Have we really Decoupled from World Markets?

US markets had a great sell off on Monday night, with Nasdaq going down by about 10% and Dow falling by over 770 points, but the same kind of pain was not seen in the Indian markets, one wonders why? Why did we not fall enough... 

The answer lies in the valuation, whereas India has fallen by almost 40% from the highs of 21000, the US markets have just fallen from 13000 odd to about 10,500. Indias markets valuation were quoting at a PE of 21 when the crash occurred. Traditionally Indian markets have traded in the range of 12-21. That in essence means that we were trading at the higher end of the band when the fall happened. But does it also mean that we are currently at the lower end? Well in my humble opinion yes... so 12-13K is traditionally where we should be trading. However as we know that when markets correct they correct more than what they should, hence some over correction cannot be ruled out. But one thing is for sure we should be somewhere near the bottom. Anymore correction and the markets would acquire a screaming buy status.

I am free....Free Falling...

Its actually quite interesting to witness a bear market in its full form. For people like me who have been into equities now for around 5 years, this is the first touch with a good bear market...What actually I am more interested in is how this bear market will end. It reminds me of a beautiful article by Ramesh Damani, wherein he clearly says

The primary markets would be bone dry, you will see a fall because now the public is dumping bluechips. So while there is no art-form to decide between the second and third phase, generally the more the desperation in the market, the more people there will be who say I am never going to come back in the stock market. Generally, it's a good time to start thinking about stocks again when the public gets fearful, you want to be greedy in terms of buying stock.

I dont think that this position is reached just yet. People still think that money can be made in the stock markets. . though I think that point is not too far away... Now with NASDAQ down 7% tonight, our markets would definitely react with a 5-10% drop tomorrow.

So when is this going to stop...well as I had said in my post of yesterday if we break below 12800, then there is a chance that we would see lower bottoms. So it cannot be a case of double bottom reversal. It looks like a case of lower tops and lower bottoms, which basically means the bear market continues...

New Series...New Hope?

With the new series begining on Friday with a huge drop, the picture does not look good at all. However as I have said earlier that all is not lost ...it never is... with the new series there are some positives that can be taken heart from...

1) US package seems to be getting the  approval and on Monday this should come as a good news

2) Oil is trading in a range and not going out of reach.

3) Inflation in the country is not running away either...it is showing signs of stagnating and coming to December, the base effect would take place and the inflation would come down below the 10% levels.

4) The PE multiples are trading at a lower range of around 12. 

5) Double bottom seems to have been formed on the technical charts

Keeping all these factors in mind, we need not be completely despondent. Having said that we have to keep an eye on the 12800 mark on the sensex, which was the earlier low. If we break this and fall below it then it is a definite sign of worry. However if we go above this then there is a strong chance that we might have seen the bottom. (though I personally dont think so)

If you have a look at the charts we are still way below in the negative territory (with the red line breaking below the black line). Till the time we see Nifty crossing 4250 mark, we would be still having a negative trend.

So what should be done now...well wait for Monday...it might give us a whipsaw with the markets moving up a bit...but it would need to be seen to what extent do they go up...

Short lived enthusiasm...downturn started from Monday

image courtesy: Indiabulls
(MACD of Nifty still below 0, indicating short term weakness)

After the spectacular rise on Friday across the global markets, many a people were led to believe that the worst is over. US financial aid package will bring an end to all the woes and things will be line. However the question is are they? Well in my previous post I had written that we are still not out the woods just yet till the time we start trading above 4300 convincingly... That reading still stands. From the technical charts one thing is clear that we are in a downturn. The parameters have not improved and Fridays one day gain was not sufficient to wipe out the losses that we have been incurring for the past 8 months now! Also since this series will end on today we can pin our hopes only on the next series to see whether there is a revival.

NIFTY STILL NOT OUT OF THE WOODS

Although the rally on NIFTY of around 200 points on Friday did a lot of good to the shaken sentiments of the investors, technically speaking we are not out of the woods just yet. The charts show that we are still trading in the negative territory and the trend is still negative in the near term... . So what does this mean, should one aggressively go out there and take long positions...in my humble opinion definitely not...though many many people would be tempted to do so...I think till the time we cross 4300 and stay there decisively till such time the clouds of negativity would not have blown over our markets...I think its best to sit out of these pullbacks for some time...as these tend to be very short. Same is the case when we are in a secular bull market, and there are corrections ...people tend to jump in at the first occassion only to get trapped. The very very short term horizon (1-2 days) is still positive, but how far will it carry the markets is yet to be known...also another factor is the expiry on Thursday...Usually series that take a negative or positive turn during the middle of the series, end on the same note...hence going by that indicator it is best to wait and watch and take positions only when the markets give you a confirmed signal

FINAL CAPITULATION???

With the financial market icons coming falling down, its time to take stock what is happening...has the final capitulation happened... Well if you observe what has happened in our markets then it does not seem so. Our markets really havent collapsed in the very recent times although we might have moved down from 21K to 13K in the long term perspective. I liked the quote from Rakesh jhunjhunwala when he says that if markets had gone up from 3,000 to 13,000 and come back to 11,000 then wouldnt we have still called it a bull market? so why are we ruing on the fact that we have gone down to 13,000....look where we started from....

Well the point that worries me about the markets from a technical perspective is that this series has gone into the negative zone...and there is some time for this series to end...that might mean that there could be a lot of downside still to be seen...I havent been able to track the F&O markets so am not really sure how the put call ratios and open interests playing up...

So is this a good buying opportunity? Well not quite... I think waiting for the final capitulation still might be around the corner...the valuations are good, however that is not only because of prices falling but also because of PE reratings. So still screaming buys might be just around the corner...watch out with baited breath...

ds

End of Midcaps? Not quite....

The other day there was an interview of Shankar Sharma on CNBC TV 18, wherein Shankar was mentioning that Mid Caps story had peaked out in 2005. Well it is true that Midcaps have underperformed compared to the large caps in the fall of 2008, however the recovery of these stocks is always more sharper and quicker than the blue chips. So even if your favourite midcap is down 30-40%, the chances that it will shoot up 10-20% in one day are always there. A recent eg can be the recovery on Thursday, wherein the market moved up by 3% whereas midcaps such as Indiabulls etc recovered to the tune of 12% in one single session! Also another interesting point is that midcaps would tend to overcorrect in big falls. Hence lets say a midcap with 100% growth rate might be available at sub 10 PE's and thats always a screaming buy!!! I had written in my post on 17th august, that Largecaps will outperform midcaps in the short run, that has a reason...when the money is moving out the markets in a rapid pace, the investments typically happen in large caps. Only when there is no longer value in them do the midcaps start to shine. And even small amounts of money infusion causes them to trade 10-15% higher in single trading session.