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Tuesday, August 31, 2010

Notes from the USA (Aug 2010) – a guest post

This is Kiran’s first-hand, ground-zero view of the state of the US economy. If you like what you read, or would like to ask him a question, please leave a comment using the link beneath this post.

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Economics of the USA from Ground Zero

Lets do some detailed macro economics here, and then bring it home to how things are unfolding in the US.

The US Govt says that the increase in real GDP in the second quarter primarily reflected positive contributions from non-residential fixed investment, exports, personal consumption expenditures, private inventory investment, federal government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, also increased.


If you see the graph below it shows a slow-down. The US Govt says that the deceleration in real GDP in the 2nd quarter primarily reflected an acceleration in imports and a slow-down in private inventory investment. This is not good.


What makes the situation even more convincing is that a few days ago, the Q2 ’10 GDP was revised down to 1.6% (instead of the earlier estimate of 2.4%).  So, the slowdown has already begun and we are just finding out.  Inventory buildup was the real reason for the jump in growth, in addition to the stimulus to housing and autos, but that is fading away. This is not good at all!

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The reality of what is happening can be seen in the following chart which I follow closely to track the future of the US economy.  The newly reported Consumer Metrics Institute’s Daily Growth Index (CMI) annualized growth rate is 1.6%, down from a 2.4% rate published just 28 days earlier -- a 33% downward revision of the growth rate in four weeks.  It overlays well on the GDP chart, portraying what is about to happen to the US GDP.


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Views from Ground Zero


My view of the US economy from ground zero is that we are definitely slowing down, and the slowdown is more rapid than most people are ‘feeling’ and obviously more than what the government is telling us.  The revision and the overlay chart above proves this point even more. 


Of course, do not forget that the US Govt created an artificial demand for housing sales in Q1 and Q2 ‘10.  If you were a first time home buyer you got a $8000 tax subsidy from the government, and if you were a 2nd time home buyer, you got $6500.  Contracts needed to be done by Apr 30, 2010 and the purchase has to conclude by Sep 30, 2010.  Now, the sales of new homes in the US fell to an all-time record low in July ‘10, as demand from consumers dried up after the tax breaks were withdrawn.  So, we may see a positive GDP number in Q3 ’10, but we should be close to zero (0%) in Q4 ’10!

clip_image006

The worry that the global economies, and in particular people in China or India should have is the likely slow-down in US spending in Q1 & Q2 ’11.  If the GDP is negative for 2 quarters in a row, then US Govt. calls that a recession, and if we get to a recession, then the global markets are going to get affected. 


Employment Situation


All of this stems from a simple rule of economics.  We have approximately 140 Million people employed today in the US.  If there is more unemployment in this pool, then spending gets curtailed.  If spending is curtailed, the discretionary spending (flavored coffee, ice-cream, gambling, cosmetics, nice clothing, cool electronics, jewelry, luxury items, vacation/resorts, upgrades to anything/everything, outsourcing home-chores etc) gets cut back, which then spirals into affecting the GDP and the global employment further.


On the other hand, the US is still considered to be the land of opportunity with the lowest cost of food and clothing.  On top of it, the average hourly earnings of all employees on private nonfarm payrolls increased to $22.59 in July ’10.  Over the past 12 months this has increased by 1.8%. In July ‘10, average hourly earnings of private-sector production and nonsupervisory employees increased to $19.04.  Wouldn’t you say that this is enough for a money-conscious family to live decently? The problem is due to the personal debt habits of many people in the US - the spend-thrift patterns, utilizing most goods as disposables, tendency to spend money before it is earned.  When things slow down, trouble is right around the corner for this large subset of people in the US.  This is precisely why we are in this situation.


Life Style of Majority


You might ask, what do the streets of the US look and feel like at ground zero? Well, I get around in my city/suburb and see two sides of the coin.  If households have a job, life is 90% as merry as it always was, and spending continues, albeit at a slower pace.  If one of the jobs in the family has been affected by downsizing (layoffs), then there is budgeting going on, and everyone in the family spends less.  If no one in the family is working full time, then life is tough and spending is completely curtailed.  The latter is the situation for lower and lower-middle America (housing, construction, manufacturing and related industry workers). 


Case in point……we just got invited by two of our American friends to the usual neighborhood parties of Fall 2010, to say our last hurray to the summer. One of them is a Wine-Tasting-Party.  We open nearly 40-50 bottles of wine over a period of 6 hours and taste it, as part of the annual ritual at our friends’ house.  In both of these households, one of the jobs in the family is gone, and yet, the lifestyle continues to be the same!  A good guesstimate would be that they both have huge borrowings on their homes (mortgage) and credit cards.  Both have kids in colleges, and are making their kids study on ‘college loans’.  Hunkering down into a ‘savings’ mode is not yet an acceptable practice for the lavish life-styles of middle and upper-middle America.


Now, 80%-90% people who were employed earlier are still employed with similar or slightly lower pay.  Hence, if one goes around in the ‘good’ suburbs, you will see less people in stores, buying less ‘stuff’, and yet, the businesses continue to operate.  There are ‘high end’ stores that are affected and are closing ‘under 10%’ of their corporate/franchised locations, but majority of them still survive.  The Christmas shopping season between Nov 1st, 2010 and Jan 5th, 2011 will be the biggest proof, although I project that it will prove the ‘slow-down’, and a ‘recession’ scenario for sure.


Reality of Indians/Asians


If you are wondering how all this affects Indians/Asians, then I can tell you that it affects less than 1% of Indians/Asians in America.  Why?  Because, the 1st and 2nd generation Indians/Asians are highly conservative, money conscious, big savers, and leverage the land of opportunity to the hilt.  Many Indians/Asians work two jobs if necessary, shop aggressively at every “weekly special sale” in town, and cut corners by in-sourcing everything (cutting grass, cleaning house, cooking foods from scratch, picking up freebies, taking lunch to work).  Also, Indians/Asians figure out that buying is better than renting, and driving used cars is good for the pocket book. Such prudence allows savings to grow rapidly, for leveraging during a rain day.


Bottom Line


The US is still a land of opportunity, the land of the simplest processes, and a country with methodical execution of almost 99% of human wants/needs.  It is still a country filled with ‘what is in it for me’ and ‘I want it now’ syndrome. My kids are growing up with the same natural instincts and I am fighting to teach them the Indian Values and Common Sense Smartness.  I have been a beneficiary of this land of opportunity for decades, and love the simplicity and clarity of everything that America offers.


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A combination of high debt (personal, professional and country level), high pay scales relative to other countries, open borders to bring anything/everything in, and finally, a fiscal policy where government wants to play in every circle, is the recipe that has created this challenging situation.  There is some improvement in the savings rate (as shown above), but all in all, it may take another decade to get back on the original track, although with this shake-down, it may never get on the original track.


What do you think, dear readers?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Monday, August 30, 2010

Dow Jones (DJIA) Index Chart Pattern – Aug 27, '10

The chart pattern of the Dow Jones (DJIA) index behaved like a drowning person last week – desperate to clutch at whatever index level seemed to be floating by.

On Monday, Aug 23, ‘10 it rose all the way to the 200 day EMA intra-day, tried to hang on but fell back and closed lower at 10174. That was the highest close for the week, on the lowest volumes. I had mentioned about the support zone between 10100 – 10200, but the bulls failed to regroup for a pullback.

The next day, the Dow dropped to 10040 on higher volumes. On Thursday, Aug 26, ‘10, the index closed below the psychological 10000 level. Friday’s sharp recovery was probably due to some bottom fishing aided by short covering. The index managed to close at 10150 – bang in the middle of the support zone, which is now likely to turn into a resistance zone.

The 3 months closing chart pattern of the Dow Jones (DJIA) index chart pattern gives a clear indication that the bears are in no mood to relent, despite Friday’s buying:

Dow_Aug2710

The 20 day EMA has slipped below both the 50 day and 200 day EMAs. The 50 day EMA is resting on the 200 day EMA. If it falls below the long-term moving average as well, the bear market will be technically confirmed. As long as the Jul 1, ‘10 low of 9596 holds, the bulls will have some hope.

