Thursday, November 12, 2009

NIFTY: Targets Met, Markets to Go Into Doldrums


The yesterday's move completes the minor "rally" target on the Index and the market is exhausting its energy to create major swings. The fundamentals are not going to show too much of a change over next few months. By now, everyone is convinced about the recovery. Things are not as bad as they were supposed to be. In fact, from now on, it is going to be just a mundane update on economic numbers as far as this part of the world is concerned.

As things stand today, practically all the important information is available and discounted. Growth targets are now well known and a consensus is emerging there. We all know general inflation is not a concern (the most fallacious indicator at the moment in India), food and primary article prices are going through the roof (jeopardizing the growth engine and long term growth prospects by skewing the income distribution), interest rates are going to stay high and so on and so forth. No surprises on any side.

So all the rallies and dips are just a way for the market to finally settle for a relatively low volatility price range. None of the variables that move the market are likely to change much over next few weeks. On top of that, international money is going to completely cease movement come December as the investor/trader/fund manager community heads for the annual break.

This makes for a very dull market over next few weeks. Of course, die hard punters will keep on trying to find direction for this market. But there isn't much juice and every move is going to dissipate more and more energy.

Clearly, time to trade ranges so long as the market shows some energy. Then shut shop and enjoy the winters and the holidays.


Tuesday, October 27, 2009

NIFTY: Is it a Correction or Beginning of a Reversal?


In my last post, I had surmised that we are seeing the signs or footprints of the market teetering on the verge of a change in trend. Whether this downmove is just a correction or beginning of a reversal in the market is the key question.

Answering this question is important because if you are an investor, you need to reallocate the portfolio (you might want to buy gold, for instance; which looks like an excellent choice at the moment). If you are a trader, you need to change the 'bias'. And if you are fans of CNBC 'market expert anchors', then you might want to switch loyalties (curiously, Ms. Mitali Mukherjee starts beaming when the market is going up, and Ms. Shireen Bhan is gleaming when its going down).

There are several factors that will determine where this market is going. Before that, it is helpful to recount how this market got here in the first place.

  • Change in growth outlook. We took out couple of percentage points from the growth outlook in the beginning this year. That on its own accounted for about 40% of the fall in the market witnessed prior to the rise. And surprise, surprise, we added it all back up.
  • Risk Premia. Went straight through the roof, way beyond justifiable. Several percentage points added to the discount rate (whatever you were using to value stocks and other things) and when sanity returned, suddenly everything looked cheap.
  • Flood of money. Critical to depressing risk premia (again) to current, artificially low levels. And boosting growth expectations to, well, artificially high levels.

So here we are. And here is where we are going.

  • Growth outlook. Sanguine, with cumulative factors pointing to a long period of 6% GDP growth (give or take a few bips here and there). The steroids have pushed the flexible parts of the economy as far out as they could. Now the whole thingamajig needs to move forward for growth to happen. The feedback effect between different sectors becomes important after a while for growth to happen. Managing that is a tall order because Government's own fiscal condition is going to become a large drag on the economy.

    Also, you can do a selective interpretation of whether 6% is good or bad or whatever. But it clearly does not support valuations that are 20-22 times earnings for the market as a whole. True, we are not there yet (in terms of valuation multiple). But we will need higher growth for the trot to continue.

  • Risk. Premium will start rising again. The simple reason is that despite the cycle of despair and the euphoria, the state of the global financial systems in terms of asset quality is exactly the same as it used to be before the whole thing began. The poison is still in the system. To the extent that even the pioneers of the "good bank, bad bank" approach are yet to implement it to that canary in the coalmine, Northern Rock. European Parliament is still in the process of approving the split and eventual selloff of the bank. Clearly, the global system is far from fit and the moment the reprieve provided by trading profits ends, things will start looking tough again, on the loans side in particular. Any spike in global risk premia is going to spoil the party for Indians too.

    It's nice to assume the risk has gone away. It has not. And any additional points added to discount rate will make those "attractive" valuations ever "more attractive".

  • Turning the taps off. One of the most hilarious aspects of past few years' inflation debate has been the dance routine performed by regulators around the inflation numbers. Its either commodity inflation, or food inflation or this inflation or that inflation; so long as you can prove that "core" inflation is in check. Well, the inflation juggernaut having run through asset prices, real estate, commodities (one by one), food articles, etc. will finally run over whatever "core" is remaining in due time. The taps will have to be turned off at some time.

    The funny thing is that even turning the taps off is not needed for things to start looking bad. As with all things "stimulative", greater and greater quantities are needed to keep the same thing looking good (that is why you need to keep drinking more and more beer to keep believing that your wife looks good!). So the moment you stop expanding the pool of liquidity, things are going to look ugly again.

I guess the policymakers realize these things. That is the reason why there is so much talk of "stimulus continuing" or a "second stimulus" and so on.

Finally, the timing part. Well, the fatigue of the market has been evident. Nifty has been struggling more and more to make relative new highs. The post election euphoria is more or less over. The results are not disappointing but not earth shattering either (something everyone had assumed). From now on, it is going to be evident that from auto to telecom, from pharmaceuticals to FMCG; it is going to be a slow trudge rather than a sprint to far greater profits.

Still, can we confidently say that the reversal has begun? May be not. The market may surprise with a sharp upmove before settling down to a long, dreary sideways move of chipping away prices slowly. But the winter is certainly looking uninspiring at the moment.

Thursday, October 22, 2009

Foot prints of a Reversal (Is the Bear on the Prowl Again?)


Short answer: Yes. Watch out.

I do not say this because that is the "consensus" among "professionals" and "analysts" out there. Those who have ever gone back far enough on this blog (for reading posts, not for searching who Mitali Mukherjee's husband is, we have a rocking piece on that which still brings tons of hits to this blog, hahahaha) would know why that is the case. There is a solid, fundamental reason why this market went up from March (globally) or from May (in India). And all the analysis behind that you can find in the posts that appeared here between January and March (and not in August, when I just did not post).

Similarly, there are solid, fundamental reasons why this market cannot sustain it any more.

Global Folly: Stimulus Season 2

Let us get it straight. Nobody knew whether the first stimulus would work or not. But it was needed. Put simply, the bloke called "global economy" (or whatever name you like, say "global financial system") had an accident. Blood was spilled and it was necessary to replace all those lost pints. Whether somebody knew it would work or not.

And now? Patient has survived. Even recovered somewhat. But is fat and bloated now (something like a reversal to the original position, though not fully). High cholesterol, high whatever, whatever… you name it. The fix? Give more transfusions! If nothing else, you will balance out the high cholesterol by "averaging it out" with the new, "fresh" blood. Okay, bad pun. But hey, the "new blood" represented by a certain Nobel Prize winner is doing just that, "averaging out" the effect of the old. Anyway, that is a different story. Let's get back to our main discussion.

Did I hear "bad example"? Of course it is! But it makes the point.

So what happens as this bloke is given more and more transfusions? I don't know. Hey, I am not a doctor!

Losing the Plot

The plot was simple. It was broken. Fix it. Get out.

But the choice finally taken is to keep pumping in more and more. Chinese economy vital to global health! Put it on steroids. Now that it has run the course, pump in some more. Same with the US. And of course, how can the rising superpower like India be far behind (I know, I know, those of you global freaks don't give a damn about India. Why don't you just shut up? There are tens of millions of investors in this country who care, besides more than a billion of us around who need to eat, sleep and make merry, well sort of!).

So, the plot is lost. In the meantime, you suffered commodity inflation again (I told you so), stock prices went up (I told you so), spending driven sectors blew the top off the charts (I told you so). The problem? NO, the market is not "ripe for" or "waiting for" a correction, as a celebrated analyst commented on CNBC India today. It is just that sectors that ran ahead of the economy were fired by steroids. The rest of the economy cannot support them beyond a point. The pullback becomes inevitable.

