The six new classifications of hybrid mutual funds

"SEBI has recently proposed a change in the name of balanced funds into six categories - 

• Equity savings fund 
• Aggressive Hybrid Fund 
• Balanced Hybrid Fund 
• Conservative Hybrid Fund 
• Multi-asset allocation funds and 
• Dynamic asset allocation fund"

Read more about them here.

(Note: Those who invested in HDFC Prudence Fund may want to switch to HDFC Balanced Fund.)

5 Tips for Reading a Balance Sheet

The Indian stock market indices have come off their Jan '18 tops and have been consolidating sideways for the past 4 weeks. There is every possibility that there will be some more consolidation or correction at least till Mar 31 '18.

From Apr 1 '18, the re-introduced LTCG tax comes into effect. That can put a near-term floor on the indices. From mid-Apr, Q4 (Mar '18) results season will start. 

If Q4 results of India Inc. show any improvement over Q3 results - as they are expected to do - buyers may overwhelm sellers, and stock indices can resume their upward trajectory.

This may be as good a time as any to start preparing a 'buy list' from companies that have performed well in the previous three quarters. 

How to choose which companies to put on the 'buy list' from the several hundreds that declared good results? The best place to start is to read their annual reports, and choose the ones with the strongest balance sheets.

Given below are links to three introductory articles published in investopedia.com to get you started on balance sheet analysis:

1) 5 Tips for Reading a Balance Sheet 

2) Reading the Balance Sheet

3) Breaking Down the Balance Sheet

There are several links in the above articles which can help you to dig deeper into balance sheet analysis.

If you don't feel excited about analysing balance sheets and identifying good companies for investment, fret not. You can start SIPs in highly-rated equity and balanced mutual funds, and leave all the analysis to fund managers.

(Wishing all visitors, regular readers, g+/fb/twitter followers and newsletter subscribers a safe, colourful and happy Holi.)

Nifty chart: a midweek technical update (Nov 02 '16)

For the month of Oct '16, FIIs were net sellers of equity worth Rs 57.7 Billion. DIIs were net buyers of equity worth Rs 79.1 Billion, as per provisional figures. During the two days of trading this week, FIIs net sold equity worth Rs 7.9 Billion while DIIs were net buyers of equity worth Rs 6 Billion.

The spat between the recently removed Chairman and the board of directors of Tata Sons seems to be getting uglier by the day, with charges and counter-charges flying back and forth in the media. That has kept bullish sentiments depressed in the stock market.

The latest news of Trump narrowing the gap with Clinton in opinion polls about the forthcoming US elections dampened bullish sentiments even more. That caused widespread selling across global stock markets and a rush to the safe haven of gold. 

The daily bar chart pattern of Nifty continues to correct within a downward-sloping channel (called a 'flag') since the end of Aug '16. After a fifth failed attempt to breakout above the 'flag', the index fell with a downward 'gap' today but received good support from the 8500 level.

All four daily technical indicators are in bearish zones. RSI is moving sideways below its 50% level. The other three - MACD, ROC, Slow stochastic - are showing downward momentum that is hinting at some more correction.

Nifty's TTM P/E has slipped to 23.01, but remains higher than its long-term average. The breadth indicator NSE TRIN (not shown) is trying to emerge from its overbought zone.

A likely fall below 8500 can drop the index to a strong zone of support between 8300 and 8400. The lower edge of the 'flag', the upward 'gap' formed on Jul 11 '16 and the rising 200 day EMA are all within the 100 point support zone. 

The index has corrected just over 5% from its Sep 7 top, and retraced about 22% of its entire rally from the Feb '16 low to the Sep '16 top. These are less than the range of 'normal' bull market corrections (of 8-10% from the top and 30-35% retracement of previous up move).

Q2 (Sep '16) results declared so far haven't given much indication of India Inc's return to consistent earnings growth. India's efforts at imposing anti-dumping duty on Chinese steel may be challenged at the WTO by several countries.

Amidst all the bearish doom and gloom, a few companies have declared decent quarterly results and are showing sustainable growth prospects. Identifying and buying them can lead to good long-term returns. 

Patience is a key differentiator between success and failure in the stock market. Don't try to buy in a hurry or sell in a panic. Keep calm, do your homework and wait for suitable opportunities. 

The smartest move for most small investors can be investing regularly in a handful of good equity/balanced funds regardless of market movements. 

3 Secrets of Successful Companies

When small investors enter the stock market for the first time, they often make the mistake of buying individual stocks based on a friend's tip or a relative's recommendation. 

Such initial steps usually end up with a loss of the invested capital - either because the entry is at an inopportune time, or the stocks selected are of the cheaper/riskier variety, or both.

For the novice investor, the better way to start investing in the stock market is to select a couple of good equity and balanced funds and invest regularly - leaving stock selection to experienced fund managers.

At some point of time however - may be two or three years down the road - it may be a good idea to start selecting your own stocks. 

Why? Because fund managers tend to have a herd-like mentality - selecting from the same group of well-researched stocks for different funds. That leads to steady but average returns.

For above-average returns, one needs to select a few mid-cap and small-cap stocks for a 'satellite portfolio' - along with a 'core portfolio' of large-cap stocks.

Selecting under-researched mid-cap and small-cap stocks is not a trivial task. It requires knowledge and experience to choose from thousands of listed companies.

