The much anticipated down cycles has started

Thoughts from market analysis on Wednesday (Jul 1st-2009):

The market correction that I had been anticipating for since a month or so now and had been preparing for.. I think has started now.. 2~3 weeks back VIX action kind of indiacted that it may start soon but market levels weren’t there as yet.

But now when I look at VIX, VXN, VXO, etc. and other market sentiment indicators, technical indicators, Various resistance levels on indices charts, I kind of feel strongly that the correction of 10~15% has started now.. or will start anytime from now (within next 1~2 weeks).

I have some positions in QID, SDS, SKF, SRS, URE, and covered positions in INTC, BAC.

This has further created opportunities to short
- US indices,
- also to speculate on major downside in US financial Houses, who esp. may be vulnerable to deleveraging related to consumer finance defaults and reduced payments.
- Overblown commodity leveraged funds.
- (A friend adds) Some overblown emerging market stocks that had rose too much, too fast in last 3 months (which in my mind was more of a pump and dump action by latge investment houses, and sold to common man as hope of quick upcoming recovery).

Enjoy the downhill game.

What Makes+Keeps – Countires and Societies Rich

A country is only rich, if it keeps suffecient share of created wealth for long-term growth and invested reserves for non-income years of the peoples’ life.

If all the income generated by people (as part of large cicrulation of money, exchange of hands), then things inflate and thus as a result disposable income is always tight. This creates illusion of wealth as everyone has decent spending power to lead quality of life, but not any extra income for retirement (non-income years) and into country’s growth requirements. Such illusion of circulatory wealth creates short term richness but long term it becomes tougher and tougher.

Many developed countries (US, Japan) fell into this mess, in last 20~30 years when all that was earned was spent on short-term pleasures,
and not on reserves to keep long-term goals also met. Developing countries are also falling into this mess, by over-spending and stretching.

Those who can create a good mix of :

1. “Decent GDP growth” (through Value creation and not illusory wealth creation)
2. Manageable Inflation of Quality of Life, and
3. Decent disposable income (through savings reserve for non-income years at societal level) and decent currency reserve to invest into future strategic initiatives that see for #1.

Will be the ones thriving for much longer than Western Countries. it will be interesting to see how the Asian emreging Countries manage this economic transition over next 30~70 years as they become richer and developed.

Market’s UP Move – Since Friday

Based on move in May I was quite sold to the idea that Markets are about to tumble very soon. However based on the kind of accumulation we saw on Friday afternoon, it seems the short side is a short-sighted strategy for now. The Anti-USD movement of capital may be causing another round of accumulation of stocks, gold, etc. and thus the market’s upside movemt nmay continue som more.. Dow hitting 9100 and SP500 hitting 950 won’t be surprising.

So what did we do with our positions in QID, SRS, SDS. For now we’re still holding the bag aof losses in these. Although the market reversal from recent ~40% gain on indices is imminent, but it seems that this is going to take some time. But certainly The Big Money knows something that allthis new upside buying has started.

We’re actively watching the action, to see if we should cover out of our Inverse ETF positions, or stick in while waiting for the eventual move to downside.

Enjoy this tough stomach wrenching game.

Way To Go – Away ?

I think for us the time to go short has come, and we’re starting to ride
vehicles like QID, SDS, SRS, so we’re 20% Long Term stock, 25% short, 55% cash
and rest all cash. Let’s see how this plays out. Is it “Sell in May and Go” or not, time will tell.

Just for the record.

Market Trend Spotting and it’s elements

A friend recently asked me: Do you still think market will head down in big way or it has more less stablised around this level ?

And here were my thoughts: Based on recent over-bought levels, It has to head down, big way or slowly, can’t say Even if it seems to have stabilized for now.
I am still wary to go long. as it’s still as over-bought as it was in mid-April. I am rather short starting last few weeks so I am staying hedged.

Within a day the answer was coming to its roots, and
I hope he was getting the context of my answer, by watching the markets in following days. My answer would not have made sense right then or during last week or 2 weeks back, as sentiment (common man level) was still very good.

Some might question that just 2 days going down is data not trend yet. But I think it was not safe to get in, till that correction happens
I think the correction started this week.. and showing it’s true colors this+next+next2~3 weeks.

It may still show some +ve momentum for a couple of days more, but till the correction (from the big 9-weeks in Mar~Apr hope-rally) completes, it’s not safe to get back in the the world of mid-term “momentum trading” and “market direction trading”. (Ofcourse, in buy-and-hold approach, none of this applies).

And these are my thoughts, not any thoeries that I had read anywhere, so they have their own immaturity and naivete to them.