Closing Time

Okay, I will not write more on it today. I think it merits a detailed discussion, on India, on global economy and on China especially.



Wednesday, October 21, 2009

The Comeback

It has been quite some time since this blog has been updated (more than 5 months now). I know it is not ideal to disappear without any warning, information, etc.; but yours truly suddenly quit trading and got into the staid life of paid employment. And as luck would have it (or generally has it, if you believe the brilliant "offisial atyachaar" guys), it left no time for me to even visit my own blog; forget about updating it.

But despair no more! The Compleat Trader is back, not as a trader though, only as an observer and a commentator on the economy and how it impacts the financial markets. In any case, this blog is not a "mass" following blog, very few people read it on a regular basis. But I am really grateful to this set of readers who have been truly loyal. Despite the blog not being updated for five months, it has still maintained a sustained monthly traffic of about 1,000 visits a month! Am truly floored and feel honored. Clearly, there is something that people find of value in this. And I hope I can continue to write stuff that people find useful.

Okay, time to be arrogant! Yes, despite me not following the market, the medium term view has been a thumping success. The last word on this from yours truly was on April 24, 2009 in shape of Indian Stocks: Which Sectors should We Put our Money on? Please take a look if you need some convincing.

So folks, yours truly is back. Of course, it will take him some time to hit the same form again and deliver crackling insights for investors and traders alike. Till that time, please "bear" with me (and subsequent posts will show why the word has been emphasized).


Monday, May 4, 2009

NIFTY: Thumping Success on the View, Should We Book Profits Now?


The view on NIFTY has turned out to be quite on the mark and markets have rallied strongly. We did see a blip globally as well as in India due to swine flu concerns. But I had pointed out in my last post; it is just a temporary phase and markets would rally strongly from there.

Going into this rally, the one question that we need to answer is when to book profits. My earlier view still remains intact; the rally has steam to go past 4000 on the NIFTY. That would be another 10% from here.

However, as we get closer to our target from here, the upward pressure will weaken and market is likely to get choppy. High volatility is definitely on the card.

To Book or not to Book?

I think part profit taking is justified from here. It is difficult to predict the exact path of the market from here and there may be a pause for one or two sessions before the course is resumed. There may be a re-entry point available at a lower level on such a day. At the same time, the market may simply carry on and you may regret getting out of positions. Under such circumstances, lightening your position makes sense as you still keep a finger in the pie if the trend simply continues.

Hence, if you are itching to do something and cannot sit tight, take part profits. Re-enter if the market does test 3550.


Wednesday, April 29, 2009

Swine Flu Blues: Jittery? Take a Healthy Dose of Perspective, Thrice a Day for Two Weeks


As swine flu spreads across the world, the jitters are increasing. But so far, things seem to be under control. The encouraging fact is that the cases seen outside Mexico have been mild and most of them have not even required any hospitalization.

The financial markets have chosen to be jittery at this news. Today's selloff was quite severe but may prove to be an overreaction.

Developed World Scare

Most of the scare value coming from flu outbreaks is due to the history of 1918 flu which killed an estimated 50 million people and infected 40% of the global population.

Recent outbreaks have been tame by comparison, with counts limited to thousands instead of millions. Contrast this with the biggest killers on the planet today. Malaria kills 5 million every year. Rabies kills half a million people a year in India alone.

Partly, the scare is due to the fact that malaria, diarrhea and rabies are third world disease. Developed world has more or less tamed these problems. New strains of flu, by contrast, put them at the same level of risk as, say, a country like India.

This is not to downplay the potential harm this may cause. But some perspective can help.

Indian Preparedness

The UK has enough stockpiles of anti-viral drugs to treat 50% of its population. The US has equivalent of 15%, Japan has equivalent of about 20%. India is also stepping up to the challenge and is stockpiling enough anti-virals to treat 0.0020% of its population.

Still, India could be in a relatively safe condition due to the climate (very hot and dry) at the moment. But the onset of Monsoon will bring a totally changed climatic condition, highly conducive to spread of flu like infections. Let us hope the outbreak is contained before then.

Short the Market?

No. One, it is unethical (I have my biases too) to take advantage of such a thing. Two, as the world takes that universal cure for all things psychological, a good dose of perspective, the markets can bounce back. So shorting remains risky.

Swine Flu Kay Sholay

A senior colleague returns from the US. So it is a fit situation to enact the famous Sholay scene.

Kaaliya: Kya laaye ho Sukhiya?

Sukhiya: Swine flu laaya hoon sarkar.

Monday, April 27, 2009

Taliban Under Attack, To Be or Not to Be (Happy)?


Associated Press reports that the peace pact between the Pakistan government and Taliban has broken after Taliban were attacked with artillery and helicopter gunships.

This attack would certainly please a lot of people, particularly the US government. But I am not sure whether it is a good thing or a bad thing. I do not know whether we should feel happy about it or not.

Uncertain Events

First, no one knows whether the events being reported are really the correct ones or not. They may be, they may not be. Information available at the moment is too patchy to form a certain view.

It is hard to believe that Pakistan government (and Army) has suddenly decided to take stern military action against the Taliban when they are retreating out of the Buner district.

The worst case would be if the attack has been faked to mollify Washington and (if India counts in this scheme of things) not to disturb the deep slumber of the neighbor next door. When I say fake, it is not necessarily fake; but something that keeps everyone happy without doing any serious damage to Taliban military machine.

Heads I Win…

Either way, it is a lose-lose situation. If the attack is half-hearted, the implications are serious. The world goes back to sleep and the Taliban suffer no serious damage (initial reports say 20 killed). If they lose only a few dozen fighters out of potentially a million at their command and have all their weapons; how big a dent is it going to make in their capability?

And if the attack is a serious attempt to check Taliban, the danger is a country slipping into a long struggle; possibly a war of attrition.

The world, especially India, does not necessarily win in either of these situations.

Jaago (Man)Mohan Pyaare…

In the meantime, let us hope that the deep and peaceful slumber enjoyed by "strategic"
thinkers and leadership here is disrupted for a few seconds to pay attention to such serious events next door.

And if you think it is only Manmohan Singh who is sleeping over this, think again. Advani, Modi, Rajnath trio of the 'patriotic' outfit is yet to wake up too. The less said about the rest (Behenji, Stone Age bhai, Comrade Karat and so on), the better.

So those who are rejoicing over this turn of events; HOLD YOUR HORSES.

Global Markets: We Don’t Need Another Black Swan


Outbreak of swine flu is not something anyone would look forward to at any time. Jumping forms of the virus are probably the worst health threat that we face today. The danger with a disease that can infect pigs, birds and humans alike is enormous.

It is significant that the outbreak of disease has happened in Mexico this time around, unlike China where conditions for viruses to emerge are more conducive (climate wise). So being in a dry, hot country (even India at the moment is like that) is not likely to put you at a lower risk. That does not sound good.

It also does not help that migratory birds can take the virus to any corner of the world, no matter how many quarantines you put up. It is a bleak situation and the best hope for us is that it dies out quickly.

Possibly the Worst Time

There is never a good time for an outbreak like this. But this time is particularly bad. The world is already reeling under the impact of the financial crisis. A health threat like this can derail the economy in a number of ways. It raises uncertainty, takes attention away from economic matters, puts enormous pressure on those who are worst affected (God forbid if someone loses his/her job and has to face a major health scare with it) and hampers economic activity directly. All the quarantines, restrictions on movement of goods and people come at an economic cost. Add to that the general unwillingness to invest, hire or expand in an uncertain environment.