So, where should one start? Look for three essential characteristics that make a company successful. These are:

1) Barriers to entry
2) Management quality
3) Market leadership

What about other important metrics like Profit Margin, P/E, P/BV, RoE, Debt/Equity ratio, Interest Coverage ratio, Cash Flow, Growth rate and so forth? Those need to be looked at also for a more detailed study and analysis.

Learn more about the '3 Secrets of Successful Companies'. 

Related Post
How to Increase your stock market Returns - be an Investor and a Speculator at the same time

Nifty chart: a midweek technical update (Oct 26 '16)

News of the surprisingly unceremonious sacking of the Tata Sons Chairman sent a shock wave through the Indian stock market. The initial reaction was a sell-off in most of the stocks of Tata companies.

As Cyrus Mistry refused to back down without a fight and chastised the Tata Sons board of directors for their unprofessional attitude, FIIs voted with their feet.

Their total net selling in equities touched nearly Rs 24 Billion during the first three trading days of the week. As per provisional figures, DIIs were net buyers of equity worth Rs 17 Billion - not enough to prevent Nifty from dropping below its 20 day and 50 day EMAs.

The daily bar chart pattern of Nifty made an unsuccessful attempt to break out above the downward-sloping channel within which it has been trading for the past 8 weeks.

Many small investors - particularly those who entered the market last month - may be wondering whether this is the early stage of another bear phase. 

The chart structure doesn't suggest that. As long as the 200 day EMA is rising and the index is trading above it, bulls remain in the driver's seat.

As suggested in last week's post, the index appears to be forming a 'flag' pattern, which is quite a reliable 'continuation' pattern.

That means the current corrective phase should end with an upward breakout from the downward-sloping channel.

Can the index correct some more? How much further can it fall? What will be a good level to start buying?

Daily technical indicators are looking bearish and showing downward momentum. Nifty's TTM P/E remains higher than its long-term average at 23.30. The breadth indicator NSE TRIN (not shown) has dropped inside its overbought zone. Some more correction is likely. 

Downside supports can be expected from the 8500 level; the lower edge of the 'flag'; the 'gap' formed on Jul 11 '16; and the rising 200 day EMA.

Support levels can get washed away in a wave of selling. FIIs have turned bears, which should be a worrying sign for bulls. However, buying is likely to emerge in the zone between 8500 and 8300 - which has four strong supports.

Quit worrying about when and at what level to start buying. It requires skills that elude even experienced investors. Small investors should not even bother to try.

Just select fundamentally strong companies that have delivered good and steady performance over many years. Accumulate them slowly and dispassionately. 

If you haven't yet mastered stock-picking skills, SIP into an equity fund or a balanced fund.

How to find under-valued stocks (even when a stock market is trading near its lifetime high)

The Indian stock market has rallied almost 30% from its Feb '16 low and is within hand-shaking distance of its lifetime high touched back in Mar '15.

Many stocks are touching 52 week highs on a daily basis. Some have touched their lifetime highs. 

Small investors are in a quandary. Should they jump on to the bandwagon and ride the bull market, or should they wait for a correction to enter?

The answer is: Neither. Instead, they should do their homework. Try to find undervalued stocks. 

Are there any undervalued stocks left in the market? Haven't all of them been bought already?

Those are valid questions - specially when a market is near its lifetime high. The truth is, there are undervalued stocks available under all market conditions. They are more difficult to find near market tops.

So, what is the 'secret formula' for finding undervalued stocks? There isn't any. 
Finding undervalued stocks requires methodical, 'grunt work'.

The following five metrics will get you started on your quest:

1. P/E (Price to Earnings) ratio
2. P/BV (Price to Book Value) ratio
3. Debt/Equity ratio
4. Free Cash Flow
5. PEG (P/E to Earnings growth) ratio

The first three ratios are readily available from any finance website. The last two may need to be calculated from Annual Reports.

Read more about the five metrics from this article.

Not interested in doing grunt work to find undervalued stocks? Leave the job to experienced fund managers. Invest in equity or balanced funds.

Related Post
How to pick Stocks for Investment - Part III

How to do 'due diligence' before buying a stock

The Indian economy is back on the growth path. Liquidity is sloshing around. FIIs are buying. The stock market has shaken off the bears and is rising towards its lifetime high. 

You are either a smart investor who entered at lower levels and are enjoying the bull ride. Or, you are a new investor feeling anxious whether to enter the market now or wait for a correction.

Either way, you may be interested in catching hold of the 'next Eicher Motors' or the 'next Page Industries' or the 'next Yes Bank' and becoming a 'Crorepati'.

Successful investing requires more than luck and pluck. It requires serious hard work, discipline and patience.

Most of the hard work - or 'due diligence' - should be done before buying a stock. What is 'due diligence'? It is the process of investigating all available information about a company whose stock you are thinking of purchasing.

What does 'all available information' include? Financial information available from Annual Reports. Stock price history available from stock exchanges. Brokerage reports. Industry reports. Reputation of company management.

That seems like a lot of 'available information' to investigate. What if one doesn't have the time or know-how to do all this investigating? Isn't there a shortcut?

Fortunately, there is. You can leave the 'due diligence' to experienced fund managers by starting a SIP in a diversified equity fund or a balanced fund with a track record of 5 years or more.