The technical indicators are not giving any encouragement to the bulls. The slow stochastic and the RSI are in their oversold zones. The MACD is negative and below the signal line. The MFI is below the 50% level.

The fundamental news isn’t any better. GDP growth was revised downwards to a pitiful 1.6%. Unemployment is up. Home sales are down. All that Mr Bernanke promised near the foot of the picturesque Grand Tetons was that he will provide more stimulus if the economy gets much worse. That obviously means that the ‘substantial progress’ he mentioned last year has remained a dream.

Bottomline? The Dow Jones (DJIA) index chart pattern is exhibiting a bearish ‘lower tops – lower bottoms’ pattern. Sell on rises.

Sunday, August 29, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX – Aug 27, '10

FTSE 100 Index Chart

FTSE_Aug2710

The 3 months closing chart pattern of the FTSE 100 index mostly has bad news for the bulls. So, let me start with good news. After falling below the 5100 level intra-day on Wed. Aug 25, ‘10, the index moved up on Thursday and Friday on increasing volumes to close just above the 5200 level. The FTSE 100 actually gained 6 points on a weekly basis.

Before the bulls get enthused and start to plan a new rally, here is a litany of bad news. Monday’s close of 5235 was the highest of the week on the lowest volumes. The resistance from the confluence of the three EMAs proved too strong for the index. Volumes picked up during the 125 point drop to Wednesday’s close of 5109 – a sign of distribution.

The 20 day and 50 day EMAs have both slipped below the 200 day EMA with the FTSE 100 below them. Sign of a bear market. The slow stochastic has just emerged from the oversold zone. The MFI has moved up to the 50% level. The RSI is below the 50% level. The MACD has stayed below the falling signal line for two weeks and has turned negative.

Any up moves are likely to face resistance from the three EMAs and the down trend line joining the tops made on Aug 9 ‘10 (5410) and Aug 17 ‘10 (5350). Watch the July 1, ‘10 low of 4790 closely. A fall below can take the FTSE 100 much lower.

DAX Index Chart

DAX_Aug2710

This is what I had surmised about the behaviour of the DAX index chart pattern in last week’s analysis:

“A bearish ‘lower top – lower bottom’ pattern is compounded by another bearish head-and-shoulders pattern that can lead to a dip below the long-term moving average.

Previous forays below the 200 day EMA have been brief, followed by sharp recoveries. So, there is no need to rule out a similar bounce back by the bulls yet.”

Readers may think that I am a professional soothsayer masquerading as a technical analyst. The fact is, it was an educated guess that worked. The DAX dropped below the 200 day EMA on Tuesday, Aug 24, ‘10 but stayed below the long-term moving average for just 3 days – much like it had done in early July ‘10.

On Friday, the DAX moved up to close almost exactly on the 200 day EMA. What next? The technical indicators are hinting that any up move may peter out near the falling 20 day and 50 day EMAs. Monday’s highest close of 6011 was accompanied by the lowest volumes of the week, while Wednesday’s lowest close of 5899 had the highest volumes. Not your typical bullish behaviour.

The MACD is negative and below the signal line. The RSI and MFI are both below their 50% levels. The slow stochastic is in the oversold zone. Technically, the DAX is still in a bull market – but the bulls are on shaky ground. The MACD, RSI and MFI have made lower bottoms than the ones made in Jul ‘10, while the DAX has made a higher bottom. A negative divergence.

CAC 40 Index Chart

CAC_Aug2710

The CAC 40 index chart pattern shows the final confirmation of a bear market. The 20 day EMA has dropped below the 50 day EMA, and all three EMAs are moving down with the index below them.

The MACD is negative and below the signal line. The RSI and MFI are below their 50% levels. The slow stochastic is in the oversold zone. The index has made a much higher bottom than the one made in Jul ‘10, but not well supported by the technical indicators.

Any pullback effort by the bulls is likely to stall near the falling 20 day and 50 day EMAs.

Bottomline? The bears have tightened their grip further on the European indices. Sell on rises should be the tactic for the FTSE 100 and CAC 40. Very selective buying on a clear move above the 200 day EMA for the DAX.

Saturday, August 28, 2010

BSE Sensex Index Chart Pattern – Aug 27, '10

In last week’s analysis of the BSE Sensex index chart pattern, the short-term daily chart showed a break out above a narrow trading range. But the longer-term weekly chart did not technically confirm a break out above the year-long upward sloping consolidation channel.

The negative divergences in the MACD and RSI were warning signs of a possible change of direction for the Sensex. So, did the lack of technical confirmation for a break out and the negative divergences cause the correction?

Or, was it the statement by Mohamed El-Erian of PIMCO that economic data coming out of the USA was signalling that the economic recovery was losing momentum, which caused the FIIs to start selling? May be it was the opinion by Mark Mobius of Templeton that the slew of IPOs diverted money away from the secondary market.

Could it be that the watering down of the direct taxes proposals didn’t go down too well with the market? Or, was it the the fear of untamed inflation leading to higher interest rates? May be it was some, or all, of the reasons mentioned above.

Whatever be the reason(s), the one year bar chart pattern of the BSE Sensex index shows the start of a corrective move:

Sensex_Aug2710

The about-turn from the top of the year-long upward-sloping channel halted for two days at the rising 20 day EMA, but Friday (Aug 27, ‘10) saw the index seeking support from the 50 day EMA.

Couple of observations worth noting. In Jan ‘10, the initial correction halted at the 20 day EMA, and bounced up before falling all the way down to the lower end of the trading channel. In Apr ‘10, the initial correction halted briefly at the 20 day EMA, fell to the 50 day EMA, then bounced up before falling to the bottom of the channel.

Can a similar pattern be expected this time? The efficacy of technical analysis is dependent on repeating patterns. Unfortunately, patterns don’t always repeat, and almost never in an identical fashion. For those trading the channel, any bounce up can provide profit booking opportunities.

The weaknesses in the technical indicators may preclude such an upward bounce. The MACD is positive, but below the signal line. The ROC has dipped into negative territory. The RSI and slow stochastic are below their 50% levels and falling rapidly. The MACD, ROC, and RSI are showing negative divergences.

On the down side, expect support at the 200 day EMA (17100) and the lower end of the trading channel (16300). Any break below the 200 day EMA will be the first warning of a change of trend from bull market to bear market. A break below 16300, should it happen, will herald a bear phase.

Bottomline? The chart pattern of the BSE Sensex index is showing the signs of a deeper correction after a 3 months long bull rally. Corrections in a bull market are healthy and provide the necessary impetus for making new highs. No need to panic. At the same time, book profits if your trailing stop-losses are hit – and watch the FII trading data closely.

Friday, August 27, 2010

Stock Index Chart Patterns - Shanghai Composite, Jakarta Composite, Hang Seng - Aug 27, '10

Shanghai Composite index chart

ShanghaiComp_Aug2610

In last week’s analysis of the Shanghai Composite index chart pattern, the formation of a bullish ascending triangle pattern was mentioned, but an upward break out had become doubtful because all four technical indicators were displaying negative divergences.

It was no surprise that the index drifted down below the entangled 20 day and 50 day EMAs. A close exactly on the 50 day EMA could not prevent a loss of 1.2% on a weekly basis.

The bear market will remain in force as long as the Shanghai Composite remains below the 200 day EMA. The 20 day EMA has moved above the 50 day EMA, which is a semblance of hope for the bulls. The technical indicators are hinting at a resumption of the down trend.

The slow stochastic and the RSI have both dipped below their 50% levels. The MACD has slipped below the signal line. The ROC had dropped into negative territory, but has managed to pull back into the positive zone.

The longer-term bullish rounding bottom chart pattern (mentioned last week) is still in tact, but is in danger of being negated unless the bulls can regroup quickly and mount a fresh rally.

Hang Seng index chart

HangSeng_Aug2610

The Hang Seng index chart pattern was desperately trying to cling on to the 20 day EMA and remain in a bull market, but the force of gravity proved too strong. Even the combined supports from the entwined 50 day and 200 day EMAs and the up trend line joining the May ‘10 and Jul ‘10 could not prevent the index from dropping back into a bear market.

The technical indicators have all turned bearish, which means a deeper correction may be in the offing. The slow stochastic is in the oversold zone. The MACD is below the signal line and slipped into negative territory. The ROC is well inside negative territory. The RSI is at the edge of the oversold zone.