Not a Time to be Opportunistic

At the same time, I would advise traders to not take an opportunistic view of the market. Shorting the market believing (or hoping) that the outbreak will be a major setback to the recovery is not going to be the right thing to do.

The recovery IS underway and is not likely to be derailed unless the shock is massive. And I certainly do hope that it gets contained quickly.

Maintain Longs

For now, the call remains the same and the bias is bullish. India is unlikely to suffer a major setback till the elections results are out. If you are long, stay put.

Sunday, April 26, 2009

Weekend Crap: Fake IPL Player and Knightmaster and Other Crappy Things


Guess what? This is the 100th post on this blog. And it is only fitting that this landmark post is actually our most popular section, weekend crap. Yeeeeehaaaawwww, pardner.

Knightmaster D***o

The best thing happening during the week was of course the Fake IPL Player blog. I particularly like the name given to Badshah. Somehow it sounds quite similar to Crimemaster Gogo of Andaz Apna Apna fame.

Strange things seem to be happening to Badshah D. May be he has been so disheartened with KKR's 'exploits' that he has lost all sense of dignity. May be the Fake Player has driven something up his, well, pants. Otherwise, why would he sign up for totally shitty, brainless ads like the current Dish TV one? The one with the 'leddddy daunnnnh'. May be he has spent all his money on 'Phoren Babas'.

We Still Love our Politicians

What is going on guys? When we keep on declaring our undying love for politicians, they just keep on getting more and more uptight about it. Otherwise, why would Munnabhai be made to suffer for an innocent intention to give a 'jhappi and pappi' to a popular leader loved by everyone? And then, Mr. N Modi of a certain G affiliations (Gujarat, Godhra, Gandhi-baiting, etc.) has been ranting and raving about all things Italian.

Well, whatever these Italian guys are, they certainly are sporting. Take their PM Berlusconi. He has been painted in the nude along with a nice minister (here is the Telegraph link). Now, for just a moment, imagine if someone were to do that in India…

Nice painting though ;).

Inflation and Expansion Plans We would all Love to See

Okay, enough about trivial things. Now some serious economic thinking is needed.

One disclaimer though. This is serious stuff and click on the link only if you are an MCP (like me) and are over 18. You should not be easily offended also :-).

So here it goes, the youtube link

This is one inflation a lot of us would like to see.


PS. This post was supposed to go up yesterday morning, but due to a weird technical snag, is going up only. Hope you enjoyed your weekend.

Friday, April 24, 2009

Weekly Wrapup: Cracking Performance by NIFTY and More


An eventful week. Several new things started that could go far. Here goes the update.

India Goes to Polls in an Uncertain World

Tough times internationally as Taliban seem to be closing in on Islamabad and Pakistan. Not a good development for India.

Internally, polls are going on. But the dark underbelly of our internal affairs got exposed as Naxals took 700 hostage and a whole block of villages effectively declared they are not part of India. Not good signs for long term health of the Republic and its economy. Check this week's Geopolitics posts for details.

Stock Market on a Decided Uptrend

Am a contrarian again. I have been bullish on the market for past few weeks. And today turned out to be just the day when confirmation for this bullish bias was delivered. In my last post on the topic yesterday (Technical Check: NIFTY Update, Impending Breakout?, I had posted the graphs with the signal. Here is the update.

As you can see, the signal is loud and clear. The path is clear for the next leg of upmove. If you are long, just hang on. If you are short, hope you had a stop loss in place.

SEBI Cracks the Whip

In a surprise move, the one you see only once in many years, SEBI banned Nirmal Kotecha for manipulation. That is definitely NOT like us, we do not harass 'value creators' like Mr. Kotecha too often. But then, these are unusual times.

The key question is, when the entire market knows that there hundreds of his kind, will SEBI do something real to check their ways? This class has swindled thousands of crores out of investors (Kotecha alone an estimated 500 crores).

I would love to know what Professor JR Varma thinks about this. Will keep an eye on his blog.

Monetary Policy

Brought no surprises. Unlikely we will see much path breaking action in the monetary policy department. Except the fact that RBI will keep on increasing its QE efforts as CPI ticks down due to higher base effect.

Have a good weekend.

Indian Stocks: Which Sectors should We Put our Money on?


One of the key questions for "long only" investors at any point of time.

I do not think a "long only" strategy is optimal. But there is a serious set of investors who are not happy shorting any asset and instead prefer to either stay long or stay out of the market. Nothing wrong with this approach, if it gives you peace of mind.

So, am compiling a list of sectors that are likely to be outperformers over next few months. And also a few underperformers too. This list comes with a huge list of disclaimers. The primary one is that I am not responsible for any profits or losses occurring from any trades based on my opinion. And it is just an opinion after all. It is true that I have been right almost all the time in past six months. But still, I am only human. So exercise your own judgment.


Okay, beginning with the list. This list is based on the current information and may change over next few weeks. The likely outperformers in this market are the following.

  1. Banking. Falling bond yields, treasury profits, lower cost of funds, will all combine to outweigh any increase in NPAs in the near term. Banks have been very smart in managing their spreads. They have resisted reducing PLRs arguing high cost of deposits. Cost of deposits was high for less than one quarter, applying possibly to a fraction of all deposits. High PLR applies to 100% of loans. Smart indeed!
  2. Steel. Metals are my favorite bullish play. Demand destruction has run its course. As economy recovers, demand will grow. Monetary expansion helps.
  3. Cement. One of the best sectors to be in. Just be careful and select companies that are pushing down energy consumption aggressively. A company like Dalmia Cement is a good pick based on energy consumption.
  4. Telecom. Another favorite because of strong domestic demand story.
  5. Transportation. The sector leads any uptick in the economy. All indications point to a normal monsoon, another positive for the sector. Great time to buy into good commercial vehicle stocks. Ashok Leyland would be a great pick.
  6. Two Wheelers. Self evident case. Just to recount, rural India marches on and can't buy enough of them.


Now, the ones to avoid. They won't necessarily go down, but are not likely to match market returns. So be circumspect when buying.

  1. Pharmaceuticals. Those who believe Ranbaxy's woes are an isolated case are dead wrong. Suddenly, US FDA has woken up and finds all Indian companies have one problem or the other. Add to that increasing domestic competition and fewer new product launches. Huge forex losses accumulated by most of pharmacos would be just the last straw. Avoid.
  2. IT/BPO. The US is getting rabid about H1B and all sorts of things. Expect low growth from here on for a few quarters till the hysteria dies down.
  3. Oil. As global commodity cycle turns up again, a huge avoid.
  4. Organized retail/Real estate. The secret is out and it is not pretty. Out of these, real estate will turn the cycle in one quarter. Stay away from retail at all costs.
  5. Aviation. A dream gone sour. Enough said.
  6. Media. Several will die. Those who remain will struggle as the cash they have is burnt out and no fresh money is available. They will spoil the advertising market in a last ditch survival attempt.

So there you are. This weekend, there is enough to meditate on. Choose well, and enjoy a healthy portfolio.

India Bond Yields Show Clouds Thinning on the Bullish Side


"I think the most important question facing humanity is, 'Is the universe a friendly place?'

Albert Einstein

My favorite topic again, bond yields in India. Right now, the most important thing we need to know is whether the market is optimistic or not. All the fundamentals are aligned to turn neutral at the moment. This bodes well as the gloom of past six months starts to dissipate.

So, now the question, whether markets are optimistic or not. If they are optimistic, it should lead to a further reaction to excessive gloom of the past. And what better thing to test that than the bond market?

Good Proxy for Liquidity

Relationship between bond and equity markets tends to be fluid. In a 'flight to safety' situation, bonds tend to gain while stocks fall. In an 'appetite for risk situation', stocks gain while bonds stagnate. But there are situations when both can gain or lose together.