You will still get the benefit of good long-term returns - provided you hold on to the fund units for the long-term - without the hassle of going through Annual Reports, Brokerage Reports and Price charts.

In fact, a SIP in a good equity fund or balanced fund is the best way for new investors to start investing in the stock market.

However, if researching companies excite you and making outsize returns from the stocks of less known and 'undiscovered' companies gets your adrenaline pumping, then performing 'due diligence' won't seem like a chore.

So, prepare a 'watch list' of companies based on their past, current and likely future performances and start your 'due diligence' to prepare a shorter 'buy list'.

Haven't done proper 'due diligence' before? 
Read the article by Ryan Barnes: Due Diligence In 10 Easy Steps

Does your Investment Style fit your Personality?

To be a successful investor, you must have your own investment style. That means evolving a system that works for you - by figuring out your own strengths and weaknesses and keeping a record of your successes and failures.

Every person has personality traits, cognitive biases, eccentricities, habits that affect their decision making. If you are impulsive, you may buy 5000 shares of Opto Circuits at Rs 9 and hope to double your investment in 3 months.

If you are risk averse, you may be happy with the long-term returns you get from a monthly SIP in an index fund or a balanced fund. 

An investor below the age of 30 may invest all her monthly savings into an equity fund. An investor who has already celebrated his 50th birthday may prefer the safety of bank fixed deposits or a debt fund.

According to an article published by the CFA Institute, there are four types of Investor Personalities:

1. Preservers - loss averse and deliberate in decision making, they are more keen to preserve their existing wealth than indulge in risky investments in search of rapid growth. They often end up not taking any decision at all and miss money-making opportunities.

2. Followers - not much interested or skilled in the investment process, they end up following the advice of friends or colleagues and have a portfolio full of yesterday's winners.

3. Accumulators - may have tasted success in a business enterprise or career, giving them the confidence to actively manage their own investment portfolio. They like to win big, and often make large risky bets that can lead to big losses.

4. Independents - like to think 'out of the box' and play contrarian based on their own research. They usually follow a plan and are not as over-confident as Accumulators. But relying too much on their own research can be time consuming and counter-productive.

So, which of these four Investor Personalities fit you the best? Give it some thought (if you haven't done so before) and then decide what kind of investment style you should follow. Your investment success will depend on it.

Read more from this investopedia.com article.  

Nifty chart: a midweek update (Apr 06 '16)

The RBI Governor cut the repo rate by 25 bps (0.25%) to 6.5%. The move was widely expected and already discounted by the stock market, as per analysts. So, what was the reason for the big sell-off?

It was a classic case of 'sell on news' - led by FIIs. They were net sellers of equity worth Rs 800 Crores on Tue. Apr 5, and Rs 500 Crores today. Probably just routine profit booking after massive buying last month.

Adrian Mowat of JP Morgan Chase believes that measures to increase liquidity in the system by Dr Rajan - like increasing the reverse repo rate by 25 bps to 6%, cutting MSF by 75 bps to 7%, announcing OMO of Rs 15,000 Crores - will be game changers.  

In an earlier post on the 1 year closing chart pattern of Nifty, the importance of the 'support-resistance' level of 7550 was explained.

It is interesting to note how 7550 is continuing to play an important role. The index broke out above 7550, but pulled back - only to bounce up again.

It faced strong resistance from its sliding 200 day EMA and pulled back towards 7550 for a second time. The index is also receiving support from its 20 day EMA.

The two dips provided good opportunities to add/enter. Can Nifty fall some more? Sure it can, specially if FIIs continue to sell. Expect the 7550 level and the rising 50 day EMA to provide support on the downside.

Daily technical indicators have corrected overbought conditions and showing downward momentum, but remain in bullish zones. Since the beginning of Mar '16, bulls have been buying every dip - and may continue to do so.

Nifty is still trading below its 200 day EMA in bear territory. On longer-term weekly chart (not shown), the index has dropped to seek support from its 20 week EMA but closed almost 500 points above its 200 week EMA in a long-term bull market.

The near-term trigger for the market will be declaration of Q4 (Mar '16) results from next week. It is unlikely that India Inc. will show much improvement from Q3 (Dec '15) results.

Stock picking will take centre stage - so be careful about what you buy. If you are not sure, buy units of a good large-cap or balanced mutual fund with a proven track record.

A convincing move above 8000 will be the first indication that bulls are regaining control.

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 21, 2015

Economic slowdown in China leading to a sharp fall in commodity prices, recession in countries like Brazil and Chile, renewed turmoil in Greece were several reasons cited for massive selling by FIIs across global markets including India.

As per provisional figures, FIIs were net sellers of equity worth Rs 3900 Crores during the week - bulk of the selling occurring on the last 2 days. DIIs tried to stop the rot. Their net buying in equities totalled Rs 2800 Crores.

Despite the gloomy predictions of much lower levels in the Indian market by some analysts, bulls managed to stage a recovery – triggered by the possibility of restoring status quo on restrospective MAT for FIIs. Both Sensex and Nifty managed to hold on to important supports.

BSE Sensex index chart

The daily bar chart pattern of Sensex dropped below the ‘triangle’ pattern (within which it was consolidating for the past month) and its 200 day EMA with a downward ‘gap’ on Fri. Aug 21. A fall below an important support with a ‘gap’ is considered to be more significant than a fall without a ‘gap’.

