on higher volume) than buyers, the market is trending down.

Watch for signs that the market is changing course (different price and volume than the prevailing trend), if you see more than a few of these, prepare for a change.

Conclusion
Reading the market from one day to the next may not be helpful, but you can watch the general direction of the market and with some study spot the warning signs that a change is coming.

Big stock market winners look a lot alike -- they have strong earnings and sales growth, a dynamic new product or service, leading price performance and rising mutual fund ownership. Interestingly, successful investors share similar traits.

Top investors always keep their losses small; they never average down in price; they don't immediately shun a stock because it has a high price-earnings ratio (P/E Ratio); and finally, they pay attention to the general health of the market when they buy and sell stocks.

Yet, at the same time, many investors still operate using unsound principles. Successful investors learn to avoid the common pitfalls, and follow these insights that can put you well on your way to becoming a better investor.

Buying Low-Priced Stocks
What sounds better? Buying 1,000 shares of a $1 stock or buying 20 shares of a $50 stock? Most people would probably say the former because it seems like a bargain, with more opportunity for big increases from owning more shares. But the money you make in a stock isn't based on how many shares you own. It's based on the amount of money invested.

Many investors have a love affair with cheap stocks, but low-priced stocks are generally missing a key ingredient of past stock market winners: institutional sponsorship.

A stock can't make big gains without the buying power of mutual funds, banks, insurance companies and other deep-pocketed investors fueling their price moves. It's not retail trades of 100, 200 or 300 shares that cause a stock to surge higher in price, it's big institutional block share trades of 10,000, 20,000 or more that cause these great jumps in price when they buy -- as well as great price drops when they sell.

Institutional investors account for about 70% of the trading volume each day on the exchanges, so it's a good idea to fish in the same pond as they do. Stocks priced at $1, $2 or $3 a share are not on the radar screens of institutional investors. Many of these stocks are thinly traded so it's hard for mutual funds to buy and sell big volume shares.

Remember: Cheap stocks are cheap for a reason. Stocks sell for what they’re worth. In many cases, investors that try to grab stocks on the cheap don’t realize that they're buying a company mired in problems with no institutional sponsorship, slowing earnings and sales growth and shrinking market share. These are bad traits for a stock to have. Institutions have research teams that seek out great opportunities, and because they buy in huge quantities over time, consider piggybacking their choices if you find these fund managers have better-than-average performance.

The reality is that your prospect of doubling your money in a $1 stock sure sounds good, but your chances are better of winning the lottery. Focus on institutional quality stocks.

Avoiding Stocks With High P/E Ratios
"Focus on stocks with low P/E ratios. They're attractively valued and there’s a lot of upside." How many times have you heard this statement from investment pros?

While it's true that stocks with low P/E ratios can go higher, investors often misuse this valuation metric. Leaders in an industry group often trade at a higher premium than their peers for a simple reason: They're expanding their market share faster because of outstanding earnings and sales growth prospects.

Stocks on your watch list should have the traits of past big stock market winners we mentioned earlier: leading price performance in their industry group, top-notch earnings and sales growth and rising fund ownership, to name a few. A dynamic new product or service doesn't hurt either.

Stocks with "high" P/E ratios share a common trait: their performance shows there's plenty of bullishness about the company's future prospects. For example: In Aug 2003, stun-gun maker Taser International had a P/E of 44 before a 900% increase. At the time, the market was bullish about the firm's earnings and sales growth prospects. The market turned out to be right. For five straight quarters, Taser has posted triple-digit earnings and sales gains.


At end-Oct 2004, the average P/E Ratio of stocks in the S&P 500 Index was around 17.




Letting Small Losses Turn Into Big Ones
Insurance policies help us minimize risk when it comes to our health, home or car. In the stock market, most people don't even think about buying insurance policies with individual stocks but it's a good practice.

Cut your losses in any stock at 7% or 8% and you'll never get hit with a big loss. This is your insurance policy. If you buy stocks at the right time, they should never fall 7-8% below your purchase price.

A small loss in a stock can easily be overcome. It’s the big ones that can do serious damage to a portfolio. Take a 50% loss on a stock, and it would need to rise 100% to get back to break-even. But if you cut your losses at 7% or 8%, a single 25% gain can wipe out three 7%-8% losses.