These days the feeling is worst is over or very close to bottom
But that’s the common man feeling based on what media is comfortable pushing at us. The reality is far deeper and needs much more study, which we don’t do
And we’ll see all this unfold truly by year-end. For now sentiment is depending on what government and financial community wants they can push to common man. And common man is buying based on recent spike which was primarily bounce from over-sold conditions short-covering and then profit-making momentum from recent TARP money through hedge-fund actions.

Having said that, I should add that with our current approach to look at sentiment indicators to predict trend reversals, I don’t think we can even catch day-to-day or even week level trend.. but we try to catch the next one~two month trend or even next 6~12 months trend, assuming no underlying assumption changes.Bcoz if underlying assumption changes, then no trend catching works.

Further, One thing that should be applied besides ’sentiment trend catching’ are the contexts in which markets was operating, like Obamania, Govt reform, bank attitiude, etc.. to determine the strength and probability of strength of any trend.  Currently I use day-to-day and weekly level charts and financial numbers to decide on these trend spotting.  I never trust news to judge for good reasons, as it’s a trailing indicator and that it’s manipulated.

I am yet to learn putting in the context of sentiment into it, which would be interesting to do, provided I had time and priority on that. So with whatever limited I know, all this doesn’t work beyond 6~12 months, bcoz in long-run financial-fundamentals and underlying business sentiment drives market direction. Sentiment saturation indicators work only to catch short-term sentiment reversals.

I must admit, that my short term returns are good.. but long term returns are average..

Thus to have better long-term returns, the market-context, sentiment-context part and “big-economic-picture” part becomes very important. Markets are sticky as it takes time to make everyone convinced that things are over-bought or over-sold. Financial community 1st plays the markets to their advantage and then uses media to influence fear and hope and that’s what “common man feeling” becomes to be. All this recent sentiment facade of “all if good and getting better” created by govt. and financial community, is being used to distribute stocks after biug gains to common man accounts (401k, trading, IRA, LongTerm buying opportunity, etc.)
The feeling in smart-money, which matters more is much more imp. to catch the waves early.

The most rich and savvy market timers I have come know, are saying (not sure how true) are sitting outside since April-end. “Understanding which they direction they want the market to go” is also interesting part of “Context”.

So in summary, we need to start adding weight of the following elements To our current approach for market trend detection.
- “market context”, govt policy, financial community, money-flow,
- And resulting “sentiment context”,
- “big-picture investing”
- “financial fundamental shifts”
- “direction momentum”,
- “markets are sticky” behaviour,
- “pause” between ‘trend reversals’ (due to ‘time required by big/smart-money for gradual-distribution-to-common public after-capturing-gains from previous trends’)

A close watch on Jan~Feb correction and then March~April rally and its imminent reversal in May, taught us a lot.

Enjoy the Game.

BSE – On a Short-Term TOP !!

I think Indian Stock Indices have already made a short term top last week (along with various developed world stock markets – Possibly due to some FII and HF money-recycle action).

So exit of some part of stock exposure in your portolfios is recommended. Hope this chart helps explains the psychological top that “has already formed” or “is about to be formed soon”.

Summer (3rd bottom) Target levels

As mentioned in the last post, I expect a 3rd leg down on the markets this summer. If recovery (or stabilization) is in the wake for last this year, US Stock Markets would provide the next large leg down to be the 3rd bottom and a decent entry points for selective buying of high quality, low-debt, strong business Cos.

Roughtly, I am targetting to wait for these levels:

S&P: ~ 600, NASDAQ : ~1200, Dow: 6300~6400 (Exact target nos. to come out when/if this down leg eventually starts later :- this-spring/early-summer)

Basically another round of cleansing to ~10% from March-6th lows before initiating another round of selective buying. This buying will be provided we see enough divergence on charts to conclude that it’s a safe buying opportunity. Till then cash, hedged and some safe bets (INTC, GE, GLW, LLY,) are only holdings.

Also, do take at this nice video clip.
http://www.forbes.com/2009/01/23/intelligentinvestinggrantham.html

Covers a broad range of investment topics and sets the long term perspective right from here on, in a simple 25 min Video interview.

Enjoy the Game.

Perfect day to go 30~40% cash

Stock Markets:

I think short term top is close/here/today.

Or may be another day when Dow hits 7800, S&P 820 and NASDAQ 1540, and it’s going to be over. These are short term resistance levels. This euphoric cycle may go on this week or some more.. but decent exit levels on stocks hitting 20~30+% runs per day, may just vanish as we reach close to the chart tops.

CSCO:

Also, a great day to sell CSCO ESPP, esp. for those you want to sell some ESPP (only if urgently they need some cash), then today is the day. Else within 1~2 years better prices shall be seen. CSCO has shown decent strength recently so another capitulation under 14 isn’t expectedly shortly.