However, the index managed to recover most of its losses on the last day of the week and closed just inside the ‘support-resistance zone’ between 27350 and 28800. In the process, it formed a ‘hammer’ pattern (in candlestick parlance), which may trigger a reversal of last week’s down trend.

Due to F&O expiry, a sharp recovery by bulls is unlikely next week. Daily technical indicators are in bearish zones, and starting to look oversold. Some more correction or consolidation is possible, but don’t be surprised if the index bounces up.

Sensex lost about 2.5% on a weekly closing basis. But many fundamentally strong large-cap stocks have fallen much more – either due to brokerage guidance or due to the general panic triggered by margin calls. This may be a good time to start accumulating them slowly.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty dropped below its 20 week EMA, but received good support from its 50 week EMA and closed inside the ‘support-resistance zone’ between 8180 and 8630.

Though the index lost 2.5% on a weekly closing basis, it is trading in a long-term bull market. Weekly technical indicators are in bullish zones but showing downward momentum.

MACD is touching its signal line just above the ‘0’ line. ROC faced resistance from the edge of its overbought zone and has slipped down. RSI is resting on its 50% level. Slow stochastic has moved down from its overbought zone.

Some more correction or consolidation can’t be ruled out. Note that the possibility of forming a “cup and handle” or “rounding bottom” pattern (mentioned in last week’s post) will be negated if the index falls below its Jun ‘15 low of 7940.

Bottomline? The bar chart patterns of Sensex and Nifty managed to hold on to important supports despite strong bear attacks. Bull markets are far from over. Accumulate ‘good’ stocks and maintain appropriate stop-losses. If you are planning to enter the market for the first time, choose a good balanced fund.

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 14, 2015

WPI inflation was –4.05% in Jul ‘15 against –2.4% in Jun ‘15. It was the 9th straight month of contraction – thanks to lower prices of food and manufactured items. The possibility of an interest rate cut by RBI due to low CPI and WPI cheered market participants.

All is not well on the balance of payments front. Merchandise exports contracted for the 8th month in a row, falling 10.3% on a YoY basis in Jul ‘15. Imports were also lower by 10.3% on a YoY basis. Trade deficit increased to $12.8 Billion in Jul ‘15 from $10.8 Billion in Jun ‘15.

FIIs were net sellers of equity worth Rs 2800 Crores last week, as per provisional figures. DIIs were net buyers of equity worth Rs 2000 Crores. However, both FIIs and DIIs were net buyers on the last day of the week – triggering a pullback. Sensex and Nifty closed lower on a weekly basis.

BSE Sensex index chart

The daily bar chart pattern of Sensex dropped below its 20 day and 50 day EMAs as well as the second blue up trend line, but bounced up strongly after receiving good support from its 200 day EMA. The index closed the week above all three EMAs in bull territory.

Bears are still in the picture. Since both the blue up trend lines have been breached on the down side, the possibility of another down move can’t be ruled out. The index has closed above its 200 day EMA on every trading day since Jun 19 ‘15 – showing that bulls have the advantage.

As mentioned last week, the index seems to be forming a bullish ‘rounding bottom’ or ‘cup and handle’ pattern. Either pattern – if they play out – should end with upward break outs to new highs.

Daily technical indicators are giving mixed signals. MACD and ROC are at their respective ‘0’ lines. Slow stochastic has bounced up weakly from the edge of its oversold zone. Only RSI is looking bullish by rising above its 50% level.

Sensex needs to move convincingly above the 28800 level (which is the upper boundary of the ‘support-resistance zone’) for bulls to regain control. Bears will try to ensure that doesn’t happen any time soon. Stay invested.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty dropped below its 20 week EMA and the blue up trend line intra-week, but bounced up to close above its two weekly EMAs and the trend line in bull territory. Resistance from the 8630 level (upper edge of the ‘support-resistance zone’) is proving to be strong.

Weekly technical indicators are looking bullish. MACD is gradually rising above its signal line in positive zone. ROC is about to enter its overbought zone. RSI is moving sideways above its 50% level. Slow stochastic is inside its overbought zone, but moving sideways.

The index may consolidate a bit before making another attempt to cross above the resistance zone between 8630 and 8670.

Bottomline? The bar chart patterns of Sensex and Nifty seem to be forming bullish continuation patterns. It may take another 4-6 weeks to complete the patterns. This isn’t the time to jump in feet first. Pick ‘good’ stocks and maintain appropriate stop-losses. First-timers should avoid individual stocks and regularly invest in units of a good balanced fund.

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 07, 2015

Q1 (Jun ‘15) results declared so far have been less than encouraging, with top line and bottom line pressure visible across sectors. PSU banks continue to disappoint. Auto biggies like Tata Motors and M&M declared weak numbers.

Modi’s “Make in India” campaign got a boost with Taiwan’s Foxconn – world’s largest contract electronics manufacturer that supplies to Apple, Amazon, Blackberry, Xiaomi – signing a 5 years, $5 Billion investment deal with the Maharashtra government.

As per provisional figures, FIIs were net buyers of equity worth Rs 930 Crores last week. DIIs were net sellers of equity worth Rs 410 Crores. Both Sensex and Nifty closed marginally higher on a weekly basis, but failed to cross above resistance levels.