Here's a set of hypothetical trades to illustrate the point. Even if you had made these seven trades over a period of time - and taken losses on five of them - you would still come out ahead by more than $3,700. That's because the two stocks that worked out resulted in a combined profit of $5,500. And the five losses - all capped at 7% or 8% - added up to $1,569.




The rationale for that 7% Sell Rule was never clearer than in the bear market that began in Mar 2000. It caused unnecessary, severe damage to many investors' portfolios. Small losses in tech stocks snowballed into huge ones. Some stocks lost 70%-80% or more of their value. Some will never reclaim their old highs. Others may, but it'll be a long road back. All successful investors share one trait: they firmly recognize the importance of protecting hard-earned capital by selling fast when a stock declines 7% or 8% from where they bought it.

If a stock you own starts to fall on expanding trading volume, it's usually better to sell first and ask questions later, rather than the other way around. Keep losses small to avoid severe damage. You can always re-enter the game if you've only lost 7%. Don't ever look back after a smart sell, even if the stock rebounds. You have no way of knowing its future, so you are best off reacting to what your stock is telling you right now. Learning this trait is hard -- but it will save you a great deal in the long run.

Averaging Down
Averaging down means you're buying stock as the price falls in the hopes of getting a bargain. It's also known as throwing good money after bad or trying to catch a falling knife. Either way, trying to lower your average cost in a stock is another risky proposition.

For example, take Amazon.com between June and Oct of 2004. Its chart revealed much institutional selling by mutual funds and other big investors.

In June, it was a $54 stock. In July, it was a $45 stock. Investors who bought in at $45 may have thought they were getting a bargain, but they weren’t paying attention to multiple heavy-volume declines in the stock. What's the sense of buying a stock when mutual funds and other big investors are selling big blocks of shares? That's a tough tide to swim against.

When Amazon released its earnings on Oct 21, it fell another 10% to around $37. In general, stock charts tell bullish or bearish stories long before headlines do. In Amazon's case, heavy volume declines between July 8 to 23 told a bearish story.

Buying Stocks In A Down Market
Some investors don't pay any attention to the current state of the market when they buy stocks. And that's a mistake.

The goal is to buy stocks when the major indexes are showing signs of accumulation (buying: heavy volume price increases) and to sell when they're showing signs of distribution (selling: heavy volume price declines). Three-fourths of all stocks follow the market's trend, so watch it each day, and don't go against the trend. It's not hard to tell when the indexes start to show signs of duress.

Distribution days will start to crop up in the market where the indexes close lower on heavier volume than the day before. In this case, a strong market opening will fizzle into weak closes. And leading stocks in the market's leading industry groups will start to sell off on heavy volume. This is exactly what happened at the start of the bear market in Mar 2000.

When you're buying stocks, make sure you're swimming with the market tide, not against it.



By Ken Shreve, Content Editor, www.investors.com

given below is market report of india

I'm trading in bear-market mode
By Rob Hanna

TradingMarkets.com
May 31, 2006 5:00 PM ET

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As I do at the end of each month, below is an overview of what I’m seeing:

Positives:

Sentiment -- While fear levels are quite to the point that extreme, some measures of sentiment are starting to show signs of excessive bearishness. The slide of the last few weeks has spooked some investors. Overall, this is a mildly bullish development.

Negatives:

Foreign Markets -- In the “Taller They Are The Harder They Fall” category foreign markets have taken a beating. Some areas like India and Eastern Europe have come down so hard that accounts in those areas may take months or years to make back losses. Money being lost overseas is not a positive for the US.
My shrunken watch list -- It’s been over three years since my watch list has been this small. I am not finding anything with intermediate-term potential. Bases have been destroyed and it will be some time before most of them can be rebuilt.

Accumulation/Distribution -- The market has been selling off on higher volume and rallying on lower volume fairly consistently in recent weeks. This will need to change if there is going to be a sustainable rally.

Breadth -- Breadth statistics have been weakening for months. I showed many charts in this column over the last few months which illustrated this. This is what tipped me off in the first place that an imminent decline was likely. It will likely take some time before many measures of breadth are able to strengthen to a bullish posture. This is still a negative.