Accumulate and enjoy the cash for better opportunities, later after this summer.

Opportunity for Selective Buying in Around HERE.

I think, the time to use the selective buying window is now/around here. Of course I expect the 3rd bottom leg sometime this summer, some of the LongTerm Buying opportunities can be started for gradual accumulation in time-windows like this week offered.

I don’t expect major uptick or bull cycle anytime soon. But a decent reversal from depressed levels. Since this is a deep recession, I think this time it’s not going to be an easy or painless recovery. It’s going to take it own time. Also, I think before any up-cycle begins, real big-money will wait till valuations stabilize and become attractive again. It’s different from 80s and 90s and 2000s market. No wonder, Warren Buffett is also committing mistakes, . For he also has not seen business/deleveraging cycles like these.

However, various selective stocks which would be ‘on sale’ now and further again later this summer, they may not be available for same valuations next year, after the dust of fear/uncertainity storm settles. But time to consider and start selectively and gradually accumulating is here.

Also, for picking I’d go by valuations of Cos. (INTC, GLW, LLY, TOL, MDC) and not by name of Cos. (GE, etc.). Some credence can be given to the sector, as new growth sectors are expected to emerge in coming times.

Enjoy the Investing Game.

After the Recent Turbulence

Theme:

“When it’s market bottom, No one ever, (nor can ever, neither will ever) come to you and tell today is the bottom”. As everyone is dead scared to make a prediction about the positiveness of future, esp. when times are really tough. Even contrarians (who are aware of long-term cycles) make general statements about finding value during such tough times, as it is some of these situations, when the best long-term investments are made.

This theme drives this post. Although we are not claiming/declaring that current times are bottom times, yet we think it’s the time to share to the fact that “Such a perspective is very important to make successful long-term investments”.

US Markets:

Off recently the US market, went through some interesting turbulent (not unexpected) times, and various hyperinflated asset classes (and corresponding sector stocks) deflated causing indices to take some rest ( from flying high). I think for short run, NASDAQ’s @ 2200, DJIA’s @ ~11000 would provide some technical support points, and a decent bounce could easily happen. But we are not close to a long-term bottom, which might happen 6~9 months from now. So the upcoming bounce could be a good opportunity to unload short term/speculative investments, and keep cash ready for future long-term investments when markets show signs of decent weakening from long-term perspective.

US Dollar:

$ made some interesting run-up off recently. And I think the run-up was much higher than expected acutely from adjustment of valuations.

Even if dollar was undervalued compared to many to developed market currencies, this steep run-up smells unwinding and deleveraging of futures and not just international currency valuation adjustments.

So the $ should correct back to form some more bases, before it runs gradually back up against stronger world currencies.

OIL:

I think OIL I could correct to 99 or even to 85 (based on technical parameters – chart below), before forming decent base, before demand supply gaps and proportions stock to drive its long edge up.

Various OIL related stocks would start showing the uptrend before OIL’s upside movement.

Gold

Gold corrected under $800/ounce (to my surprise). And now various experts are predicting decent amount of correction in commodities during the second half of 2008, which means Gold could correct further (and all technical indicators stock to flaw out). So it’s a wait and watch times for Gold enthusiasts to see where it bottoms.

Various factors like $ valuation, OIL and hedge fund interests in commodities, would play in towards uptrend on gold.

Just like Oil, various gold mining stocks would start showing the uptrend before gold’s upside movement, as a leading indicator of what the large institutions/hedge funds – think on the future price of gold.

Savvy Investments (Rotation of Assets @ Right Time)

A few months back (July-2008) an friend (also an Indian) asked me – “what would I do in the investing arena at that time”. And my thought out answer was: “I would sell all the speculative investments in Indian real estate, at current market valuation, and rotate the money back from Indian Rupee to US dollar (it was 41 Rs/USD, then and now it’s 45.5 Rs/USD) and invest that sum into various foreclosure properties (ofcourse into cash-flow positive mode), considering the fact that USD could unwind back up and that the Indian real estate is fairly over-prized compared to international valuations of similar real estate. Time alone will tell, how wise with this thought process turns out to be. But considering how I see it future trends unfold this would provide a much safer compounding of wealth been staying in speculative Indian investments, even if supply of quality real-estate is low and demand for middle-class housing is not expected to go down.  The valuations and affordability are going to put an upper bar on price appreciations in Indian real estate.

After all it’s all about rotating in when something starts to makes some sense, and rotating out when something stops to make sense. in both directions it’s sometimes too late to wait for the trend to prove itself before acting to rotate in/out, the real money is made in timely action.

So enjoy the game.