BSE Sensex index chart

The daily bar chart pattern of Sensex traded with a slight upward bias between the two up trend lines (drawn on the Sensex chart last week). The index is trading above its three EMAs in a bull market, and may be forming a bullish ‘rounding bottom’ or ‘cup and handle’ pattern.

That is good news for bulls. Three of the four daily technical indicators have turned bullish. MACD has just crossed above its signal line in positive zone. ROC has moved above its 10 day MA and entered positive territory. Slow stochastic has risen above its 50% level.

RSI has failed to enter bullish zone, and is moving sideways below its 50% level. Sensex is still inside the ‘support-resistance zone’ and needs to cross above 28800 with good volume support for bulls to regain full control.

Expect bears to put up a fight to defend the 28800 level. Stay invested.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty received good support from its 20 week EMA intra-week, and bounced up with good volume support to close about 30 points higher on a weekly basis.

The index is trading above its two weekly EMAs and the blue up trend line in a bull market, but failed to cross above the ‘support-resistance zone’ between 8180 and 8630.

Nifty may be in the process of forming a ‘rounding bottom’ or a ‘cup and handle’ pattern. If either pattern plays out, the index can break out above its lifetime high of 9119 (touched in Mar ‘15). Note the bullish ‘saucer’ pattern being formed by the 20 week EMA.

Weekly technical indicators have turned bullish. MACD has crossed above its signal line in positive zone. ROC is moving above its rising 10 week MA in positive zone. RSI is rising above its 50% level. Slow stochastic has entered its overbought zone after 5 months.

Bears may try to defend the resistance zone between 8630 and 8670 (the technical significance of the two levels were mentioned last week). But it is looking like a lost cause.

Bottomline? The bar chart patterns of Sensex and Nifty appear to be forming bullish continuation patterns. Long-term trends are bullish. If you wish to enter now, do so gradually. Pick ‘good’ stocks and maintain appropriate stop-losses. First-timers will be better off by regularly investing in units of a good balanced fund.

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 10, 2015

News on the manufacturing front remains indifferent. The IIP number for May ‘15 was 2.7%, compared with 5.6% in May ‘14. The Apr ‘15 number was revised downwards to 3.4% (from 4.1%).

As per provisional figures, FIIs and DIIs were both net sellers of equity during the past week. FII net selling was worth Rs 900 Crores; DII net selling totalled Rs 180 Crores. Sensex and Nifty closed lower for the week.

A Greek bailout is being negotiated. China’s stock market intervention has stopped the fall. Monsoon rains have been fairly widespread. Three concerns for the market are out of the way.

Q1 (Jun ‘15) results will provide the next trigger. Expectations of good results are muted. Any positive surprises from companies will boost their stock prices.

BSE Sensex index chart

The daily bar chart pattern of Sensex crossed and closed above the 28100 level (which is at the middle of the ‘support-resistance zone’ between 27350 and 28800) during the first two days of the week, but formed a small ‘reversal day’ pattern on Jul 7 ‘15.

The subsequent correction found good support from the 50 day EMA. The index has formed a bullish pattern of ‘higher tops and higher bottoms’ from the low of 26307 (touched on Jun 12 ‘15).

Daily technical indicators have corrected overbought conditions, and are looking a bit bearish. MACD has just crossed below its signal line in positive territory. ROC is below its falling 10 day MA, and is trying to emerge from its negative zone. RSI and Slow stochastic have slipped below their respective 50% levels.

Expect some consolidation as the market digests Q1 results.

NSE Nifty 50 index chart

The following comment was made in last week’s post on the weekly bar chart pattern of Nifty: “The possibility of a pullback towards the down trend line (or even a drop below it) can’t be ignored.”

The index did pullback to the down trend line, and formed a ‘reversal week’ pattern (higher high, lower close) – breaking the sequence of three straight higher weekly closes.

Strong volumes on down weeks show that bears are active. However, the index is trading above its rising 50 week EMA in a bull market. That means, the pullback is providing an adding opportunity.

Weekly technical indicators are giving mixed signals, hinting at some consolidation before the up move can resume. MACD and RSI are in bearish zones, while ROC and Slow stochastic are in bullish zones.

Bottomline? The down trends on BSE Sensex and NSE Nifty charts have ended, but bears are still active. Both indices are back in bull territories. Stay invested, or add to existing portfolios. If you are planning to enter the market for the first time, choose a good balanced fund and gradually build up your capital. Leave stock-picking to expert fund managers.

(Note: Are you looking to add good quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2015.)

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 03, 2015

A dark cloud hanging over global stock markets is the Greek referendum on whether to accept austerity measures proposed by ECB and IMF, or not. As per opinion polls, there is a 50-50 split between ‘Yes’ and ‘No’ votes.

The Greek government has been campaigning for a ‘No’ vote – which can have repercussions on the stability of the Euro zone. Some of the backlash may temporarily affect the Indian market, though the possibility of a ‘No’ vote has been largely discounted.

Reports of increase in government spending, unlocking of stalled projects, a decent monsoon so far, announcements of big-ticket schemes like Smart Cities, Digital India, solar power and irrigation helped to boost bullish sentiments.

FIIs turned net buyers of equity worth Rs 1000 Crores during the first three trading days of Jul ‘15, as per provisional figures. DIIs turned net sellers – with their selling totalling just under Rs 400 Crores. Both Sensex and Nifty closed higher for the third week in a row.