The technical confirmation of a bear market – both the 20 day and 50 day EMAs falling below the 200 day EMA – is awaited. But it is a question of ‘When?’, not ‘if’. Any attempts at a pull back will provide selling opportunities

Jakarta Composite index chart

Jakarta_Aug2610

The Jakarta Composite index chart pattern is miles away from the trials and tribulations of the Chinese indices. It was in a full-fledged bull market, making new 52 week highs and looking a bit overbought when I analysed the chart on Jul 23, ‘10.

The Jakarta Composite hit a new high of 3104 on Jul 30, ‘10 before the expected pause came in the form of a correction that lasted all of 4 days. The index closed twice below the 20 day EMA and the 3000 level, before resuming the bull rally with renewed vigour.

A new 52 week high of 3150 was touched on Thu. Aug 26, ‘10. Profit booking today saw the index close 12 points lower on a weekly basis. Volumes have picked up considerably, which is a good sign but the technical indicators are showing signs of negative divergence.

The slow stochastic has entered the overbought zone. The MACD is positive and above the signal line, but has made a lower top. The ROC is positive but has drifted down even as the index made a new high. The RSI is at the edge of the overbought zone but has made lower tops.

A correction down to the 20 day or 50 day EMA can be expected in the near future.

Bottomline? The chart patterns of the Shanghai Composite and the Hang Seng are in bear markets. Sell on rises. The Jakarta Composite is in a strong bull market that has lasted 16 months. Buy the dips, with trailing stop-losses.

Thursday, August 26, 2010

Is the Sensex correction already over?

In last Thursday’s post, what had looked like a ‘beautiful’ break out from a short-term trading channel was actually just a test of the upper end of a ‘boring’ longer-term trading range.

One of the fun aspects of watching the business TV channels is that smartly-clad young presenters ask almost identical questions to different ‘experts’ who, in turn, provide identical answers depending on what the Sensex was doing in the prior 2-3 days.

If the Sensex was moving up, the ‘experts’ talk about ‘another 5-10% upside’ or ‘new highs’. Two days of down moves, and the tone changes. The talk shifts to ‘a correction is overdue’ or ‘at least 10-15% downside from here’.

No wonder small investors get all confused. The fact is, no one really knows for sure what the Sensex is going to do next and, as I have mentioned a number of times before, it shouldn’t really matter.

Investors should always take buy/sell decisions based on their own portfolios and their outlook. So why am I writing about Sensex levels? It is an effort to show how technical analysis can assist in taking investment decisions.

Now, a look at the short-term Sensex chart pattern:

Sensex_breakout_Aug 2610

Last Thursday’s (Aug 19, ‘10) break out was on good volumes, followed by Friday’s pullback to the upper end of the trading channel. But there was no follow-through buying on Monday (Aug 23, ‘10) that would have confirmed the break-out.

Instead, the index closed on the upper end of the trading channel, before dropping back into the channel on Tuesday. The correction continued on Wednesday (Aug 25, ‘10) but got support from the 20 day EMA. Today, the Sensex closed slightly higher than the 20 day EMA.

If the correction resumes tomorrow, there is strong support in the 17950 – 18050 zone from the lower end of the trading channel, the 50 day EMA and the Apr. ‘10 top. What if the support zone is breached?

Let us look at the long-term chart pattern of the Sensex for the clues:

Sensex_breakout2_Aug2610

The 200 day EMA is currently at 17100, and the lower end of the trading range is approximately at 16300. Those will be the lower targets for now.

Another point to note is how the 20 day EMA has provided good support to the Sensex for the past 2 months. A breach of the short-term moving average will be an indication of a slightly deeper correction.

Fundamentally, not much has changed in India. We can conclude that this was routine profit booking due to the monthly F&O settlement today (Aug 26, ‘10).

Did the recent disappointing economic news from Europe and USA have any effect on investor sentiments in India? It doesn’t seem so from the chart below:

Sensex vs Dow_Aug2610

For the past three months, the Dow and Sensex seem to be going their separate ways – the former is in a bear market while the latter is in a clear bull market. No wonder the FIIs are pumping money into Indian stocks.

That was the long answer. The short answer is: technically, it would seem so.

Wednesday, August 25, 2010

Stock Chart Pattern - Tata Chemicals Ltd (An Update)

The stock chart pattern of Tata Chemicals has been quietly moving up, away from the limelight, even as Tata Motors was grabbing all the headlines because of the turn around in the Jaguar-Land Rover acquisition.

The stock had closed at 274 back on Sep 16 ‘09 after a mild break out above a bullish ‘ascending triangle’ pattern. The negative divergences in the technical indicators and the comparatively lower volumes were not convincing enough. I had advised new entrants to await a correction.

A look at the one year bar chart pattern of Tata Chemicals reveals several text book examples of technical analysis:

Tata Chem_Aug2510

After the mild break out above the 270 level in mid-Sep. ‘09, the stock price reverted back into the ascending triangle, took support at the ascending trend line and once again had an unconvincing break out.

This time (in early Oct ‘09) it got support from the 20 day EMA and the 270 level and rose to 295. As the stock made a higher top, note that the MACD and RSI made lower tops. The negative divergences heralded the sharp 15% correction down to the 250 level, which was also the previous top of May ‘09 – and provided an entry opportunity to investors.

A ‘reversal day’ pattern on Oct. 30, ‘09 led to the next leg of the bullish ‘higher top – higher bottom’ pattern, that touched a high of 326 on Jan. 4, ‘10. Another ‘reversal day’ pattern, plus the negative divergences in the RSI and slow stochastic (which failed to make new highs) led to another 15% correction that stopped just above the 270 level.

A double-bottom was formed (at 275 in end-Jan ‘10 and 274 in end-Feb ‘10), providing another entry point to investors. A 2 months long bull rally followed, and rose to touch a new high of 356 on May 4, ‘10.

A ‘reversal day’ pattern (once again!) and negative divergences in the MACD and RSI (lower tops) caused a 17% correction down to the 200 day EMA and the Oct ‘09 top of 295.

A 2 months long sideways consolidation between 305 and 340 was followed by a high volume break out (on Jul. 30 ‘10), a pullback to the top of the consolidation zone (on Aug. 2 ‘10), followed by a high volume rally that touched a 2 years high of 412 on Aug 19 ‘10.

All three technical indicators are looking overbought and the stock has moved way above the 20 day EMA. A sideways consolidation has started and volumes are sliding. A possible correction may drop the stock to the support zone between 370 and 356 – which approximately correspond to the levels of the 20 day and 50 day EMAs.

The stock has gained 50% since I analysed it in Sep ‘09, comfortably outperforming the Sensex - which has managed barely an 11% gain during the same period.

Bottomline? The stock chart pattern of Tata Chemicals is an example of the kind of ‘boring’ stock young investors should add to their portfolios on dips. Chasing after publicity-seeking companies that are always in the news may be detrimental to wealth building. Existing holders can opt to book part profits, or hold with a stop-loss at 380.

Tuesday, August 24, 2010

How to identify a truly great company from a merely good company

In a post back in Dec. ‘09, I had mentioned that the great companies can be distinguished from the good companies by how efficiently they use the money invested in the business to generate higher profits. The post was an introduction to a short series of articles on financial efficiency and profitability ratios.

At that point of time, I had not heard of, or read anything by Jim Collins – the former award-winning teacher at the Stanford Graduate School of Business. In his 2001 book, titled “Good to Great”, Collins has distilled and analysed the results of a 5 years long research project undertaken to identify how merely good companies become truly great companies.

Collins and his team of research associates sorted through all the published information available on more than 1400 US companies, and held countless interviews and discussions to come up with a short-list of 11 truly great companies.

These companies were merely good for many years before they were able to produce sustained great results over a period of 15 years, and significantly outperformed bigger and better known competitors in terms of stock market returns.

The outperformance period of 15 years occurred during the 1970s, 1980s and 1990s – just prior to the dot.com boom and bust. Some of the companies are no longer great companies, and some are almost down and out.

