The ride upwards was good, and smooth..
Now let’s prepare for another Large Correction.
Not sure when exactly it will start, but’s it’s better to be on sidelines (or hedged) at this point.
- Valuations, Sentiment, (P/Es, PEG ratios, upside Volatility) are all at un-sustainable levels, while
- rally-momentum is getting exhausted. (MAC, RSI, Stoch. indicators, VIX, VXO,)

Today we’re pretty close to the TOP of this US Stock Market Rally that started in Mar 2009.
This rally had many factors and themes:
- Short covering and, ban on “Nake Shorting”, relaxing Mark-2-Market.
- “Better than expectedly worse ” nos. on various fronts.
- Money sitting on side lines pilling in towards late stage of the rally.

Since the corprate revenue nos., neither GDP, nor any economic no. are in +ve territoty (but mostly +ve than expected worse levels), reality is going to sink in.
Till then this rally might just be short of capitulation on upside.

Very soon, the negative surprises are going to kill, this technical overbough situation. Another week or so, I think.

Let’s enjoy the game.

The 9~10% correction that started after July 2nd, got quickly over within a week and upside started on July 9th.. Luckily this time I played downside and upside with almost perfect precision.

The Upside might be another day left..

There are signs of gradual accumulation happening on various strong stocks.. (not in general yet), but we need to see how that works out when indices hit their key resistance points of S&P500 : 1000 NASDAQ : 1950. Till then we’ll exit out of this ongoing upside, over next few trading days. PLus this was an options expiration week so upside was expected.

With : “Possibly One or Two more days” I mean these days could be any day of the next week and not necessarily Monday/Tuesday.

The anticipated 10~15% correction on US charts, may pause here or may terminate around here. The correction may be over here (if markets are slated to be range bound) or may not be over (if something big bad stuff is cooking in the background).

But, for considering the rate of downward change in last 4~5 days I am covering my double inverse (short) positions i.e. selling QID,SDS, SKF, SRS. Selling only 1/2 of my DUG, as I expect Energy related vehicles may correct some more as they led this correction for last 3~4 days) and OIL may correct some more due to further $ strength.

I am not “YET” initiating large long positions. I will add into long positions once ‘full correction is over’ symptoms show up. There is always a time-gap between downside getting over vs. upside getting started. Till then, it’s a wait and watch.

Enjoying the game.

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.

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.

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.

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.

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.

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”.

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.

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.

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.

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.

Almost all US Indices are Getting @ Interesting Points.

So the key Q:

Is today the day of hitting a short term bottom.. and thus a point from were a decent bounce could start ? OR
Is today the day of breach of long term support trends, and so a start of another major down side movement all across ?
A friend mentions: i think there is still too much money with folks (even though with lesser purchasing power), and I see all sectors getting sold off today .. so where is it going ? I think it has to come back into the market, but I really doubt as a long term investment. So maybe we will see short rallies
which is what we have seen in this year.

Despite being hopeful of bounce or not.

Nevertheless, Interesting times to come, ahead.  Hold your breath for the Joyride and enjoy the game.

State of OIL hysteria:

Some of it can be estimated using technicals around primary indicators like: Crude Oil, Oil futures, stock prices of Oil drillers and refiners.

Last week’s short covering around OIL futures and Index funds.. and recent correlated down action on most energy stocks hints on deleveraging continuing around OIL/energy.

Crude action in next few weeks should confirm what is going to happen
a correction or another spike before true correction happens
as Crude is still sitting up without major correction. Crude price is is the primary indicator and it is contiually staying up, which is a little bothersome.

State of indian markets
Taking a major hit – Some say because of oil, CRR, etc. Oh Well !!! OIL, CRR may be the catalyst. I think this was all expected and it unfolded.

Considering the bearish action that started early this year.. on 20K to 15K correction and then an expected bounce from 15K~17K (all published earlier on my blog) and then further down-spiral once it hit 17K at 50DaySMA as resistance line.

I expect some bounce to 15.5~16K region [some kind of succor rally ], before it corrects to 12K~13K region over next 1~2 yrs. In my mind, the economics of Indian Cos. needs to improve by-and-large, to sustain next round of big move on Indian Stock Market.

What puzzles me is Indian Exchange Rate !! Despite demand on $ for buying Oil.. the exchange rate should have been 39~40 by now. RBI intervention is too high to keep it that low. And that it still floats in 42+ region. But 9+% inflation is going to push them to change their monetary policy to make INR a stronger currency to reduce of cost Oil imports and commodity prices. More sooner than later. The govt. is stuck between need for election-economic gimmicks on one side and need for truthful economic policy and reform needed on another side.

US markets:

Under continuous correction for last 2~3 weeks.
I expect US indices to touch and test these levels:

Dow: 11900 support
NASDAQ : 2300 support,
S&P: 1300 support.

Amidst all this doom-and-gloom news on the blogs and media, I think all this is getting baked into current market levels. Depending upon how “recession fears” confirm themselves and “quality of earnings” in upcoming weeks, Stocks could rally/bounce off these support levels, or simply loose/crash base from here. Interesting times to play game-by-the-time-tested-rules or be on the side-lines BUT not to speculate. Technically, looks like Large-Cap-Value Stocks would likely be safer bets, Mid and Smalls caps to correct more before LongTerm Entry levels can be seen. I expect an interesting bounce to trade some profits after this correction. But a turbulent Year ahead IMHO.

Enjoy the Game.

As I mentioned, that Gold would correct to 840~860 range.. and it exactly did during recent months.

Now that the correction is under-way.. what seems next when we look at Gold’s (Weekly and Daily) Chart and it’s trend lines. I think the correction price point has been touched, but the sentiment indicators still indicate further weakness. And with the de-leveraging that’s being expected and seems to be happening in most commodities (Oil, Gold, Basic commodities, etc.), Gold could touch 80~820 region.