BSE Sensex index chart

In last week’s post on the daily bar chart pattern of Sensex, “…a pullback to the down trend line or, even below it to the 200 day EMA” was mentioned as a possibility. The index did just that on Mon. Jun 29 ‘15, but bounced up to close above its three EMAs and the down trend line in bull territory.

The 28100 level – which is right in the middle of the ‘support-resistance zone – is providing a bit of resistance. This is one of those ‘coincidences’ that frequently appear on price charts, and make technical analysis an interesting pursuit.

The 20 day EMA is about to cross above the 50 day EMA. All three EMAs have started rising, and the index is trading above them in a bull market. There may be technical headwinds ahead, but the correction from the Mar ‘15 lifetime high seems to be over.

Daily technical indicators continue to look bullish and overbought. MACD is rising above its signal line towards overbought territory. ROC is looking a little weak by correcting from its overbought zone and crossing below its 10 day MA. RSI and Slow stochastic are well inside their respective overbought zones, but not showing much upward momentum.

The index appears to be waiting for the outcome of the Greek referendum and Q1 (Jun ‘15) results to resume its up move. Overbought conditions may lead to some consolidation or correction.

NSE Nifty 50 index chart

The following remarks appeared in last week’s post on the weekly bar chart pattern of Nifty: “Expect another interesting fight for dominance between bulls and bears next week – with bulls having a slight advantage.”

Note that the index dropped lower during the week to test support from the lower edge of the ‘support-resistance zone’, but bounced up strongly to close well above its two weekly EMAs and the blue down trend line.

Is it time to celebrate for bulls? The week’s smaller volume bar suggests otherwise. Any upward break out (in this case, above the down trend line) should be accompanied by an increase (and not a decrease) in volumes.

The possibility of a pullback towards the down trend line (or even a drop below it) can’t be ignored. Since the index is trading above its two weekly EMAs in a bull market, any pullback can be used as an adding opportunity.

Weekly technical indicators are turning bullish. MACD is started rising towards its falling signal line, and looks poised to enter positive zone. ROC is showing strong upward momentum by crossing above its 10 week MA and entering positive territory. RSI has just managed to move above its 50% level. Slow stochastic is expected to follow suit.

Bottomline? The 4 months long down trends on BSE Sensex and NSE Nifty charts appear to have ended. Bears are still not out of the game, but are fighting a losing battle. Both indices are back in bull territories. Stay invested. If you have some savings and are itching to enter the market for the first time, start a SIP in a good balanced fund and build up your capital. The stock market can be an expensive teacher.

(Note: If you already have a stock portfolio, and are looking to add good quality mid-cap and small-cap stocks, subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered till July 21, 2015.)

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 26, 2015

The following comment appeared in last week’s post: “Unless FIIs turn buyers, down trends on both Sensex and Nifty charts may not get reversed any time soon.”

As per last week’s provisional figures, FIIs were net buyers of equity worth Rs 445 Crores. DIIs were also net buyers of equity worth Rs 550 Crores.

Sensex has managed to cross above its down trend line (on chart below), while Nifty is poised to do likewise. Monsoon rains have covered the entire Indian peninsula ahead of schedule – so a major market concern is out of the way.

The Lalit Modi fiasco has galvanised the opposition and put the government on the back foot. Hopefully, reform measures will not slow down as a result.

Greece’s sovereign debt problem has not been resolved yet. Only 2 more days remain for the repayment deadline set by ECB and IMF. If a last minute deal is not agreed upon, there will be repercussions in the global economy.

BSE Sensex index chart

The daily bar chart pattern of Sensex overcame resistances from the blue down trend line and the lower edge of the ‘support-resistance zone’ and crossed above its three daily EMAs into bull territory on Mon. Jun 22.

Follow up buying from bulls was missing. The index consolidated sideways within a 330 points range during the rest of the week. Which begs the question: Is the down trend over?

The answer is: Not yet. Why? Volumes (not shown on chart) during Monday’s upward break out were not significantly high. That makes a pullback to the down trend line or, even below it to the 200 day EMA, a possibility.

If the pullback halts at the down trend line or the lower edge of the ‘support-resistance zone’, the subsequent upward bounce will be a good adding opportunity.

Daily technical indicators are looking bullish and overbought. MACD is rising above its signal line in positive territory. ROC, RSI and Slow stochastic are inside their respective overbought zones, but not showing much upward momentum.

Some more consolidation or a correction is likely. Note that the entire down move from the lifetime high touched in Mar ‘15 has been a bull market correction. Analysts predicting doom and gloom and much lower index levels should be ignored.

NSE Nifty 50 index chart

The following comment was made in last week’s post on the weekly bar chart pattern of Nifty: “Unless volumes pick up, Nifty may not be able to convincingly cross above the down trend line.”

Volumes did pick up during the past week – enough to enable Nifty to cross and close above its 20 week EMA in bull territory; but not enough to cross above the blue down trend line. That may give bears an opportunity to regain control.

Weekly technical indicators are still in bearish zones, but showing signs of turning around. MACD is below its falling signal line, but moving sideways just below the ‘0’ line. ROC, RSI and Slow stochastic have bounced up from their respective oversold zones, and showing good upward momentum.

Expect another interesting fight for dominance between bulls and bears next week – with bulls having a slight advantage.