The book is a good read nevertheless, and reveals some universal and timeless principles that can help us to identify (and invest in) the truly great companies in the Indian stock markets. Here is a gist of the principles:

1. The transformation from good to great doesn’t happen suddenly. It is a process of a gradual build-up followed by a breakthrough.

2. Unlike the popular perception of how companies are turned around by high-profile leaders with rockstar-like personalities and egos, the good-to-great leaders are self-effacing, quiet, reserved, and have strong personal integrity. Such leaders ‘are a paradoxical blend of personal humility and professional will. They are more like Lincoln and Socrates than Patton or Caesar.’

3. Good-to-great leaders make sure that they select the right people for the right jobs, and spend most of their time on team building and succession planning. They don’t take the credit for the outperformance of their companies. They give the credit to their team.

4. Once the entire team is on board and the vision and strategy have been agreed upon, there is complete faith in the eventual success – and at the same time, the discipline to confront and overcome adversity and changes in current reality.

5. The good-to-great companies have a culture of discipline – disciplined people, disciplined thought, disciplined action. The culture of discipline combined with an ethic of entrepreneurship produces great sustained performance.

As I was reading the book, the first name that flashed across my mind was ‘Narayanmurthy’. He epitomises all the principles mentioned about good-to-great leaders, and led Infosys to become one of the truly great companies. The succession planning in the company has been an example that others should emulate.

Ratan Tata (Tata Steel, Tata Motors), Anand Mahindra (M&M), Yogi Deveshwar (ITC) are some of the names that also come to mind. Disciplined investing in these companies can generate enormous wealth over the long-term.

I am sure there are several other names that readers may know of.

Monday, August 23, 2010

Dow Jones (DJIA) Index Chart Pattern – Aug 20, '10

The Dow Jones (DJIA) index chart pattern had been saved by the 200 day EMA from lapsing into a bear market, but in last week’s analysis, I had pointed out that the reprieve could be short-lived. The technical indicators had signalled a continuation of the correction.

Using the support from the 200 day EMA, the bulls attempted a pull back that was resisted by the falling 20 day EMA. The Dow fell below the 200 day EMA and is in danger of reverting to a bear market. The technical confirmation – the 20 day and 50 day EMAs both dropping below the longer-term moving average – is still awaited.

A look at the 3 months closing chart pattern of the Dow Jones (DJIA) index will show that the bulls are walking a tight rope:

Dow_Aug2010  

The 20 day EMA is almost touching the 50 day EMA, and both moving averages are drifting down, but remain above the 200 day EMA. There is support in the 10100-10200 zone, which can help the bulls to try another pull back.

Volumes were the highest on Thursday’s down day – a sign of distribution. The technical indicators have weakened further and does not support any bullish hopes. But the Dow has defied the bears time and again, so the possibility can’t be ruled out.

The slow stochastic is at the edge of the oversold zone. The MACD is below the signal line and almost at the ‘0’ level. The RSI and MFI are both below their 50% levels. Any rise in the Dow is likely to provide selling opportunities to the bears.

Last week’s spike in the unemployment numbers confirmed the gradual realisation of market players that the economic recovery so far is a jobless one. The official figures are a lot less than the actual unemployment numbers. Spectre of a double-dip recession is looming on the horizon again. Any further money printing may lead to inflation.

Bottomline? The Dow Jones (DJIA) chart pattern has formed a bearish ‘lower top – lower bottom’ pattern and dropped below the 200 day EMA. These are bear market signals. Things may get a bit worse before it can get better. Book profits on rises.

Sunday, August 22, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX – Aug 20, '10

FTSE 100 Index Chart

FTSE_Aug2010

The FTSE 100 index chart pattern made a feeble effort at a pull back, using the support from the entangled 50 day and 200 day EMAs. The effort was short-lived. The weak technical indicators and low volumes led to the inevitable drop back into a bear market – as foreseen last week.

The index not only lost 180 points on a weekly basis, but closed the week below the 200 day EMA and the 5200 level. In the process, the FTSE 100 chart has made a bearish ‘lower top – lower bottom’ pattern. Also note a bearish ‘rounding top’ pattern formed by connecting the Jul ‘10 and Aug ‘10 tops.

The rally from the Jul 1, ‘10 low of 4790 appears to have ended, signalling the onset of the next leg of the bear market, which will be confirmed when the index drops below 4790. The technical indicators are supporting that prognosis.

The 20 day EMA has started to drop and is likely to fall below the merged 50 day and 200 day EMAs soon. Higher volumes on down days suggest distribution. The slow stochastic has almost dropped to the oversold zone. The MACD is below the signal line and barely in positive territory. The RSI and MFI are both below their 50% levels.

DAX Index Chart

DAX_Aug2010

The weak pull back effort by the DAX index chart pattern was cut short by a ‘reversal day’ pattern on Thurs. Aug 19, ‘10. The index touched a high of 6229 but closed 150 points lower by the end of the day on good volumes.

The fall continued on Fri. Aug 20, ‘10 and after briefly slipping below the 6000 level intra-day, the index closed at 6005 – more than 100 points lower on a weekly basis.

Technically, the DAX will remain in a bull market as long as it stays above the 200 day EMA. However, a bearish ‘lower top – lower bottom’ pattern is compounded by another bearish head-and-shoulders pattern that can lead to a dip below the long-term moving average.

Previous forays below the 200 day EMA have been brief, followed by sharp recoveries. So, there is no need to rule out a similar bounce back by the bulls yet.

The technical indicators don’t hold out immediate bullish promise. The slow stochastic is at the edge of the oversold zone. The RSI and MFI have both slipped below their 50% levels. The MACD is below the signal line and barely positive.

CAC 40 Index Chart

CAC_Aug2010

There is no doubt whatsoever about which animal is dominating the CAC 40 index chart pattern. The bears are poised to hammer in the last nail in the bull coffin – just waiting for the 20 day EMA to drop below the 50 day EMA.

Volumes increased on Thursday and Friday as the index fell. A clear sign of distribution. The technical indicators are looking weak but not oversold – which means the correction is likely to continue next week.

The slow stochastic is about to enter the oversold zone. The RSI and MFI are below their 50% levels. The MACD is below the signal line and marginally in positive territory.

Bottomline? The bears are tightening their grips on the European indices. The FTSE 100 and CAC 40 chart patterns are back in bear markets, awaiting a final technical confirmation that will open up shorting opportunities. The DAX chart pattern is still above a rising 200 day EMA, and a bounce up from the 5800-6000 zone may provide buying opportunities. 

Saturday, August 21, 2010

BSE Sensex Index Chart Pattern – Aug 20, '10

The BSE Sensex index chart pattern finally seems to have broken out of its ‘boring’ trading channel. If I didn’t know better, I would claim that comparing the Sensex to the Chennai climate in last week’s analysis finally goaded the bulls into some serious action.

It was actually the cascading flow of FII money which tipped the scales towards the bulls. Here are some interesting data published in the BusinessWorld issue of Aug. 16 ‘10. FII inflows in US $Billions in the Jan to July ‘10 period (and percentage increase over the same period a year ago) have been as follows:

India – 10.25 (+40%); Japan – 8.7 (+128%); South Korea – 7.6 (-40%); Indonesia – 1.4 (+67%).

There may be questions about the source of these FII funds. Whether they are of a particularly dark colour, hitherto stashed away in a picturesque, land-locked country in Europe by some of our esteemed representatives in Parliament, is some thing only a detailed investigation by SEBI may reveal.

If such rumours are indeed true, then any fears of a sudden reversal of the flow is unlikely. Remember an old stock market adage: ‘buy the rumour and sell the news’. So let the inflows continue to boost the wealth of small investors who believe in partial profit booking.

Enough ranting. Now a look at the short-term daily bar chart pattern of the BSE Sensex index:

Sensex_Aug2010

Of particular interest is the last two days of trading (marked with a blue oval on the top right). On Thurs. Aug 19, ‘10, the index broke out of its ‘Mini-me’ trading range with decent volumes. On Fri. Aug 20, ‘10, the index pulled back towards the trading channel, found support and closed just above the upper trend line.

The technical indicators are giving mixed signals. The slow stochastic is looking bullish and has entered the overbought zone. The RSI dropped down after touching the overbought zone, and the lower top indicates negative divergence. The MACD has been playing hide-and-seek with the signal line for a while, drifting down slowly in positive territory without giving any clear trend indications.