But I don’t expect sharp correction in Gold under 850 mark. Gold, as in the past, should form some base in this region till long term moving averages base out and new support gets formed, before gradually moving up.

Now some may bring in elements of rising USD and reversal in Euro strenghtneing from here on. I beleive at somepoint USD will stop correcting further and strengthen on. But considering the current state of US economy that seems far from remote, to start anytime now. Euro (due to rishing govt. debt on various weak and some strong economies) should unwind to $ parity over next few years. But USD is not yet ready to start the reverse strengthening move. So I expect USD Index to correct to ~60 from current ~73 region. And during such time ot turbulence in currencies, no matter which one’s become strong and which one’s become weak, Gold is very likely to stay a safe currency and inflation hedge, globally.

Here, I must state that:

Gold, unlike Oil and other daily use commodities, doesn’t serve any other useful purpose, so it’s ‘useful demand’ stays limited to jewellery. By-and-large, it’s an anti-currency and anti-inflation bet.. So as long as these forces stay alive, gold should do well. Once global stabilization of stronger currency framework happens, all speculative demand from Gold should move out. Luckilu, all speculative price action (futures and speculative based) for precious metals, moved away into Oil and some other commodities.. And this bubble rotation from gold into Oil, etc. caused Gold correction and Oil speculation. Good for Gold in long run.

In nut-shell, Advise stays un-changed, i.e. :

“Those considering buying gold, might want to wait for such corrections to 860 region, and then start to “gradually” accumulate. Those who have better clarity and right patience, may want to look for clear technical signals of bottoming signs and buy gradually towards next uptick.”

Enjoy the Game.

PS:

Some very useful links to read:

http://www.frontlinethoughts.com/article.asp?id=mwo052308
http://www.gloomboomdoom.com/subscribers/download/080601.pdf
http://www.frontlinethoughts.com/article.asp?id=mwo053008

Looking at Gold (Weekly and Daily) Chart. It’s trend lines.
It’s EMA (50-day, 200 and 350 day), Long term Stoch and RSI patterns.
It recent breaking down off short term support lines and long term support lines and EMA support levels.

I think there is a decent chance that over next 2~3 months gold should touch 830~860 mark, form base in that region, new support before climbing up again by this yearend, to reach new peaks.

So those considering buying gold, might want to wait for such corrections to 870 region, and start to gradually accumulate. Those who have better clarity and right patience, may want to look for clear signals of bottoming signs and buy gradually towards next uptick.

Enjoy the Game.

US Markets : Critical Juncture

I am looking at the charts of US markets (NASDAQ, SP500, DJIA, etc.), their technical indicators and volatility indices (VIX, VXN). It looks like that the US markets (after recent up-side bounce) are reaching an interesting point of resistance lines, from where is they are more likely to move down, to either test last lows or make new lows.

So, If this week’s action starts down, for those considering buying short positions (through ultra-short vehicles like QID, SDS, DXD,… or other vehicles) might want to consider coming days, as the right time to do so.

Now this is assuming, that the recent bounce is over. BUT it’s also possible that markets budge this resistance point and continue to move up. So if markets bounce big from here (i.e. crossing the resistance lines on upside on a good volume), then it’s better hold on to your plans to initiate short positions. And wait untill another buying saturation becomes visible on the US indices charts. We will keep a watch and update you all.

For now, play this with confirmation of upside/downside volume, as direction becomes clear.

Enjoy the game.

Looking at the above chart (Weekly and Daily) of Indian Stock market.. Some questions start to emerge.

Where are the Indian markets headed from here. (After 25% correction from peak in Dec-07) ?
considering the following factors
1. With outlook for FDI and FII investment into India, starting to slow down in recent past, but is slowly re-establish itself in coming years/months.
2. With speculative bets off from the market scene during recent correction. And more Long Term investment players staying in.
3. With high-inflation and thus liquidity crunch likely to be introduced into the Indian financial markets (through : CRR, interest rate increases, etc.), could market rise further.
4. With Western economies undergoing ‘recession effect’ and thus stock markets expected to correct sometime over the upcoming Summer/Fall months, would CH-INDIA and SouthEastAsia (SEA) undergo similar downside.

Do these charts offer some answers On future trends ?
Probably not. As such charts don’t reflect how future fundamentals will drive such action.. unless institutional accumulation/distribution signals are available.. future direction is tough to gauge.
However, charts do offer some guidance on current sentiment and thus PROBABILITY of likely future action.

Currently, these charts show that:
1. The BSE has crossed LongTerm Support lines. @ 17K.. These long term support lines might become resistance lines going fwd.. unless that’s broken on the top side on high accumulation volume.
2. Sentiment indicators show bottoming up of bearish sentiment.. or the market is close to formation of short term bottom.
3. Markets need to form acute bottom levels with some 2nd round of capitulation (which might happen this week or anytime in coming months), should show negative MACD divergence on bottom side for confirmed upside action to sustain.
4. So once these technical factors clearly show ‘bearshih exhaustion’ over next few months, there could be a short term bounce from 14.5K~15 K levels.
5. Long term action would be based on key fundamental drivers – like Corporate earnings, earnings growth, inflation, interest rates/liquidity, International interest (esp. FII), election year effects, etc. Since confluence of these factors put together is not expected to change in big way.. major upside change in earnings growth is not expected. Most of the current growth is captured in the market.
6. However, over next few years.. as corporate fundamentals move ahead of the stock, markets might catchup again.. so in 2010~2011, BSE might touch new highs.

So some uncertainty, but NOT A BAD TIME TO START CONSIDERING BUILDING LONG TERM PORTFOLIOs, once next round of capitulation of negative action is seen. No clear guidance for now.

Enjoy the Game