Bottomline? Bulls are on the verge of reversing the down trends on BSE Sensex and NSE Nifty charts. Bears are still in the game, and may try their best to retain control. Both indices are back in bull territories. Stay invested, and be prepared to add to existing portfolios. If you are planning to enter the market for the first time, choose a good balanced fund.

5 mistakes small investors should avoid near a stock market top

The Indian stock market has been in a bull phase since Dec 2011. Nifty had touched a low of 4531 on Dec 20 ‘11, and rose to touch a lifetime high of 9119 on Mar 4 ‘15 – doubling in a little over 3 years.

Can the market rise even higher? Sure it can. Can it double again in the next 3 years? Anything is possible in the stock market – but the probability will be low because of the higher base.

So, expectations of making windfall gains should be moderated. Does that mean that there are no multibaggers left in the market? The market always provides opportunities – but investors need to be patient rather than chase after the ‘next Infosys’ or the ‘next L&T’.

Making huge gains is what motivates small investors to enter the stock market. But more important than making huge gains is preserving capital. The best way to do that is to avoid some common mistakes small investors make near a market top.

Here are five of them:

1. Looking at the Sensex and Nifty levels on a daily basis

Sensex and Nifty should be looked at for determining the long-term trend in the market. An easy way to do that is to look at an index chart with the 200 day EMA superimposed on it. A rising 200 day EMA with the index trading above it indicates a bull market. A falling 200 day EMA with the index trading below it represents a bear market.

Unless you own the 30 Sensex stocks or the 50 Nifty stocks, knowing the precise levels of Sensex and Nifty are not of much consequence and induces needless greed or fear. It is the performance of your portfolio that you need to monitor. Your asset allocation plan should tell you which assets you should buy or sell or hold.

Don’t have an asset allocation plan? Better make one – otherwise your investment decisions will be based on hearsay and gut-feel, which are sure tickets for disaster!

2. Selling in a panic if the market corrects 5-10%

There is a tendency for stock markets to correct when indices hit levels with several zeros in them, e.g. Sensex at 30000 or Nifty at 9000. Many traders (and investors) prefer to sell (or buy) at such levels. Note how call and put options are written at 7600 or 8800 – never at 7562 or 8793!

Corrections are part and parcel of a bull market. Corrections of 5-10% are quite common. These should be taken in stride, and in fact, welcomed as opportunities to add more. If you sell off in a panic, you may either miss the next leg of the up move, or re-enter at higher levels.

3. Getting swayed by economic and/or political news

Various economic and political news – which may or may not affect the stock market – flow into the market on a daily basis. Some companies win a few coal blocks in the auction – their stock prices go up. The IIP number is lower than expectations, the market falls.

The trick to avoid getting influenced by news is to realise that the effect of most news lasts 2 to 3 days at most. Things return to normal soon. It is the actual performance of the companies you own (yes, you own a small ‘share’ of the company whose stock you purchase) that matter over the longer term.

4. Buying ‘cheap’ stocks because the good stocks are ‘too expensive’

Regardless of when you enter the market, good stocks will typically trade at a premium. This is more so near a market top. If a stock is trading at a ‘cheap’ valuation, there is usually a very good reason for it to do so. Remember that ‘cheap’ stocks have a tendency to get even ‘cheaper’ – often just after you buy a large chunk of it!

If you are not an expert stock picker, and are confused about which stocks to buy during the ongoing correction in the market, choose a good diversified equity fund or a balanced fund. And keep investing your surplus savings in the fund regularly. After a few years, you will be amazed at the fortune you have generated with very little effort.

5. Holding on to your losers in the hope of getting back your ‘buy price’

If your portfolio has losers – don’t feel ashamed or blame your luck. Despite careful selection processes, stocks fail to perform as per expectations or lose money.

The big mistake – and this is perhaps the biggest cause of loss for most small investors – is to keep holding on to the losers in the hope of getting back your ‘buy price’. If a stock is losing money near a market top, it is unlikely it will ever make any money. Remember that the market doesn’t care about your ‘buy price’.

The best time to get rid of your losers is near a market top – when you may still find a buyer for them!

New to investing? Try a balanced fund

The stock market is hitting new highs on a regular basis. Many stocks are touching their 52 week or lifetime highs. New and astonishingly higher targets for Sensex and Nifty are being floated by market experts in a mad scramble to outdo each other. A frenzy of bullishness is being built up – but for whose benefit?

If you are a new or first-time investor in the market, it won’t be surprising if you are getting caught up in the frenzy. With stories of fantastic multi-bagger returns from unknown stocks doing the rounds, getting the ‘left behind’ feeling is quite natural. Who doesn’t want to get on the bull bandwagon and make a ton of money in quick time?!

Jumping in feet first into the market is precisely what stock brokers and market experts want you to do. Brokers make money on the number of transactions they do. The more the merrier. Market experts have bought at much lower levels. They want to dump their holdings on to unsuspecting novices at higher prices.

What should a small investor do? In a sensible article published in Business Standard, new investors have been advised to take a look at balanced funds. The advice is sound. The growth option is often preferred by young investors. The dividend option is safer – as it acts like partial profit booking when NAVs become too high.

Related post

Should you invest in Balanced Funds?

Nifty chart: a mid-week update (Oct 23, ‘13)

What a difference FII buying makes! Less than two months back, market sentiment was at rock bottom. FIIs were selling and all analysts and experts were predicting significantly lower levels for Nifty. Bulls seemed to have turned tail and were running away in sheer panic.