We have exactly that situation at the moment in Indian markets. Primary concern with the economy and the markets right now is liquidity. Higher liquidity brings bond yields down and helps the economy. Hence, the positive correlation (agree that it is unusual, but we are in unusual times).

What Yields are Saying

As of now, the yields are coming down after hitting a peak. We are seeing new lows vs. past few weeks. This indicates liquidity is returning. Certainly, the OMOs by RBI are helping this situation. As the higher base effect of last year's inflation starts giving benign CPI numbers, RBI is likely to feel less apprehensive about pumping more liquidity in.

Going forward, we are likely to see further easing in the situation, though not an all out "stimulus".

So, bond yields are the thing to watch for now. They will also tell us whether markets are a friendly place or not. And that, my friends, is the most important question facing us.


Pushing with a String and Other Cynical Thoughts


The policy options for the government coming to power in India are not many.

It is not that India is struggling with this problem alone. Governments around the world are facing the same problem. Consider this article from Bloomberg, Gilt `Indigestion' Looms as U.K. Plans Record Bond Sales of $318 Billion.

Still, India's problems are a bit more peculiar. One, there is a lot riding on the monsoons. So far, the indications are good but we need to keep our fingers crossed. Two, the government still has not figured out how to handle the economy in a crisis mode other than free riding on RBI's management of the monetary system.

"Mental" Recession

Add to that the Indian mentality of manufacturing recessions out of thin air.

Consider this. Wipro's BPO business has doubled in the current environment. The company is talking about possible salary cuts.

Hero Honda is enjoying record sales. Telcos are adding record number of customers.

But there is a general environment of gloom that has been created. Corporates have cried themselves hoarse for sops, have handed out salary cuts shamelessly and are not willing to spend at all.

True, some have been hit hard due to mindless currency punts and forex borrowings. But does it mean the entire economy should grind to a halt?

This is an Indian phenomenon. India took three years to come out of the dot com bust. Despite the fact that India did not have a dot com bubble.

Getting the Economy Going

Still, this economy needs to get going.

And I have mentioned before that using monetary policy alone is not enough. Monetary policy works like a string. You can pull it to tighten things; you cannot push on a string to loosen anything.

The problem is that the next government:

  • Will have no fiscal headroom to jump start the economy.
  • Will have no apparatus to implement any infrastructure development programs.

The latter were systematically dismantled by Manmohan Singh's key minister who would not move on a single project unless… All the work done by Vajpayee's government was systematically undone. Of course, Manmohan Singh is a nice man. Firing such a person is out of question.

The net result is that the next government will be hard pressed to implement anything, unless Dr. Singh comes back to power. If he does, he can start pushing on the string again, like he is doing right now.

Corporate Mantra

Cry recession, even when your sales are rising in double digits and profit growth is 20%+. Cut salaries. Fire people, ask those who are left behind to pick up the extra load.

This mindset is going to get a severe backlash. The tight job market of past five years is likely to return after about one year and a lot of employers are going to face the flak.

Wonderful Thing

The best thing is that the politicians will keep quiet as the corporate world uses scare tactics to cut compensation blatantly. But once salaries start rising fast, there will be talk of 'cap on private sector salaries to maintain social equity'.

Strange are the ways of the Lord!

Thursday, April 23, 2009

Technical Check: NIFTY Update, Impending Breakout?


Today's price action on NIFTY was important. A dip from today's opening level would have broken the support line that looked "far away" on 21st early morning.

But the consolidation pattern on the charts is almost complete and the breakout seems to be impending. This is despite the gloom shown by several pundits. It is also important to remember that FII data has turned strongly positive today.

Past few sessions have been in a range that has been trending down. That channel is about to be broken.

Next day or two will be critical in price action. Generally, it is not a good idea to predict which way a channel is going to be broken. Still, the bias remains bullish and shorting is going to be detrimental.

Bulls rejoice!

Udayan ‘Uvaach’ (Quote)

"…tune in to find out whether the bottom is behind us…"

Well, mine is behind me, I do not know about others ;-)

The Art of Burying Your Head in Sand


The recent advances by Taliban have seen several responses, most of them have come from the US. The one missing is from India, where people are too busy calling each other old/young, weak/strong, wimpy/tough and so on. But a matter of such import has been completely ignored.

I do not want to do any scaremongering, but want to highlight two important items that point to the dangers being faced by India and how Indian state response is multiplying risks attached with them.


I will not highlight the highjacking of a train by Naxalites. But the one that is even more illustrative is the Lalgarh standoff. A fairly large area (covering more than 100 villages) in West Bengal is under Naxalite control. This block had completely denied access to all police, security and government personnel. They were not allowed to set up polling booths for elections too.

The standoff has ended now, with a compromise being worked out. The solution is that polling booths will be set up at the fringe of the area in question. But government officials are still not allowed.

This is a bleak example for our democracy. If you have to negotiate with extremist groups in every part of the country to even hold elections and feel everything is okay with the country, it is delusional.


Well, Taliban are close to Islamabad. That is enough to alarm Obama. Of course, we are not alarmed. Our strategic interest is the responsibility of the US. That is what we have always been like. The moment we get attacked by terrorists, we are furious with the US for not being able to control Pakistan or whosoever is behind the attacks.

This development is disturbing, to say the least. In my series , Danger at the Doorstep, I had discussed the implications of Pakistan Army siding with Taliban. So far, the Army has not responded to increasing boldness of the Taliban. That is not a good sign.

Indian Response


I do not think anybody noticed both of these things. I do not think anyone bothers to see the link between the two, a state not willing to watch out for its own interest.

I do not think it is one political party being weak. It is more a matter of institutionalized apathy.



It is not just the frequent terror strikes. It is the fact that disruptive forces are encircling India like never before. Countering them all means stretching our already strained security apparatus even more.

But to defeat your enemy, you must know him. That is what Sun Tzu said more than 2000 years ago in Art of War. Faking that you know him does not count. But our establishment is showing no signs of even understanding what is going on here.

Economically, this does not sound good. We are already reeling (God knows why) from the impact of slowdown. A conflict is not going to do any good to our dreams of becoming a global powerhouse. Keep your fingers crossed and watch with bated breath.

Tuesday, April 21, 2009

Monetary Policy: No Surprises, only Confirmation of Current Policy


In my early morning post today, I had commented on the tepid nature of likely announcements in the Annual Policy Statement of Reserve Bank of India. Practically all that was surmised in that post, including the 25bps rate cut, has materialized.

I will repeat what I said in the morning, the cut is irrelevant. It is a symbolic gesture in these circumstances because there is a wide gap between the policy rates of the RBI and actual rates in the economy, whether indicated by bond yields or BPLRs of commercial banks.

Delivering What Matters

This gap is not due to whims and fancies of RBI or the banks. This gap is created by the liquidity position in the market and the fact that adequate liquidity exists in only two places; the interbank market and the empty brains of "market analysts" suffering from a virulent bout of inanity.

In my boring and painfully long post Back to Fears of Depression written on January 10, I had explained that ample liquidity in interbank market does not mean the entire economy is adequately supplied with money. To repeat, there are many levels of liquidity in the economic system. First, liquidity in the banking system, measured through inter-bank market activity and rates. Second, liquidity in the organized commercial sector; measured through corporate bond market, commercial paper market and BPLR. And third, lower levels that reach MMEs, households, etc.

Central bank can control only the first level directly, which is usually enough to regulate the overall money supply under normal circumstances. In a crisis, the linkages break. The primary channel of interbank market may be flush with funds; the commercial sector still does not get enough.