Let us also look at the longer-term picture – the weekly bar chart pattern of the BSE Sensex since the May ‘09 election results announcement:

Sensex_Aug2010_weekly 

Note the gap at the left of the chart which was partly filled during the July ‘09 correction. I had written a post about ‘gap analysis’ in Sept ‘09 to set a possible upward Sensex target of 17800.

The index has been in the upward-sloping consolidation channel for the past 12 months from which it tried to emerge last week. The blue oval at the top right marks the spot where the index just managed to close above the trading channel.

Technically, the upward break out from the trading range has not yet been confirmed. The 3% ‘whipsaw’ lee-way means only a close above 18850 will be a technically valid break out.

The slow stochastic is well inside the overbought zone. The RSI has moved up to touch the overbought zone. The MACD is meandering sideways in positive territory. Note that both the MACD and RSI made higher tops in Jun ‘09, when the Sensex was at 15600. Can the negative divergences cause the Sensex to crash down? Let us answer that by saying that the bulls have definitely left the door ajar.

Bottomline? The bulls (read, the FIIs) are trying to use a flood of liquidity to wrest complete control of the BSE Sensex chart pattern. The bears are on the ropes, but still on their feet. Stay invested, and maintain trailing stop-losses to preserve your profits. In case you have missed the bull rally, this is not the time to lose patience and start buying.

Friday, August 20, 2010

Stock Index Chart Patterns - Shanghai Composite, Korea KOSPI, Hang Seng – Aug 20, '10

Shanghai Composite index chart

ShanghaiComp_Aug1910

The Shanghai Composite index chart used the strong support from the entangled 20 day and 50 day EMAs and made another attempt to extricate itself from the bear grasp. The upward bounce failed to clear the 2700 level. The index remained 150 points below the 200 day EMA, but closed about 1.4% higher on a weekly basis.

The Shanghai Composite has made a bullish ascending triangle pattern, from which the likely break out should be upwards. But all four technical indicators are showing negative divergences, by making lower tops as the index made several tops in the 2675-2700 zone.

The slow stochastic has moved up after touching the 50% level, and the %K has crossed above the %D. Both are bullish signs. However, it stopped at the edge of the overbought zone. The MACD has edged above the signal line. The ROC touched the ‘0’ line and moved back into positive territory. The RSI has slipped down to the 50% level.

The bulls are down on points, but will continue to fight as long as the index remains above the 20 day and 50 day EMAs. On the longer term charts, the index seems to be forming a bullish rounding bottom pattern. To complete the pattern, the index needs to rise another 500 points (19%) over the next 4-5 weeks.

Hang Seng index chart

HangSeng_Aug1910

The technical indicators of the Hang Seng index chart were looking bearish a week ago. They turned weaker as the index grappled with the falling 20 day EMA to get back into a bull market. Today’s fall took the index below the psychological 21000 level, as it closed 90 points lower on a weekly basis.

The slow stochastic and RSI have both dropped below their 50% levels. The ROC has slipped into negative territory. The MACD is below the signal line and falling.

The up trend line joining the bottoms made in May ‘10 and July ‘10 is currently at the level of the entwined 50 day and 200 day EMAs. The bulls will try to ensure that the Hang Seng index doesn’t drop below the trend line into bear country.

KOSPI (Korea) index chart

Kospi_Aug1910

The KOSPI (Korea) index chart had just emerged above the 50 day and 20 day EMAs after a strong bear attack when I had last taken a look in early July ‘10.

The index proceeded on a strong bull rally that stalled after a ‘reversal day’ pattern formed on Aug 5, ‘10. The index touched a new high of 1797 but closed lower than the previous day. A sharp correction took the index briefly below the 50 day EMA.

The bulls charged immediately and took the KOSPI above all the three EMAs. The technical indicators are not looking all that bullish yet. Volumes have started to slip as the index moved up this week.

The slow stochastic is just above the 50% level and the %K line has crossed above the %D. The MACD has started to rise but is still below the signal line. The ROC has reached the ‘0’ level from below. The RSI is rising slowly but hasn’t reached the 50% level.

Bottomline? The Shanghai Composite index chart is trying to change directions in a bear market. Very selective buying (with strict stop-loss) suggested. The Hang Seng is dangerously close to falling into bear country. Hold till a clear direction emerges. The KOSPI chart has been in a bull market for two months, forming higher tops and bottoms. Buy the dips.

Thursday, August 19, 2010

Did we finally see the bullish break out in the Sensex today?

Break outs in the Sensex, like beauty, often depends on the eyes of the beholder. A former beauty queen married to a very tall actor may be the epitome of beauty for many; to others, she may appear heavily made up and vapid.

On the short-term (3 months) bar chart pattern, the Sensex has given an exquisitely ‘beautiful’ upward break out on good volumes:

Sensex_breakout_Aug 1910

The upward sloping trading range (of about 400 points) of the past 6 weeks has clearly been overcome today, as the Sensex touched a new 52 week high of 18475 intra-day. The index closed above the trading range at 18454.

I had written the following concluding comments in last Saturday’s analysis of the Sensex chart:

‘The chart pattern of the BSE Sensex index is trying to break out upwards, but is being held in a tight leash by the bears – resembling a tug-of-war with one side slowly gaining ground but the other side refusing to give up without a good fight.’ 

Have the bears lost the fight, or have they been saved by the ringing bell signalling the end of this round? For the answer, we need to take a look at the 1 year bar chart pattern of the Sensex:

Sensex_breakout2_Aug 1910

What have we here? The Sensex is still in the ‘boring’ trading range of the past year! The intra-day high of 18475 (marked by the blue dot) did go past the trend line connecting the tops. But the index closed bang on the trend line. No break out yet.

Now look at what happened in Oct ‘09, Jan ‘10 and Apr ‘10. On all three occasions, the Sensex reversed directions after touching (or coming close to) the upper end of the trading channel and corrected all the way down to the lower end.

Will the bears use the opportunity to press sales? I would not bet against it. Friday’s (Aug 20, ‘10) trade promises to be very interesting. The Sensex can go either way from here.

Investors should refrain from buying, unless there is compelling value in individual stocks. There is no reason to sell off in a panic either. Hold on to your existing portfolios with tight stop-losses. Book part profits in stocks that have run-up sharply in the past few days.

Wednesday, August 18, 2010

Stock Chart Pattern - 3i Infotech Ltd (An Update)

If the stock chart pattern of 3i Infotech was a Bob Dylan fan, it may have been singing - “Can this really be the end, to be stuck inside of a channel with the down trend blues again”. But that song could not have lasted beyond the third week of May ‘10.

That is when the chart dropped below the down trend channel, and fell all the way down to the long-term support level of 60. But that is telling the story from Chapter 9. So let us start at the beginning, by taking a look at the one year closing chart pattern of 3i Infotech:

3i Infotech_Aug1810

The bull rally in the stock from the bear market low of 25 (made in Mar ‘09), ended with two intra-day tops at 103 in Oct ‘09. Though the 312% rise may seem spectacular, it only retraced 56% of the bear market fall from the peak of 165 (touched in May ‘07).

By failing to go past the 61.8% Fibonacci retracement level of the 140 points fall (from 165 to 25), the stock technically remained in a long-term bear market – in spite of the fact that it was way above its 200 DMA when the correction began in Oct ‘09.

The stock moved within a down trend channel (bounded by the lines marked C and C’) from Oct ‘09 till the third week of May ‘10. From Jan ‘10 onwards, the stock’s decline became steeper – as marked by the down trend line D.

Note that the line C’, which had acted as a support, was touched 3 times. The first was in Nov ‘09, when the stock bounced all the way up to the line C in Jan ‘10. Thereafter, the line D became the resistance line. The second support on C’ occurred in Feb ‘10. This time, the upward bounce went only as far as the 200 DMA.

Further up move attempts were thwarted by the falling 20 and 50 DMAs and the down trend line D. The third support on C’ happened in early May ‘10. The short bounce stalled at the falling 20 DMA and the line D.

