Had been wanting to write on this topic for some time now though the immediate trigger was my friend Abhijit Patak’s assertion that I had no right to comment on the failures of others when I did not give my own view before hand. Both here and on Twitter, I have tried to not give trades since my belief is that
1. My trades may be randomly right or wrong, but that in itself shall not make me a good or bad analyst.
2. A risk of 5K may be small for some big for others, I am no one to judge the same and hence any advise without knowing the risk appetite of the reader is clear bunkum
3. Prediction is something I do not think forms the core of Technical analysis. The only two ways to be able to predict a future number in terms of the market as well as stocks is by either doing Elliot Wave analysis or Gann. I am neither a fan of either despite seeing Nitin being absolutely right in his Analysis using Elliot or my Boss being able to predict the market using Gann. Its always difficult to throw away your cherished beliefs and I for one am not going to throw the towel right now.
4. Its always good to teach one to fish than provide the fish.
But Prediction is something we love and want to talk about. Few years back, Elliot Wave International gave a target of 1,00,000 for the Sensex. I am not sure how they came up with the nice round figure, but it was the talk of the town. With India growth story still being talked about, that was seen as a non brainer.
But today, the view is anything but bullish. People have lot all hope and I am seeing a lot of guys talking about targets way down (even as Big Institutions stick to their big targets – 7000 by Goldman for instance). But as of now, the retail has been dead right with markets falling quite a bit and that in itself driving more people out – a vicious confirmation cycle of its own.
I myself have become a skeptic of the markets seeing the kind of rigging that happens day in and day out. I can give hundreds of examples of stocks that were pumped and dumped on the exchanges and as far as I can see, there has been no causalities in terms of people being caught and brought to justice. As far as the markets are, it seems, we are still part of the wild west (or should we say East).
But as I wrote in an earlier posting here, if one had a system using which one traded, the probability of getting caught was slightly lower (assuming that one did not over-ride the signals but instead adhered to it). So, in a way, not all is lost. Also a observation of such stocks shall say that they are mostly (80% of the time), listed only on BSE and generally have low volumes. So, if one filters out such stocks (no matter how good their supposed fundamentals are – For example: Ashriya was supposed to be a Goldcoin in terms of great funda, but then again, who knows what is there inside.), the risk of ruin reduces by a great extent.
Let me come back to the topic I choose as the Subject Line. Is the India story done and dead. If not, how should one play the markets now.
While I am not a perma bull, I do have a greater bias to the bullish side than bearish (not that it affects my trade in any way since my trades are purely signal driven, but the bias does make it difficult to exit in terms of investments – something to work on).
A lot of commentators have been calling for a break below 5000 and many looking for a break below even 4000. The question is, how feasible are such large targets. Honestly, your guess is as good as mine. I really do not have the foresight to say with any degree of confidence as to how the global economy will move in the coming months but one thing I am sure of is that if any such fall comes, the markets will be the least of your bother.
The markets are a sentiment of the future economy not the past. Markets generally tend to move before the world starts to know something is good and falls (generally) before people see something amiss. This is well documented by the broad definition of technical analysis as well. Hence lets once more go back to the basic assumptions of technical analysis. They are
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
2. Price moves in trends.
3. History tends to repeat itself.
Currently, our GDP data is falling, IIP is not showing any moves, Inflation remains on the higher side and Interest rates aren’t dipping either. But this is already news that every one knows. For markets to fall, we need a real big trigger – a downgrade to junk status by credit rating agencies can be one, but knowing the way the agencies have done in the past, I give their weights or ratings the least amount of weight. But that will for a short time do impact the markets since a lot of funds may have to withdraw their investments and with the kind of liquidity we have, the fall can be pretty severe.
While the 2008 crack was a sudden fall off the cliff, any fall now will have more ramifications than 2008. India was not affected to the extent in 2008 as a lot of other countries were due to the sole reason that we still had quite a cushion and it worked as a parachute to slow our fall by which time the global economy or rather the markets took off and hence gave us a pretty fast exit option.
But any serious fall now will be due to a real change in economy or perception of the future – a future that would be bleak by all accounts. Assume for a moment that market starts to fall from the current levels, what we will see is that fund raising for primary markets will just not be possible. Banks will fear to lend since a slowing economy and a raising NPA will spark them to restrict lending even further. If anyone checks out the history of Japan, we can see how the deflation in Japanese economy started and how that has become a self fulfilling cycle which has become very difficult to break. While Japan has survived due to a lot of reasons, any such road in India will result in we going back to the dark ages.
On the other hand, lets look at the positives. Interest rates are high due to high inflation. Leaving aside food inflation, inflation elsewhere is dramatically coming down. In last few days, we have seen a slide in Gold / Silver and other commodities. We being a big importer, this fall should have a direct impact on the CAD which hopefully shall contract a bit.
Markets generally move ahead of the improvements that are visible in the business cycle. In 2003, business cycle was down and out but at that point of time we started one of the biggest bull rallies we have had for a long time. Of course, that was helped by the global rally as well which fed more fuel to the system.
Its not more than 5 years since our top of 2008 which has not been breached even as valuations are more attractive than before. As I have said previously, I cannot predict where the markets will go to, but unless we hit a massive sinkhole with rampant unemployment, we are unlikely to go anywhere below 4600 though I do feel that breaking 5180 which is the 200 Weekly EMA will prove to be a tough nut to crack.
The very fact that Japan has decided to expand its money supply drastically in the same way US and Europe are doing means that there shall be a flush of cheap money and that cheap money shall go to places where some semblance of growth still exists. All said and done, India is one of the few big nations to still have a nice growth story and one which can easily accommodate huge supply of funds. Right now, much of the funds are going to South East Nations, but these markets are tiny and its easy for them to become expensive very fast. With China just starting to show signs of slowdown (only god knows when it will slow down, but when it does, the crash will be similar to Gold), the biggest bet will be India.
Both Russia and Brazil are commodity driven and a crash in commodity prices shall hit them hard making it even tougher too allocate big capital to those countries.
I believe that a lot of macro factors are also showing signs of bullish bias, but I shall keep that for a separate day. Right now, one should be ready to invest with the intention to add if stocks drop down to levels of 5100 or 4600.
A look at the history of markets worldwide has shown that when the economy is expanding, the growth given by markets is huge and extends for a long period of time. In a way, we are still way down in the initial stages.
Of course, a world of caution. The whole thesis may come crashing down and I may look like a fool. But what is life without some risk 🙂
Cheers & Happy Investing