"Moralsuasion" and Clarion Calls

Going back to today morning's post, the only thing to watch for in today's announcement was a signal by RBI on liquidity. What has been delivered is, instead, a call to banks to lend more.

I am not saying it does not carry weight. In an economy where majority of the financial system is under government control and central bank doubles up as government's money manager, "moralsuasion" is a powerful tool.

Why is it not working? I have only two explanations. One, banks are afraid to lend in current economic circumstances. But I suspect it goes beyond that. Second, there is a genuine lack of liquidity in the monetary system outside the inter-bank market.

Bond Yields Again

If there was sufficient liquidity in the entire system, bond yields would not have jumped up by close to 2% as policy rates went down by a similar amount. That brings us to my pet peeve, RBI is still not infusing enough liquidity in the system to counteract heavy government borrowing program. This has changed in the past one month (as was anticipated, I can gloat sometimes) but still RBI is not likely to do much more than barely compensate for government borrowing.

Clear Signal

That is where the significance of today's policy statement lies. By not announcing any concrete ways to provide more liquidity, by not even mentioning how it will jack up money supply, by opting to give a public call to banks to raise lending, the RBI has signaled that the current policy is going to continue. The rate cut is just a sop, something that the market was anticipating any way.

Will cover the implications of RBI's lowering GDP forecast in a later post.

Why Reza Aslan Matters for India


Ostensibly, Reza Aslan has nothing to do with India. An Iranian-American, he is a writer and theologian and holds a Masters in Theological Studies from Harvard Divinity School.

What he argues is important. While the Bush administration worked hard for years at creating an image of a monolithic enemy in the shape of Jihadi Islam, reality is quite different. If you look at the current US policy in its 'war on terror', all kinds of 'enemies' are clubbed into a single entity. Whether it is Hamas in Palestine, bombings in Iraq or Taliban in Afghanistan; Bush policy was simple. Paint them all with the same brush, and then proceed to bomb them or throw missiles on them.

By painting every terrorist movement in Jihadi colors, the US is shooting itself in the foot. In a term used by of David Kilcullen, a counterterrorism expert, the US has created an 'undifferentiated enemy' by creating a universal image of Jihadi Islam. This is a gross oversimplification that only confounds matters. By fighting against a fictional enemy, nothing can be achieved. No wonder, the US has been stuck in a stalemate in its 'war on terror' for years now.

Knowing the Enemy

The problem with the Indian approach is much worse. We not only tend to lump all the disparate elements together, our response is primarily anger and rhetoric.

But first things first.

What do you find common between Kashmiri separatists and Afghan fighters fighting in Kashmir? They may be fighting in the same position but are they ideologically same? Are they motivated by the same factors? Can you equate the Naga separatists with the bombers in Karnataka or with the Mumbai attackers?

This failure to differentiate these elements from one another leads to a single approach applied to all. The result is clear. For how many years have we been fighting Naxalism, Naga separatism, Bodo separatism? The result is similar to what the US is struggling with in its 'war on terror'. Years go by as you keep fighting to obliterate the 'enemy', only to discover that the problem has become much worse.

An Emotional Response

Our response to terror always tends to be anger and rage. Displaying an emotion is not a way to deal with terror or to convince others (the US or the global community) to deal with it on your behalf. It simply borders on naiveté.

Worse still, it prevents any rational understanding of what is happening around us. Without a good understanding of what is happening, evolving any doctrine of responding to threats is impossible. What you get instead is the familiar tamasha of people shouting hoarse post every terror strike.

The Battleground

That is why it matters for India to sort its response out. Unlike the US, India is not just a party to this conflict, it is the battleground. And the impact is not minor.

Today, large parts of the country are practically out of bounds for most of us. Traveling to the North East requires army permission, going to Kashmir may not be safe and even policemen do not venture into the Naxal controlled areas of Andhra, Orissa or Jharkhand. This is not just an inconvenience. It has grave economic consequences for people living in these areas, and for the country as a consequence.

Beyond Ideology

I cannot and do not want to argue about the ideologies involved. My primary concern is the response. By adopting a simplistic response to all these situations, we are doing ourselves harm. By shouting 'military strikes' every time there is a bomb blast in the country, we are losing precious time because we do not do what can be done.

That is why Reza Aslan matters for us too.

His new book 'How to Win a Cosmic War' releases today.

Monetary Policy: What are the Options for RBI?


Today, as Reserve Bank of India (RBI) unveils the monetary policy for the coming six months, it is going to be probably one of the most tepid announcements of late. There is not much room for maneuver and much of the action of the past few months has been relatively ineffective.

Limited Policy Options

The policy options with RBI are not many. Past few rate cut actions have not resulted in any impact on the market. Take bond yields for example. In my post dated January 2 (QE on the Cards), I had pointed out the worsening liquidity position. In an immediately following post on January 6 (Bond Yields Point to Headwinds), I had pointed out the impact on commercial sector too and had surmised that increased borrowing program of the government is going to neutralize all monetary policy action of RBI.

Bond yields prior to surprising large rate cut of January were around 5.25%. From there, yields rallied by close to 2%, and have settled only after RBI undertook some serious QE action.

Where Do We Go?

I have been of the view that any meaningful QE can happen only during current fiscal year as the conditions were too difficult to manage for RBI in last quarter. This quarter, things are likely to be slightly easier and RBI can undertake some QE action through open market operations.

Still, it is unlikely that RBI's liquidity infusion is going to do much more than counter the massive borrowing program of the government. Pulling out all the stops to make it a serious "stimulus" runs the risk of shoveling too much money into the system and stoking consumer price inflation.

A Rate Cut?

The case for a rate cut is not very strong. A rate cut can work only on the margin and is effective in sufficiently liquid markets. It loses much of its impact in a market that is struggling with low liquidity. Indeed, the past few rate cuts have done nothing more than keep the market mood from getting too surly.

Still, we may see a token 25 basis point cut to keep the sentiment slightly positive. It is, frankly, irrelevant in the current conditions. Much more than the rate action, it is the actual management of liquidity that is going to drive the markets.

Hence, the real thing to watch out for is what RBI signals on liquidity conditions and its own planned action in the area.

Technical Check: NIFTY in a Consolidation Pattern


The market has paused a little bit after an impressive rally over past one month. It is a good time to take a close look at the market and ascertain where it is headed.

On the fundamental side, I have already explained why my call is on the bullish side. It is time to look at the technicals also and see whether the signal from charts is bullish or bearish.

Market has been in a rally since hitting the bottom on sixth of March. The run up from there has been impressive. Looking at the following chart, it is clear that the trend line supporting the uptrend is still far away from being broken.

From the chart, it can be seen that not only is the uptrend unbroken, the current market move is actually forming a congestion pattern on the top in a small triangle. This is an extremely healthy sign for an uptrending market because given such a large rally, market has been due for a correction.

Instead, the market has just paused and is consolidating in a part sideways move. The bearish pressure seems to be largely missing because not many people are long in this market. That means if the market starts advancing again from these levels, there is not much resistance on the way for next few hundred points.

A check on the Elliott wave is also warranted. The following chart shows one possible wave count.

The current rally looks like wave 3 in a pattern starting from the October 26 bottom for the market. In a large, broad wave pattern, the period since early November has seen a sideways consolidation move. From there, the market has rallied to form Wave 3 in the current upmove.

The current upmove had the following fibonacchi targets, 2941, 3058, 3175 and 3550. The first three have been taken out quite unceremoniously. The last one is where the market has begun to consolidate. If the market just moves sideways here and then rallies, the extended target for this move works out to be 4160.

Watching the market over next few days is important. If the market breaks this pattern on the upside in the coming week or so, there is a good possibility of seeing 4000. Even if the market does not rally, it is not going to be easy to trade the short side. Bears, tread with caution!