Now here comes an interesting part. As the stock fell below the line C’ and went lower, the MACD and RSI made higher lows and the slow stochastic made a flat bottom. Such positive divergences in all three technical indicators led to a brief up move after the stock found support at 60.

The first leg of the short up move went past the 20 DMA, the down trend line D and the 50 DMA before encountering resistance from the previous support line C’. As the stock corrected (in Jul ‘10), it twice received support from the down trend line D. Classic instances of how supports turn into resistances, and vice versa.

The second leg of the up move crossed the 50 and 20 DMAs as well as the line C’, but reversed after hitting the level of 68. Note that as the stock made a higher top, the RSI and slow stochastic made lower tops. The negative divergences pulled the stock chart down below both the 20 and 50 DMAs once more.

The fundamentals of the company has deteriorated – thanks to the huge debt burden, and the bottomline turned red in the year ending Mar ‘10. The business model can’t be faulted, as it is generating positive cash flows from operations. But the management’s growth strategy through leveraged acquisitions has badly affected the balance sheet.

Bottomline? The stock chart pattern of 3i Infotech is an example of what can happen if the growth ambitions of management exceed their execution capabilities. In my earlier post, I had recommended a stop-loss at 70. If you are still holding the stock, get out at the earliest opportunity. The stock can fall much lower.

[Note for readers: Several other companies have followed the ‘growth through leveraged acquisitions’ strategy. Do you know of any such companies? Can you share their names? Are you stuck with losses in such companies?]

Tuesday, August 17, 2010

Cairn India: an oil story worth betting on – a guest post

Nishit’s previous guest post about Bharti Airtel received good reader response that motivated him to write about the stock-of-the-moment in the oil and gas sector. Here are Nishit’s views.

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Oil is also known as Black Gold. The lust for oil has led to many wars. Empires have been built on oil and lost due to oil. Oil prices in the next decade may very easily rule above 100 dollars a barrel. Do not believe it?

As recently as 2002, oil was in a band of 15-30 dollars. Now we are in the 60-80 dollars band. Triggers for oil prices going north are:

  • War
  • Demand and Supply mismatch. Look at the Hubbert curve which states that post 2020, the oil production will start falling. Demand keeps rising about 2 % every year.

clip_image002

Over the last few years, hardly any new oil fields have been discovered. Also, alternative fuels like wind, solar energy have not really taken off to make a dent in the demand for oil.

Our aim as investors is to make money in Indian companies. In India, we have very few pure oil plays. ONGC and Oil India are crippled by the government’s subsidy policies. RIL has other businesses and is not a pure oil play.

Cairn India is a standalone player in oil production. It has operations in Rajasthan, Cambay offshore basin on the west coast and Ravva on the Krishna-Godavari basin on the east coast. It has stakes ranging from 20% to 70% in these fields and is also the operator for these fields.

Cairn India produces what is known as the Barmer crude which trades at a discount of 10-12% to the Brent crude. There are different types of crude based on the ‘sweetness’ of the crude. By ‘sweetness’, we mean how much of it can be refined and the sulphur content.

For FY 2010, Cairn India produced around 69000 barrels per day. Peak production is expected at 250,000 barrels per day from 2012 - 2015.

The current market valuations are done by factoring in crude prices at around 80 dollars a barrel. Cairn India has ready buyers for its crude from clients like IOC, HPCL and MRPL. The current fair value of Cairn India comes to around Rs 250 - 265 per share taking into consideration all the oil fields it has, the current price of crude oil.

The transportation from the oil fields would be done by trains which are already in place. So the company has oil reserves, transportation facilities and buyers. Thus, crude prices are the only key factors to watch.

One should buy Cairn India if:

  • one believes crude oil prices will shoot up to 100 dollars plus a barrel
  • one has faith in Cairn’s oil exploration expertise; Cairn is a renowned oil exploration company which uses EOR technology over water flood technology which would extract 45% more oil

I believe the EPS would go to about Rs 40 for FY12 and factoring a P/E of 10-12 would give a target price of around Rs 500.

[Just as I finished writing the post, I heard that the Vedanta group and Sesa Goa may jointly take a 51% - 60% stake in Cairn India. Sesa Goa’s earlier acquisition by the Vedanta group has done no great harm to the former’s share price, so Cairn India’s stock should not be negatively impacted by the takeover news. Sesa Goa’s stock rallied from a low of Rs 68 after the meltdown to a high of Rs 470 about 2 months back.

One should never buy on news based events as all is factored in the price. The prudent course would be to wait for the Cairn India stock to come back to Rs 275 - Rs 300 levels for an entry.]

(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Monday, August 16, 2010

Dow Jones (DJIA) Index Chart Pattern – Aug 13, '10

The Dow Jones (DJIA) index chart pattern was looking bullish last week, but dwindling volumes leading to a negative divergence in the MFI, and a ‘rising wedge’ pattern kept bearish hopes alive.

The inability of the Dow to convincingly move above the 10655 level (61.8% Fibonacci retracement level of the recent correction from the Apr ‘10 top of 11309 to the Jul ‘10 bottom of 9596) provided the bears with the impetus to launch a strong counter attack.

On Mon. Aug 9 ‘10, the index touched an intra-day high of 10756 and closed at 10699 – its highest close since May 13 ‘10 – on the lowest volumes of the week. The bears struck the next day, and the index tumbled down from the rising wedge pattern, and below the 20 day and 50 day EMAs, on increasing volumes.

The Dow lost 350 points (3.3%) on a weekly basis. The 200 day EMA saved the Dow from lapsing into a bear market, but the reprieve may be temporary. The 3 months bar chart pattern of the Dow Jones (DJIA) index shows that the bears are note done yet:

Dow_Aug1310 

Both the 20 day and 50 day EMAs have changed directions, though they are still above the flat 200 day EMA. The slow stochastic, RSI and MFI have all dropped below their 50% levels. The MACD is still positive, but is below the signal line and falling.

Is this going to be a temporary 4-5 days correction, or is it the harbinger of a bigger fall? Apparently, a technical pattern called ‘Hindenburg Omen’ has formed. Since 1985, every crash in the NYSE has been preceded by this dreadful omen – as per this article.

The fundamental news continue to be mixed. Retail sales in July rose 0.4%. The CPI rose 0.3%, its first rise in 4 months. Before bulls get too excited, they should read this WSJ article. Rent data make up nearly a third of the CPI. As house prices have plummeted, house rents have increased as more people walk out of mortgages to rent homes instead. If rent data is excluded, CPI may turn negative.

Bottomline? The chart pattern of the Dow Jones (DJIA) index has quickly turned from bullish to bearish in a week. If the 200 day EMA is unable to support the index, bear market strategy – sell on rises – should apply. Put your ‘buy’ list away for now.

Sunday, August 15, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX – Aug 13, '10

FTSE 100 Index Chart

FTSE_Aug1310

The FTSE 100 index chart pattern behaved like a textbook example in technical analysis. In last week’s analysis, I had mentioned that the rising volumes while the index dipped was a sign of distribution. Negative divergences in the RSI and MFI were also worrying signs for the bulls.

The index spurted up on Monday (Aug 9 ‘10) in a desperate effort to shake off the bears and tried to test the May 13 ‘10 intra-day and closing highs - but fell short by 20 odd points. The weak volumes didn’t help the bull cause.

The FTSE 100 quickly dropped down on the next two days on rising volumes, and received expected support from the entwined 50 day and 200 day EMAs. The small upward bounce on the last two days of the week could not move the index above the 5300 level or the 20 day EMA. The FTSE 100 lost 1% on a weekly basis.

The technical indicators are looking bearish. The slow stochastic has fallen to the 50% level. The MACD is positive, but has slipped below the signal line. The RSI and MFI are both below their 50% levels.

The bullish pattern of higher tops and bottoms has been broken. The index may try a pullback to the trend line connecting the recent (higher) bottoms. Without volume support, any up moves will be short-lived, and there is every possibility of the FTSE 100 dropping back into bear country (i.e. below the 200 day EMA).

DAX Index Chart

DAX_Aug1310 

The DAX index chart pattern made a new closing high of 6352 on Mon. Aug 9 ‘10, but low volumes failed to move the index past previous Friday’s reversal day top of 6387. Volumes picked up during the rest of the week as the index dropped below the 20 day EMA, and closed the week below the 50 day EMA. The DAX lost 2.4% on a weekly basis.

