Taking a Long view

Every one seems to be wondering whether this fall is temporary or there is more to it. These discussions are bound to happen once markets pick up a trend and stop moving sideways. On one side of argument there are equity bulls who have history on their side, both recent and past. The other side has got a neat set of rationale, like always, but along the way of recovery they seem to have lost their teeth and are no more confident of their own prophecy. Nevertheless their arguments are sound.

But from whatever little I have learnt from the markets, I am reasonably sure that the rising equity market, just like inflation, is a necessary evil for the world we live in. Its always good or atleast projected so, for common people, businesses, governments and countries etc. No doubt why the biggest and most powerful bears of the lot, read central bankers, have never tried to prick a stock bubble directly.

8 Oct, 2009

Inverse relation of Put Call ratio and volatily, with PCR leading the Vix:

http://www.market-harmonics.com/free-charts/sentiment/pcvi.htm

Correlations

3 studies have piqued my interest:

1.Correlation between monetary base and the stock market – monetary base can lead the stock market: http://www.andykessler.com/andy_kessler/2009/10/dow-jones-vs-the-monetary-base-chart.html

2.Correlation between BAA-AAA spread and stock markets – generally assumed that the BAA – AAA spread leads the stock market on a monthly moving average data basis: http://seekingalpha.com/article/134964-choice-of-yield-spreads-as-stocks-indicator

3.This is known but am thinking how this can be extended to equity market - Correlation between forex rates and the treasury rate differential between the two countries: http://www.investopedia.com/articles/forex/05/041305.asp

Idea is to use any/all of the above to see if the current market rally is anywhere close to coming off steam.

Week of 30 September 2009

Holidays, reading and some gyan for remembering later:

Jim Rogers: Invest in companies/countries which are 1) cheap 2) are about to face a dynamic change such as end of dictatorship, end of closed markets, currency deregulation, increasing trade surplus, end of wars etc 3) will survive hard times. Follow the rules of basic supply demand.

Based on the above Sri Lanka is a buy now.

LP:

S&L crisis strategies: buy commerical real estate loans which are selling below par but are 1) from brrowers about to go bust, so when they do, feb will bail out and pay full value of the loan 2) for those porjects which are very sound and will be bought by either the residents or someone else so developer will be able to repay the full loan. same applicable for pool of mortages.

may not a big deal - buy something which everyone is selling, for it must be cheap.

can be big deal - use secondary, tertiary analysis. a tsunami in mexico will increase demand for oil so buy oil, but 1) also will hurt corp 2) govenrment will support the economy by lowering rates, bullish on bonds 3) domestic funds willl buy peso and sell international currencies to support internal economy so peso will rise, etc

Week of 31 Aug 2009

Quite some data coming in this week:

India:

Monday - GDP last quarter, expectation is around 6%. fiscal deficit for June.

Tuesday - ABN PMI Index , was 53.3 for July. Monthly auto sales. Trade deficit.

US:

Friday - job data

Nifty still going strong, but there has to be a correction as the index as well most sectors see overbought. Among other sectors, IT seems slated for a sell off, RS appreciated some last week and may do more this week. Micro Tech looks good to buy, Patni/Oracle finance good to sell. Others scrips I was hoping to buy like have all gone up way too fast, so need to wait for correction. Lower GDP number will be good as it will create a buying opportunity.

Week of 18 Aug 2009

Holding period is important, just churning is not very helpful. If you like something, stick with it. for stock picking, finished another book which supports Graham: invest in high ROC low PE companies. but then decide the time to buy based on tech and overall market, so you can buy on a dip rather than at a top, so may use further refinement such as price viz--viz 52wH/L ratios , other pivots and tech indicators.

for the coming weeks, why there should be a correction:

Macro View (money week and some other blogs)

- in the most recent IAA (investors America) sentiment poll, about 53% think markets will be bullish, this was so high last time right before the correction in Jan 08.

- mutual funds in the US have seen 20 consecutive weeks of net cash inflow, which means retail investors are finally getting sucked in.

- Short interests are down, which means the short covering which helped propel the rally will not happen

- September is historically the worst month for markets

- Volumes have not seen the kind of building up which should have come with this rally.

Tech View – most short term indicators are signaling to a correction, although long term indicators are still bullish.

India – bad monsoons, but better IIP numbers, positive Direct Tax Code (surprising as this is supposed to come in effect by July 2011, that too who know, why should nifty jump 130 points?).Was there anything critical in PM's independence day address?