Monday, April 20, 2009

Metals Rally, Will it Continue?


In my Themes for 2009 post early in the year, I had surmised that commodity rally will resume at some stage during the current year. More than that, metals are likely to lead the overall commodity rally. The view has turned out to be largely correct.

It is unlikely that commodities will suffer another meltdown in prices in the coming months. The reasons for this are many.

  • Demand destruction in the developed economies has likely run its course. There does not seem to be much more scope left for demand to dip drastically. That should put a floor under the prices.
  • Chinese consumption has started picking up again. China accounts for anywhere between 25-35% of global consumption for most of the base metals. Demand surge in China is definitely bullish for metal prices.
  • Unwinding of speculative positions and investment holdings is over. Unlike last year, "investment" holding of precious and base metals is fairly low at this moment. A metal like Copper had been a favorite of commodity traders and had seen large investment demand. Unwinding of these positions had put downward pressure on the prices.

Getting into Congestion

At the same time, these factors have been impounded in the rally till now and will not provide any further upside. The prices are likely to spend some time consolidating. Moreover, some of the price movement has already discounted the large Chinese stimulus plan. Since China is not spending the full stimulus money at the moment, some of the rise in prices may be given back.

Still, the overall direction for metal prices seems to be upwards. Next few months should see a nice consolidation pattern form on the charts. Once the overhang of Chinese plan clears and actual spending starts, prices should resume their upward trend.

Inflationary Pressures

At some stage, the massive amount of money pumped into the markets will start having some effect on prices. I will not hark back to Friedman with monetary arguments. I will invoke Adam Smith instead, who recognized more than 200 years ago that metals are a better store of value; implying monetary expansion generally sees a rise in metal prices first.

As the excess amount of money works its way through the system, we are likely to see a resumption of a commodity rally. Metals, quite likely, will be in the forefront of it.

India: Danger at the Doorstep Part-3


You cannot avoid a war. You can only delay it to your own disadvantage.

- Niccolo Machiavelli in The Prince

The first two posts in this series examined the way things have gone in Pakistan. They clearly pose a great danger to the Pakistani society. But more than that, they present a clear danger to the idea of Pakistan as a nation and to its sovereignty. The latter is already gone to some extent as the country has ceded vast amounts of territory to Taliban and other jihadist forces.

The Irony Continues

The irony is no less on the other side too. There is a good chunk of 'right wing' ideology in India that has been wishing for Pakistan's move to a failed state status. They do not know what they are asking for.

If the divisive trends in Pakistan continue to gather pace, it is only a matter of time before they start spilling over into India. A divided Pakistan is the biggest geopolitical danger India faces today. Once the buffer of a large professional army keeping things under control is removed, India may have to gear up to face the menace on its own.

The Indian Response

One word: Stupor. And petty short-termism.

The Indian establishment wakes up only when there is a big terror strike on Indian soil. The response routine is now quite well established. Raise a stink, start yelling at Pakistan, create noise internationally. And then just shut up and forget about it.

This clearly does not work. And it cannot work. If you do nothing to improve border patrolling, if you do nothing to maintain preparedness of armed forces, if you deplete your military resources in five years of sheer neglect, if you have no doctrine for responding effectively to such incidents, how can you expect any measure of success in preventing future attacks?

I do not want to get into the debate of whether elements attacking India are under Pakistani control or not. I do not know and I do not care to know. It is irrelevant. What is relevant is what you do in response.

Till this day, the Indian government has not adopted any coherent doctrine on dealing with this growing menace. It is convenient to make Pakistan sound like an enemy, but we should remember that this "enemy" has to be dealt with on a day to day basis as well. It is Pakistani armed forces who are going to keep a lid on a large scale threat like this and not Indian forces. It is in Indian interest to persuade this "enemy" to deal with this threat effectively.

Dove/Hawk Strait Jacket

That is where a new mindset for dealing with terror is required. You cannot treat everything in isolation. The worrisome part in India is the tendency for people to pick up an individual aspect of the problem and harp on it. Clearly, there are multiple facets to the problem and better border patrolling, better armed forces preparedness, better international diplomacy are all part of a comprehensive approach.

India's Interest

I want to argue that persuading Pakistan and engaging Pakistan in this matter is in Indian interest. This stance is not dovish. It is certainly less dovish than shouting about military options and then giving MFN status to Pakistan or allowing duty free cement imports by land route into India.

India's interest is better served by tying everything together and pushing Pakistan to deal with this threat that endangers both the countries. And this push should be supported by linking economic incentives and diplomatic support to real progress made on measurable criteria.

Economic Implications

Unchecked, these threats are the biggest danger to India's economic dream. If the Taliban does take over Pakistan, it will not take Pakistan alone back to Stone Age, India will also be burdened with an economic penalty for several years.

Since we are talking more about economic issues and impact of international developments on financial markets, a short comment there is warranted.

Any more negative developments in the region are going to send a very strong negative signal to international investors about the whole region. Again, while the main loser in the game is going to be Pakistan, India will increasingly suffer as well (though not to the same extent) if the frequency of terror attacks goes up.

A broken Pakistan, on the other hand, is going to spell economic chaos. That is a place where we should not even want to go.

India: Danger at the Doorstep Part-2


You cannot avoid a war. You can only delay it to your own disadvantage.

- Niccolo Machiavelli in The Prince

The first part of this article was published on April 19.

We saw during the last discussion that it is not so easy for anyone to push the Pakistani army around. It is a professional army and is quite modern in terms of its armaments and preparedness. Hence, people who keep talking about the "military option" are not being completely realistic. But there are other factors that put the region at great risk.

Closing Eyes to Reality

The quote at the top of this article is not actually intended for the Indian establishment. Quite the contrary, I have been arguing that people in India who have been advocating a military solution to the terror problem are being naïve. Besides, there are multiple other options that must be explored before a military solution to the problem is sought.

The quote is actually reflecting on the internal state of affairs in Pakistan. It is increasingly clear that the Pakistani establishment is fast losing control over the phenomenon it has created. It has tried various means to control them, including fighting them in Waziristan and NWFP. It has apparently not worked.

The arrangement struck by the establishment in Swat valley is quite indicative of what is happening. What Pakistani establishment has sought is to avoid a war against the Taliban in the region. In reality, it may have ended up only postponing it.

Grave Danger

Pakistani society, in that sense, is facing a grave danger. It is not about religion. It is a free country and if majority of the people agree with imposing Sharia or any other religious law in the country, what is there to bar it?

Still, the Pakistani civil society is about to get caught in a vicious fight. It may have ignored the problem for a long period of time (like India has ignored its terror problem) by believing it is not at its doorstep, it can no longer do so because now the menace is in its courtyard.

The establishment, by fostering the phenomenon and then avoiding it, has ensured that whenever it is forced to fight a war of attrition against the Taliban, it is going to do so to its own detriment. That does not bode well for anyone, least of all for India.

Army's Role Pivotal

Pakistan Army's role is pivotal in this ensuing struggle. Contrary to its assertions, it may have the resources to contain the growing threat, if it decides to act in time. While I have no insights into the mechanics of Pakistani polity, going by the record and what is available in public domain, a large fighting force of more than a million should be adequate to contain a fairly large threat.

But the key question is, will it choose to act? If it does not, it is akin to leaving the Pakistani society on its own against the rising wave of terror.

In the next concluding part, we will analyze the response of India and what options we have.

China’s Investment Attractiveness Increasing Vs. Other EMs (Including India)


We have discussed earlier how China is using the current crisis to get ahead in the global pecking order. China's stimulus plan is probably the most effective one as it directly stimulates demand (China GDP: Growth Surprises Pessimists but Leaves Optimists Asking for More), it is pushing an aggressive currency agenda that is likely to be highly beneficial in the long run (Of Triffin's Dilemma and China's Ambition) and is increasing its influence in the regional sphere on an on-going basis (China's Rising Clout: Impact on the Regional Balance).