The up trend line connecting the recent (higher) bottoms in Jul and Aug ‘10 have been broken, and a pullback attempt by the bulls can be expected. But the technical indicators have turned weak, which could lead to a drop towards the 6000 level and the rising 200 day EMA.

The slow stochastic has slipped below the 50% level. Likewise for the RSI. The MFI is barely above the 50% level. The MACD is positive, but below the signal line.

The German economy is in better shape than most of its European neighbours, and there is no immediate threat of the DAX index moving into a bear market.

CAC 40 Index Chart

CAC_Aug1310

The CAC 40 index chart could not remain above the 200 day EMA for long. In last week’s analysis I had observed a negative divergence in the MFI, and the RSI had risen sharply to the overbought zone. A consolidation or correction was, therefore, expected.

The index fell quickly on rising volumes and closed below all three EMAs – re-entering the bear market, and losing 2.8% on a weekly basis. The 20 day EMA is above the 50 day EMA, but all three EMAs are heading down.

The technical indicators have turned bearish. The slow stochastic and the MFI are below their 50% levels. The RSI is at its 50% level. The MACD is positive but below the signal line.

Bottomline? The chart patterns of the European indices are showing the after-effects of a strong bear attack, following five weeks of bull dominance. On the longer-term charts, the FTSE 100 and CAC 40 are looking weak, and any pullbacks can be used to book profits. The DAX chart is looking bullish. Any dips can be used to add.

Saturday, August 14, 2010

BSE Sensex Index Chart Pattern – Aug 13, '10

Another week has come and gone without any noticeable difference in the BSE Sensex index chart pattern. I remember being surprised by the hot and humid weather when I visited Chennai in the month of January once. A long-term resident of the city had enlightened me: ‘We have three kinds of weather in Chennai – hot, hotter and hottest’!

The Sensex has exhibited three different types of behaviour in the past year – boring, more boring and utterly boring. Just when you think it can’t possibly move up any further and is due for a correction, the index makes a new high. When it starts to drop and you get ready to shake off the dust from your ‘buy’ list, it abruptly stops falling.

No wonder Buffett had once said: ‘Making money in the stock market is simple but not easy’. Many investors would do well to remember that, and not indulge in unnecessarily risky strategies in the hope that more risk may lead to more gain. That theory may work in drug smuggling, but leads to losses in the stock market.

Particularly disturbing are some emails I received from recent market entrants who want to know how they can start trading, and whether I provide daily tips using email or SMS. There can be only one response to such queries: read about how the stock market works and learn how to become a long-term investor; leave trading to the experienced professionals.

There is a saying in Bengali: some learn by observing, others learn by losing money. A small minority will heed my advice. The rest will lose money and then learn.

The one year bar chart pattern of the BSE Sensex index continued its gyrations in the upward-sloping channel:

Sensex_Aug1310

Note that the higher tops of the index during the past two months have not been matched by the technical indicators. The MACD and RSI have made lower tops while the slow stochastic has made a series of tops at the same level.

These negative divergences could lead to a bigger correction than the three day blip we saw last week. But the technical indicators are showing bullish signs. The RSI and slow stochastic bounced off their 50% levels. The MACD has slipped below the signal line, but remains in positive territory.

Thursday’s (Aug 12 ‘10) trading was interesting, as the Sensex formed a ‘reversal day’ pattern on decent volumes. It dropped below the 20 DMA to make a lower low, but moved up to close marginally higher than the previous day and exactly on the 20 DMA. It wasn’t surprising that the index moved up on Friday and closed 23 points higher on a weekly basis.

The FIIs have been net buyers during the week. Selling by the DIIs caused the three days of weakness, but they turned net buyers on Friday. The index is receiving good support from the 20 DMA, and all three DMAs are moving up.

If you look at last week’s longer-term chart of the BSE Sensex and observe the pattern from the low of Mar ‘09 till date, and compare it with the pattern following the recent low of May ‘10 – you will find an uncanny similarity.

A narrower upward-sloping consolidation channel within a wider upward-sloping channel (almost like the villain ‘Mini-Me’ of the Austin Powers movies!):

Sensex_Aug1310_2

Bottomline? The chart pattern of the BSE Sensex index is trying to break out upwards, but is being held in a tight leash by the bears – resembling a tug-of-war with one side slowly gaining ground but the other side refusing to give up without a good fight. Stay invested, and watch the ‘Mini-Me’ channel (of about 400 points width) closely.

Friday, August 13, 2010

Stock Index Chart Patterns - Shanghai Composite, Singapore Straits Times, Hang Seng –Aug 12, '10

Shanghai Composite index chart

ShanghaiComp_Aug1110

The bull rally in the Shanghai Composite index chart pattern hit the pause button last week. It received good support from the intertwined 20 day and 50 day EMAs and closed above the 2600 level – but lost 50 points on a weekly basis.

More importantly, it has remained below the falling 200 day EMA. That means, the long-term bear market still reigns. There are two possibilities about the future direction of the Shanghai Composite. It can use the strong support from the entangled 20 day and 50 day EMAs, and make an attempt to cross above the 200 day EMA.

Alternatively, it can drop down further after making a small double-top pattern. The technical indicators are hinting at the latter. The slow stochastic has dropped from the overbought zone. The MACD is still positive and above the signal line, but has fallen a bit. The ROC is resting on the ‘0’ line. The RSI is moving down towards the 50% level.

The property bubble has burst in China, and that may have a cascading effect on the rest of the economy. Rows upon rows of unoccupied apartment towers in major cities may not be very conducive to a resumption of the bull market.

Hang Seng index chart

HangSeng_Aug1210

It was a case of ‘so near and yet so far’ for the Hang Seng index last week. After moving past the 21800 level on low volumes, the index failed to make further headway. Rallies on decreasing volumes tend to fizzle out.

Volumes started to rise as the Hang Seng slipped and closed more than 600 points lower on a weekly basis. The 50 day EMA couldn’t move above the 200 day EMA and the 20 day EMA has stopped rising.

The technical indicators have turned weak. The slow stochastic has dropped from the overbought zone. The MACD is positive but falling and clinging on to the signal line. The ROC is at the ‘0’ level. The RSI has dropped sharply from the overbought zone.

Bulls will point out that the index has received support from the 20 day EMA and a further fall may get support from the 200 day EMA. The rising volumes during the fall is a sign of distribution.

Straits Times (Singapore) index chart

Straits Times_Aug1210

In the beginning of Jul ‘10, the Singapore Straits Times index chart had fallen below the twin support of the 20 day and 50 day EMAs, and I had expected it to drop further to the 200 day EMA.

It proved to be a temporary lull before the bull market resumed. The index charged up to test the Apr ‘10 top of 3038 and reached a slightly higher top at 3043 on Aug 3 ‘10. The double-top halted the rally.

The index fell below the 20 day EMA and stopped at the 50 day EMA, losing more than 100 points (3.4%) from the top. Both the 50 day and 200 day EMAs are still rising, the sign of a long-term bull market.

The technical indicators have weakened a lot. That means the short-term bearishness may last a little longer.The slow stochastic has dropped below the 50% level. The MACD is positive but has fallen below the signal line. The ROC has entered negative territory. The RSI is just above the 50% level, but sliding. All four technical indicators failed to make new highs when the index touched its Aug 3 ‘10 top.

Bottomline? The Shanghai Composite index chart is still in a bear market. The bull rallies in the Hang Seng and Straits Times index charts have hit road blocks. All three indices are at important support levels, but showing short-term weakness. The correction/consolidation may continue next week.

Thursday, August 12, 2010

Why has the Sensex remained rangebound for 10 months?

Many small investors are perplexed about the rangebound Sensex over the past 10 months – trading between 15300 and 18300 in a slightly upward sloping channel.

Of late, the Sensex has been trying to break above the trend line connecting the tops. But every time it has fallen back into the trading range, despite continuous buying by the FIIs.

So what gives? There could be two possible reasons. The first is that most of the Sensex stocks appear fully valued or even over-valued, so action has shifted to the mid and small-cap stocks. The second is that some Sensex-constituent stocks are performing very well, while others have lagged the Sensex.