US – Bad retail sales, bad consumer confidence, another big bank bankruptcy in the week that just ended.

Coming week – Japan data, some important data on US housing and housing earnings.

To watch - Salon, Andhra Cement, Orient Paper, Oil Country (Mind you these are based on fundamentals, so don't expect immediate returns)

Calandar & News

indicatos say something and news takes the market somewhere else. pissed me, inlcuding links to economic calandars. before you buy, check the goddamn sites to see if anything is going to come out and get straight into you ass right after you went in a trade saying yo yo.

Week of 27th July 2009

nifty shuold rise on month on month and daily basis but may fall on weekly basis.

will follow gold as well going forward. Gold seems will fall from daily and intraday rsi ew etc, but should gain on weekly basis. There is a price vol divergence, but negative stochs, rsi so may rise after a dip, whether the dip will be day long or hour long i dont know.

Week of 20 July 2009

Clearly, news seems to be more important than many other fundamental factors in recent times, so in that sense, macros are ruling as of now.Now, with the new government not having announced anything in the budget, its obvious that they will keep announcing one reform here one there, so probability of positive news coming in from time to time is high in the next one year. Yes, negative economic data will come from time to time from the US ( e.g. CIT going kaput), which will drag the market lower but will have less impact than the positive local news. With this hypothesis, overall sentiment seems long to me in the medium term. Why its not so in the long term is because lending still hasn't started yet. Whatever little is happening, its by the governments, so without any capacity building in the private sector, where is the 9% growth going to come from, something to this effect was pointed out by my able friend Ken. so, up for 6 months yes, then either drag, stagnation or some fall back in the markets cant be ruled out.

Now to the charts:

Nifty - I think looking at only daily data makes sense for main theme, which only should be confirmed by weekly or monthly trends. So what am trying to say is, daily movement should be the guiding factor, more so with the way things have been in the current market when:

stage 1. news comes, market moves in one direction for 3-10 days,
stage 2. if more news comes, move continues else market starts to turn choppy
stage 3. opposite news comes, and a revese trend starts for 3-10 days.

clearly, by the time things start reflecting on monthly data (weekly will still be ok), things start changing.

Daily - Stochs positive, RSI positive. momentum about to turn positive. Elliott wave upward 3rd point to be formed so room for more upside. previous highs were 4390, 4424 and 4517, 4655. current close is 4375. good candle (don't remember the name). just outside KLT but within BB.

Weekly & monthly data : room for upside as seen in KLT. stocks negative and RSI is alos about to head in overbought zone, overall seems like the week's 10% positive run is about to reach an end, but may take a few days, to go up it needs to break the 4424 level on weekly and 4448 level monthly, awfully close, which i think can be a kind of momentary stop before the market chooses it next course.

Other thing to watch will be the earnings, which am not so worried about, clearly all analysts were playing safe by being overly pessimistic. However, CIT may have an impact, not in this week but in the weeks to come, if there are too many strings attached.

consumer backdrop

Before money finds its way into each of the asset class , we mention all important american consumers whose spending happen to be the drivers of US economy and some may argue drivers of exporting economies also. Having lost around 20% in their house value, combined with 10% unemployment rate, which is having every 10th neighbour without a job, the consumers have suddenly realized importance of saving more than speding. also evidenced by the personal income and consumer spending number which came after they received tax credits from obama gov.

Asian consumers are also not in the best mood to spend, as linkages of global recession have not eluded them completely while their respective government stimulus may cover up growth at interim but they would definitely end up being far inferior in capacity creation than corporate spending of the same magnitude.

Where is the money?

First whether there is money?. Central banks have outdone each other in terms of flushing the banking systems with liquidity from eonia to sonia to libor to desi mibor all of them easily closer to their historic lows. So, plenty of short term money but what about long term money? its definitely not cheap as the yield curves across the globe are steepest again at all time kind of levels. but that is not the problem, problem is demand? there has been 0% credit creation in India, one of the fastest growing economies in the world, in this current year so far. just wonder what would be happening in the Recessioning nations. whatever loans and credit offtake is there, it is for substituion or repayment or some such thing. So no fresh credit demand from corporates i.e. no capex. (ofcourse credit creation is getting substituted by huge government borrowing but for expenditure not capex) So from the money supply side, world economy resembles a patient who has very good life support (money market) but no outlook on when he could have his steak and fine meals(capital markets).

So bottom line there is money, but very hot, can disappear easily.

Now where does the money go?