There is no doubt that the world needs China at this juncture. As the world comes out of this recession, China may actually be able to deliver on the premise that perpetuated the recent bubble; that China is going to be the next engine of growth for the world.

Stirring to Get Going

In my last post on China, I had cited the March retail sales numbers (up 14.7% YoY). Even more indicators are pointing to the fact that Chinese consumption is finally taking hold as the large stimulus package starts to work its way through the economy. One of the most important indicators of the health of an economy, vehicle sales, are also pointing in that direction.

Consider, for example, that China is likely to overtake the US as the largest car market in the world (click here to see the Bloomberg story on the topic). While Indian environmentalists fret over the "ecological danger" posed by additional 50,000 a year Nanos unleashed by Tata Motors, China is likely to cross the 10 million cars per year mark this year.

This obviously has the embattled large manufacturers (including GM, Volkswagen and even Toyota) look at China as some sort of a rescuer. Again, consider the fact that even at 10 million vehicles a year, the vehicle density vs. population in China will be equivalent to the US position in 1925 and Japanese position in 1965. Clearly, car makers would see many more years of growth coming ahead from this point.

As the Chinese consumption finally starts taking shape, more and more sectors will start showing this kind of promise. The investment magnet that China has been, will become even more powerful.

EMs to Suffer

This does not bode very well for other EMs, including India. If you see a higher level of safety for your money and higher returns and better future prospects in China, your first preference will be to go to China. In a world flush with money, this is not a problem. In a world where everyone is struggling to keep growth positive and is looking for investments; this spells trouble.

Stepping Up at the Right Time

China has stepped on the gas at exactly the right time, when everyone else is reeling. The best part is, there is nothing much anyone can do, except grin and bear it.

There is already enough anecdotal evidence to it as well as some market information. Car makers will of course be heading for China, but so are hedge funds. Chinese stock market has outperformed practically the entire world right from the beginning of the calendar year. And it shows no signs of stopping. It is only a matter of time before everyone capitulates and dives headlong into China.

India could have been in a similar situation, albeit on a smaller scale. However, if you have thrown away fiscal advantage over petty differences with industry (e.g., the Cement industry vs. P Chidambaram spat), dithering over meaningless fuel price sops and a totally irrational indirect tax policy; there is no ammunition left for you to do anything. Add to that the political angle, where the PM finds it impossible to remove a blatantly corrupt minister, who completely stalls all infrastructure investments, in the name of keeping his political allies happy.

Dual Trends to Put Pressure

As the global economy recovers, EMs will now face a dual pressure on capital flows. As I pointed out in my January articles, the US tends to suck in capital in the early stages of any recovery. Now, you have another destination that is going to suck in more investments.

Over the next few months and years, we will see a clear pecking order emerging where China will be at the top and other EMs will be trailing behind. India will definitely do better than other EMs, provided there is enough left after China is done having its fill.

Executing the Large Range Trading Day Strategy


This is the concluding part of the series on trading large range days. The earlier two parts of this were posted yesterday, How to Trade Large Range Trading Days and Three Steps to Spotting Large Range Trading Days.

Once you have decided that the day under consideration is likely to be a large range day, you are ready to trade it. You do this by implementing the following three part strategy.

1 - Always Trade in Line with the Early Morning Trend

A good intra-day trade on a large range day is always built in direction of the early morning trend. If the market has taken out some important indicator (I had described one of my favorites in the last post) in the first hour of trade, it is likely that the trend established in this move is going to continue. Hence, always build up your positions in line with this early morning trend.

2 - Always Build Up Your Position in Steps

This is critical. Intra-day positions do not allow differential profit taking and stop loss levels (e.g., you cannot aim for a 100 point profit target while keeping your stop loss at 20 points). That means with a 50% hit rate, you will lose money on the transaction cost. The idea of stepping into a position, on the other hand, is to create a differential trade off if you are really into a large range day.

The first thing you need to determine is your acceptable absolute cash loss per trade. Let us say you are okay to lose Rs. 1000 per trade, that will determine your step size.

Next, determine the size of the move and set about one third to one fourth of that as your step size. You can take the range of the last few large range days.

Let us say you decide the step size for NIFTY at about 20 points and absolute stop loss at Rs. 1000. This gives you a step size of one lot NIFTY futures. Now you are ready to trade. Consider the following build with their stop losses beginning with NIFTY at 3000:

  1. Entry at 3000; stop loss at 2980
  2. Entry at 3020; stop loss at 3000
  3. Entry at 3040; stop loss at 3020
  4. And so on.

You can see that you are becoming profitable after step 3 and if the move goes up to 3100, you will be long about five lots. If the move falters on the way, you will probably exit either with a maximum loss of Rs. 1000 or no loss.

3 - Exit According to a Clear Rule Before End of Day

You have multiple exit options:

  • Only trailing stop loss and exit at EOD.
  • Exit at the fixed time of the day.
  • Exit when the move has reached the average of last three large range days in magnitude.

Whatever rules you adopt, ensure that the position is liquidated at EOD. Carrying these trades overnight is generally risky.

This concludes our discussion on the topic. Since volatility continues to be high in the markets, it is important to keep a strict risk control policy. That is the reason why I recommend using a strategy that limits your risk. If you have already evolved your own rules to achieve this, use them by all means. Otherwise, the basic trading rule described here is always a good fall back option.

Sunday, April 19, 2009

Three Steps to Spotting Large Range Trading Days


In my last post (How to Trade Large Range Trading Days), I had talked about trading large range days. These days can be highly detrimental to the health of your kitty or could be highly profitable, depending on how you play them.

It is important to spot these days early on. Once you have decided that it is going to be a big range for the day, you just play along with the direction and start building up a good position.

Tell Tale Signs

Large Range Trading Days have a few tell tale signs. I have identified three such signals, the most important of which is the nature of market move.

1 - The Nature of the Move

While there are other signals that you can use to spot them, there is one signal that I have found to be consistently useful in finding such days.

Consider the following three graphs. (Source: NSE)

These three graphs have the following things in common.

  • The move is slow but steady. You do not get erratic jumps that go up by 1% in half an hour and fall back after that.
  • The move is quite sure footed and not tentative.
  • Successive peaks for downmove are lower than previous peaks and and bottoms are higher for upmoves.

2 - Early Break of Critical Indicators

The one indicator I like is the Fibonacci range for the previous day. Let me explain.

Consider the trading range of NIFTY for November 10, 2008.

Open 2973.30 High 3161.25 Low 2973.70 Close 3148.25

Here we have a trading range of 188 points. Counting from the closing point of 3148, we get the following critical trading points applying Fibonacci numbers.

R3 3336 R2 3262 R1 3219 Close 3148    S1 3077 S2 3033 S3 2960

On the following day, the S1 support is broken in the first 15 minutes of trading. That is a clear sign that a large range day is opening up.

It is critical to remember that I am not talking about a large reaction in the first few minutes of the opening to international cues. If market gaps down and has broken the S1 support or R1 resistance, then you have to wait for the break for next support or resistance for it to be a valid signal.

3 - Move of the High Beta Sector

Typically, the high beta sectors lead the changes in the market, though I do not necessarily place the maximum reliance on this indicator. You can rely on a few bellwether stocks, or an index that has a high beta or can even construct your own index. Whatever option you choose, you can use the move of such an indicator to confirm the nature of the trading day that is opening up. If a large range day is opening up, the high beta sector should be leading the broad market in the same direction.