Trying to analyse the possible first reason would require access to FII buying and selling data that I do not have. It is based on anecdotal evidence. But the second reason can be verified more easily with a quick, back-of-the-envelop calculation.

Here is what I gathered, by comparing the closing prices 10 months ago with that of today’s prices:

Sensex stocks Price on 12.10.09 Price on 12.08.10 % Gain/ (Loss) in 10 months
ACC 796 837 5.1
BHEL 2424 2496 3.0
Bharti Airtel 351 318 (9.4)
Cipla 298 314 5.4
DLF 425 316 (25.6)
Jindal Steel and Power 619 656 6.0
HDFC 2758 2991 8.4
HDFC Bank 1700 2075 22
Hero Honda 1631 1867 14.5
Hindalco 129 167 29.5
HUL 290 266 (8.3)
ICICI Bank 893 964 7.9
Infosys 2240 2779 24.1
ITC 129 153 18.6
Jaiprakash Associates 160 119 (25.6)
Larsen and Toubro 1657 1805 8.9
Mahindra and Mahindra 458 633 38.2
Maruti Suzuki 1516 1226 (19.1)
NTPC 210 195 (7.1)
ONGC 1245 1267 1.8
Reliance Comm 248 173 (30.2)
RIL 1084 972 (10.3)
Reliance Infra 1357 1095 (19.3)
SBI 2173 2784 28.1
Sterlite 170 168 (0.01)
TCS 581 855 47.2
Tata Motors 550 1024 86.2
Tata Power 1319 1329 0.01
Tata Steel 546 520 (4.8)
Wipro 344 413 20
       
SENSEX 17027 18074 6.1

Only 13 stocks have outperformed the Sensex in the past 10 months. 1 stock was an equal performer. The balance 16 underperformed the Sensex. Not a very scientific experiment, but one that may give us clues for taking investment decisions.

1. The IT pack – Infosys, TCS, Wipro have outperformed

2. SBI and HDFC Bank have outperformed; HDFC and ICICI Bank have marginally outperformed the Sensex

3. Hindalco has outperformed, but Sterlite and Tata Steel have underperformed

4. Hero Honda, M&M and Tata Motors have outperformed; Maruti Suzuki has underperformed

5. Tata Power and NTPC have underperformed; Jindal Steel and Power have given equal performance with the Sensex

6. Bharti Airtel and Reliance Comm have underperformed

7. ITC has outperformed but HUL has underperformed

8. ONGC and RIL have underperformed

9. ACC, BHEL, DLF, Jaiprakash Assoc, Reliance Infra have underperformed; L&T has marginally outperformed

10. Cipla has underperformed

One school of thought says: Tend the flowers and pull out the weeds. Translated into English, it means hold the outperformers and get rid of the underperformers.

While that may be sound logic, it may not necessarily make good investment strategy. If the Sensex has to move above the trading range, the outperformers have to keep performing, but the underperformers need to pick up the baton and start running.

In other words, if you believe that the Sensex is going to move higher, a contrarian bet on the underperformers is likely to provide good gains. That is not a blanket permit to buy all the underperformers. One still has to do due diligence.

This may not be a bad time to pick up Tata Steel, RIL, Sterlite and, on dips, HUL, NTPC, BHEL. The telecomm sector is best avoided.

Wednesday, August 11, 2010

Stock Chart Pattern - Tata Steel (An Update)

A detailed technical analysis of the stock chart pattern of Tata Steel in Sep ‘09 showed two tops just short of the 500 mark in Jun ‘09 and Aug ‘09 and a correction down to 416. I had expected the correction to continue based on the weakness in the technical indicators.

The stock did just the opposite. It reversed directions well before it could drop to the 200 DMA, made a series of higher tops and higher bottoms till it closed at 694 in Apr ‘10. A spectacular 544 points (363%) rise from the low of 150 in Mar ‘09.

The not-so-great performance of the company in 2009-10 – thanks to the huge debt burden of the Corus acquisition - weighed on the stock price. A swift plummet below the 200 DMA was finally halted at the long-term support level of 450 – correcting 45% (in 2 months) of the previous (13 months) rise.

A look at the one year closing chart pattern of Tata Steel may explain why the Sensex hasn’t been able to make much headway of late:

Tata Steel_Aug1109

One of the better traded, Sensex constituent stock has grossly underperformed in the past 4 months. After rising above the 20 and 50 DMAs, as well as a long-term support-resistance level of 528 the stock made an attempt to clear the 200 DMA and another long-term support-resistance level at 562.

All it managed was a small, head-and-shoulders pattern from which it broke downwards today (Aug 11 ‘10). The strong volumes reflected market expectation of poor Q1 results (to be announced tomorrow). If the results are disappointing, the stock may drop to the 50 DMA (at 503) and further to the support level of 450.

Any fall below the 500 level can be used for entering this bellwether stock, as domestic operations are doing well and large cash inflows are likely to kick-in due to substantial revival of the Corus operations in Europe.

The technical indicators are looking somewhat bearish. The slow stochastic has dropped below the overbought zone. The MACD is positive but has crossed below the signal line. The RSI has fallen sharply below the 50% level towards the oversold zone. The consolation for the bulls is that the RSI rarely spends much time inside the oversold zone.

Bottomline? The stock chart pattern of Tata Steel has stayed below the 200 DMA for the past 3 months. If you believe in the long-term growth story of the Indian economy, the lowest cost steel producer in the country can’t remain stagnant for long. Use dips to accumulate.

Tuesday, August 10, 2010

Gold Chart Pattern: is the correction over, or is this the start of a bigger fall?

Before I get into the gory details of the gold chart pattern and whether the correction in gold prices is over or not, please allow me a little digression into the probable reasons why any one would buy gold at a price of 1200 dollars an ounce (well, 1193 at the time of writing this post).

Some buy gold ornaments as gifts for their loved ones on special occasions – like marriages and anniversaries. They could as well have gifted a watch or a pen or an iPhone. The reason behind the gift wasn’t ‘investment’, but the joy of sharing.

In the ‘investment’ category are reasons like ‘portfolio diversification’, ‘inflation hedge’, ‘currency hedge’ and ‘crisis hedge’. Are these reasons logical or emotional?

Having some gold in one’s investment portfolio may make sense, if the percentage allocation is about 5% or so. But remember that it doesn’t provide any returns whatsoever. No dividends and no interest. Buying a couple of balanced funds instead may be a better idea.

As per the data provided in this slightly dated but very interesting article, gold is not much of a hedge against inflation. In fact, it is a better hedge against deflation. There is an inverse correlation between gold and the US dollar, but the correlation is weak.

What about a ‘crisis’? Like a world war, or a total collapse of the financial system? Several nations with nuclear weapons capability ensures that a world war is highly unlikely.

That leaves the possibility of a collapse of the financial system as the only reason for the recent run up in the price of gold. A flight to safety. A belief in the ‘Golden Rule’ – those who have gold will rule.

Does the fear of a financial collapse justify buying gold at 1200 dollars an ounce? I don’t think so. What do readers think?

That was a long digression. Now a look at the one year gold chart pattern:

Gold_Aug1010

In last month’s analysis, I had mentioned about possible support at the 1160 level that could provide an opportunity to enter. The gold price chart seems to have read the post and decided to humour the writer.

After twice failing in its attempts to cross above the 14 day SMA, making a bearish pattern of lower tops and bottoms, gold prices fell exactly to 1160 (just 20 points above the 200 day SMA). This time the bulls were ready. The chart spurted up above the 14 day SMA and, after a bit of hesitation, above the 1200 level.

A pullback down towards the 14 day SMA seems to be in progress now. The bulls will expect the short term average to provide support for the bull market to resume. The bears will hope that gold’s price may drop below the 14 day and the 200 day SMAs for a correction deeper than the 8% we have seen so far.

I am unable to answer the question as the gold chart doesn’t provide technical indicators for gauging market sentiment and price momentum. May be I should visit the bank and find out if the young lady there still tries to sell me gold coins at a ‘discount’ or not.

With the Dow and the European indices looking bullish, and strong corporate Q2 results, risk appetite seems to be returning to the stock markets. That doesn’t equate well with a rise in gold prices.