UUWNHI (Unofficial, Unscientific, Working/Not working Hanna Indicator) -- What’s been working? Shorts! Long-side breakouts are rare and many pullback strategies were steamrolled with the recent relentless selling. The easiest way to play the market right now seems to be shorting into bounces.

Overall I believe the market has now entered a corrective phase. The negatives I’m seeing are unlikely to reverse in short order. I feel there will be more downside to come before the market bottoms and a new bull rally begins. I am now trading in bear-market mode.

As a quick follow-up on the ETF trades I mentioned in my last couple of columns, all positions are now closed. About 60% of them were sold when the market bounced last Thursday, and the remaining near the close on Friday. Overall, these trades were losers, but by limiting my exposure, methodically continuing to scale in, and selling once the bounce occurred even though I wasn’t back to breakeven, the losses ended up very small. It’s about making money when you are right, and keeping losses small when you aren’t. I’ll talk more about these trades in upcoming columns, since I believe there is a lot that can be learned from them.

Best of luck with your trading,

Rob

Wow Ravi,lots of great stuff..........Thanx!

Saint

Ravi
Havnt read thru all the posts ... but maybe u shd rename this thread 'selling on bounces'

Cheers
Ravi ...oops ! AGILENT...(make what u can of this slip)

Nice take "Selling on bounces"
That will happen in a natural way
Pankaj

Suppose that on June 1st 2006 spot price of Reliance is 900 and that the expected cost of carry is 1.50 per share. If the current price of the Reliance Futures June 2006 is 903 the difference in 903-900 = 3 exceeds 1.50, the expected cost of carry.The arbitrageur will sell (go short) on June futures at a price of 903 per contract and purchase (go long in) spot shares of the stock at 900. He does this because he expects the price of the July Futures to fall to 901.50 (the spot price plus the expected cost of carry).At that price, he can cover his futures position (by purchasing a June futures) at a cost of 901.50 per contract. His gain is Rs3 per contract—the difference between the sale price of the futures contract (904.5) and the cost of covering the contract (901.50).The arbitrageur's long spot position serves to hedge his short futures position against unexpected changes in the price of the stock.
For example, suppose both the June futures price and the spot price rise by Rs3.00
immediately after the arbitrageur sells the futures and buys the stock spot.The June
futures price rises to 906.00 per contract and the spot price increases to 903.00 per share. After the price change, the basis (3.00 = 906.00– 903.00) still exceeds the expected cost of carry (Rs1.50) by Rs1.50 so the arbitrageur expects the price of the June futures to fall to 904.5 per contract. At that price he will cover his short position at a loss of 1.50 per contract (904.5 – 903).This loss, however,is more than offset by his Rs3.00 per share gain (903.00 – 900.00) on his spot position. His net gain is Rs1.50 (3.00 – 1.50)--the same as in the previous case. By hedging in the spot market,
the arbitrageur protects the expected gain from unexpected changes in the price of the stock.
On the other hand, suppose the price of the June futures is 899.00.In this case, the
Rs1.00 basis (900.00 – 899.00) is less than the 1.50 expected cost of carry.The arbitrageur will short the stock and go long in the June futures.The arbitrageur expects the price of the June futures to rise to 900.50 per share. At that price, he will sell his
June futures contract at a gain of 1.50 per contract (900.50 – 899.00).Again, his short
spot position hedges his expected gain against unanticipated changes in the price of the stock.

From Bill Cara's website i quote
"
The Book of Ecclesiastes, Chapter 3, pretty much says it all to me: “There is a time…”
1 To every thing there is a season, and a time to every purpose under the heaven:
2 A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted;
3 A time to kill, and a time to heal; a time to break down, and a time to build up;
4 A time to weep, and a time to laugh; a time to mourn, and a time to dance;
5 A time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing;
6 A time to get, and a time to lose; a time to keep, and a time to cast away;
7 A time to rend, and a time to sew; a time to keep silence, and a time to speak;
8 A time to love, and a time to hate; a time of war, and a time of peace; …….

There is always a time when things are low and a time when they are high. "

Are Indian markets immune to this time !!!!!. Only Time will Tell!!