Now that we have understood how to spot the large range day, we will talk about trading it next.

How to Trade Large Range Trading Days


One of the most persistent features of the markets in past six months has been the large range day. Even after the being into the current market for months, the large range day has not disappeared. This presents a good trading opportunity to the day trader.

The Dangers of Large Range Trading Days

The biggest danger of such a day is presented to the medium term trader and the ones who typically hold their positions for 3-5 days. The latter is typically forced to turn to day trading in this environment.

The biggest danger is getting out of profitable positions due to your stop loss getting hit on either side. This can be quite frustrating at times because one day of a large counter trend move is typically followed by trend resuming the very next day. Things get back on track the very next day while you are left nursing your wounds.

But It is Not the End of the World

Of course, a good trader will take such losses in her stride.

One of the ways a longer term trader deals with such nasty surprises is by having large stop losses. If you see such days moving the NIFTY by 100 points either way, you can always build trades that aim for a 200 point move with 100 points on the stop loss.

But this means you are giving up large number of trades that otherwise could be quite profitable. More than that, you are giving up the opportunity to trade such days in a profitable way.

Enter the Step Method

My preferred way to minimize the impact of such days and to trade them profitably is to use the tried and tested step method of building up a large position. While my earlier articles have touched upon this method, it is time to explain it better to enable better trading opportunities.

The idea behind the step method is simple. As a trader, you do not want to bet on the direction of the move, but the quantum. The difference is crucial. If you take a directional view, you will probably go long a falling market or would short a rising one. If you take the quantum view, you can get rid of having to guess the direction.

Next, we will talk about how to spot a large range trading day and how to deploy the method.

Weekend Crap-2: Feminist Rage over Michelle Obama and More


Okay, why am I writing the second edition of Weekend Crap for this weekend? Well, nothing better to do. I had prepared extensively for catching the IPL match between Mohali and Delhi. This match always promises to be interesting because my wife is a die-hard Delhiite and me being a pukka Punju have to support Mohali.

But the match is getting rained out and does not look like happening. What better to do than write some weekend crap?

First, the Feminist Rage

Well, the entire Feminist community is up in arms against Bonnie Fuller of Huffington Post because she called Michelle Obama a MILF. In an article titled Cougars And MILFs Rule! 40 Year-Old Women Are WAY Hotter Than 20 Year-Olds!, she waxes eloquent about sex appeal of women over 40. That is a fair point, but some people find the word MILF objectionable.

Read the piece for yourself. I don't care about what you want to call them, but the page sure has a lot of eye candy (hey, if a woman can call Michelle O a MILF, why can't I call these models eye-candy?) and you can even vote for your favorite ones! The best thing? You get comparison between a few gorgeous ones and their 20-something equivalents. So go for it.

We Love our Politicians

Of course, we love them so much. That is why I am not surprised by an emotional confession by Sanju Baba for his desire to give a "jaadu ki jhappi and pappi" to Behenji. I do not harbor any such emotion for Behenji but I do confess that I had a crush during my teen years for some time on none other than Puratchi Thallaivi J Jayalalitha. Yeah, yeah, she is called Amma now, but she was not always Amma.

Few people, by the way, know that Jayalalitha acted in a hindi movie too. It was quite a hilarious pot-boiler called Izzat starring (guess who) Balraj Sahni and Dharmendra in a double role. One of the roles played by Dharmendra is that of a "dark" guy and Dharmendra starts being orange/green in the beginning of the movie and keeps on getting oranger and greener throughout. The high point of the movie is a song called 'jagi badan mein jwala' in which Jayalalitha leads a village dance. The song starts like a nice gentle Bhajan and proceeds to a military marching beat in the background. If you can drop the modern famished to death sense of beauty, you can see why she had built up such a following.

Here is the youtube link, in case you want to watch the video.

Sorry, No Third Thing This Time

Okay, the match has started and Mohali is raining sixes on Delhi. So make do with what is already there. More stuff next week, of course.


India: Danger at the Doorstep Part-1


You cannot avoid a war. You can only delay it to your own disadvantage.

- Niccolo Machiavelli in The Prince

Things have been going horribly wrong in India's neighborhood for quite some time now. The Taliban threat has been rising consistently and now it is reaching an alarming proportion. The Indian establishment has taken these developments lightly and that does not bode well for stability of the country.

Someone Else's Problem

So far, the trouble with Taliban has been treated as a problem that either belongs to the US or to Pakistan. But what is happening now clearly threatens the survival of the Republic. And the Republic cannot take it lightly.

It has been fashionable in Indian polity to call Pakistan a 'failed state'. Whenever there is a need to 'talk tough', Pakistan has been an easy target and calling them names is always handy. But soundbites do not make a prepared nation and politicians with attention spans of 10 seconds do not make good policymakers.

Implications of a 'Failed State'

As Pakistan has steadily inched towards that status, it has started dawning on the world what it is going to mean. There is a good reason why Obama, who has been pushing to the hilt to withdraw troops from Iraq, is willing to commit more to Af-Pak.

The implications of letting Pakistan slip are horrifying. It has a massive army, more than 600,000 strong, that is armed to its teeth by China and the US (India has about a million, but when you consider the large border, its internal commitments for fighting insurgency and multiple enemies, Pakistan almost squares up). It has nuclear weapons whose command and control is a grey area. And then, there are possibly up to a million students of religious schools around Pakistan who can join the ranks of Taliban (that is where the word Taliban originated, it is a plural of the word Talib, meaning a student).

Now consider the fact that Pakistan's intelligence agency ISI (thought to be a 'state within a state') is packed with elements sympathetic to Taliban whom it created and trained. Also, consider the fact that Pakistan army command and control is also thought to have been infiltrated by Taliban. Nobody knows what percentage of Pak Army is sympathetic to Taliban. But once the balance tilts in their favor, there is no stopping this force from running over the more secular forces and gaining control over entire Pakistan.

Worrying Trends

26/11 showed where things are headed. It has become abundantly clear during past six months that the current civilian regime is turning out to be a puppet in the hands of more powerful forces in Pakistan. And the impunity with which Taliban are now moving into hitherto out of bound areas like the Punjab province; it is clear that these forces are gaining strength by the day.

The writing is on the wall. Now, sources in US intelligence community openly acknowledge that things could break down any time soon in Pakistan and it could get into either a civil war or could be controlled by multiple warlords or, the worst case scenario, become a single, Taliban controlled country.

Not As Easy As Afghanistan

Pakistan is NOT Afghanistan. It is a populous country, has a large professional army. If it goes the way of Afghanistan, it will not be possible for the US or India to control the situation in military terms.

The US succeeded in dislodging Taliban in Afghanistan because there were opposing forces that just needed a helping hand. The Taliban fighting force was also less than 100,000 strong and other factions could inflict a good damage on them with the help of the US. Pakistan, God forbid if things come to that, is not going to be so easy.

The strength of Pakistan Army is not in its numbers alone, though they are also impressive. Wikipedia lists the army to be about 619,000 active duty personnel, around 302,000 paramilitary and 520,000 in reserves pegging the total strength at 1,400,000. It is a modern professional army with close to 3,800 battle tanks in service (with 3000 more of a new Al-Khalid II MBT planned), around 3500 armored personnel carriers, around 2000 field guns in artillery among other armaments. It has a variety of missiles, some of which are nuclear capable. Its air force deploys about 700 aircraft that include 44 F-16s and close to 200 Mirages. Add to that advanced AWACS systems supplied to it in late 1980s and early 1990s by the US (India is still looking to acquire them). The same goes for navy also. And then, there are nukes.

Clearly, this armed force is not a pushover. And if this military machine sides with an insidious force like the Taliban, God help the world!

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