As soon as FIIs started buying again, shorts got trapped and market jumped up sharply. Now all bearish analysts and experts have not only turned bullish, but are predicting life-time highs for Nifty before the end of the year.

After touching a new 52 week high, the index is expectedly letting off some steam. Periodic corrections in a bull market improve the technical ‘health’ of price charts by eliminating froth and gathering strength to rise higher. So, should you buy, sell or hold?

The answer to the question is: It depends. On what? On your state of investment maturity. If you are new to the stock market, stifle your impulse to jump in. Markets tend to get jittery near new highs – simply because those who entered at a previous high are staring at a big loss and want to escape in a hurry. Use your savings to invest regularly in a good balanced fund and build up your capital over the next 3-5 years.

If you have invested in the market for some time, but have a penchant for accumulating unknown mid-cap and small-cap stocks – use the current sector rotation to get out and invest in a few good large-caps that are still reasonably priced. Like? Hindalco and TISCO come to mind.

If you are a seasoned investor and have a proper asset allocation plan in place, your plan should tell you what to do. What are the technical indicators saying? Three of them – MACD, RSI, Slow stochastic – are inside their overbought zones and showing signs of reversing. ROC is not in overbought zone, but displaying negative divergence by failing to touch a new high with the index.

Expect some more correction, but remember that many global stock indices are at or near life-time or 52 week highs. That is a sign of a global bull market.

Is this a good time to buy stocks/funds/gold?

Many small investors must be thinking about this question. Anecdotal evidence from the emails and comments I receive suggest as much. The answer is quite simple: It is a good time to buy if you have the money.

Experts will tell you that timing the market is not a sensible approach to investing. It is how much time you spend in the market that counts. That is because most small investors are happy to book small profits, and miss out on the big profits that can be made by holding on for the long-term.

So, why is Jim Rogers, an acknowledged guru of the commodity markets, advising caution about buying gold; and ace stock market investor, Rakesh Jhunjhunwala, suggesting that it isn’t time for bottom fishing yet? Why this apparent contradiction?

The dichotomy arises due to the different viewpoints of two different groups of investors. For the multitude of inexperienced retail investors, timing the market is not recommended. They just do not have the knowledge to put together all the little pieces of a vast economic jigsaw puzzle. Professional investors like JR and RJ know what they are doing, and can go in and out of markets with surgical precision.

When our Finance Minister said that the recent fall in stock prices was a result of western disturbances and had nothing to do with India, he was deliberately speaking a half-truth to try and prevent a bigger crash. Why? Because uncontrolled inflation and consequent hikes in interest rates had already slowed down the profit growth of India Inc., and pushed the stock market into a down trend.

Resolution of the economic crisis that gripped USA and Europe through tough policy measures by central banks was postponed by rounds of quantitative easing and bailouts. Now the sovereign debt problems are coming home to roost.

Global stock markets, India included, had a heady rise from the bear market lows of Mar ‘09. It is time for a reality check, and the picture isn’t pretty. No wonder gold prices are shooting through the roof, as fearful investors are dumping stocks and funds to buy the yellow metal.

The good news is that the Indian economy is in far better shape than those of the developed countries. Growth has slowed, but remains strong. However, inflation is still rising. Another couple of rounds of interest rate hikes are almost a given. That means more pain for investors in stocks and mutual funds in the near term.

But, as I mentioned in the beginning, if you have the money and a long-term view, this is a good time to buy. Don’t bet the barn. Invest 20% of your available surplus every month for the next 5 months. Things should start improving by then. Avoid individual stocks if you haven’t mastered stock-picking skills. Split your investments between a good balanced fund (like HDFC Prudence or DSPBR Balanced) and a good large-cap fund (like HDFC Equity or DSPBR Top 100).

I’m not a great fan of buying gold, because it gives no regular returns. The flight to gold is assuming panic proportions, and panic buying leads to severe corrections. If you must buy gold, buy a gold ETF during the next price dip.

Related Posts

"Time in" vs. "Timing" the market

Should you invest in Balanced Funds?

Gold and Silver Chart Patterns: divergent directions

7 steps for selecting a mutual fund portfolio

For most small investors, the best way to get your feet wet in the stock market is to build a mutual fund portfolio. Why? Because there are a bewildering array of stocks traded every day. Stocks classified under ‘A’ group, ‘B’ group, ‘S’ group, ‘T’ group, ‘Z’ group can confuse any investor. Which ones from among the thousands should one add to one’s portfolio?

Stock selection requires basic knowledge of economics. Understanding concepts of supply, demand, inflation, recession, stagflation, repo rate, reverse repo rate, CRR, SLR, commodity prices, oil price, foreign exchange rates, GDP growth and how they may affect the performance of a sector and individual stocks can be a daunting task that requires perseverance and experience to master.

Then there are accounting concepts one needs to learn. Debit, credit, depreciation methods, inventory calculation methods, deferred taxes, assets, liabilities, capital expenditure, working capital requirements, profit, loss, cash flows, share holding patterns have to be added to an investor’s dictionary.

To make things even more complicated, there are ratios to be analysed and different valuation methodologies, and for those who like to look at graphs and charts – a variety of technical analysis concepts and patterns. (If you are investing in individual stocks without learning and applying most of the above-mentioned concepts, you are probably not making much money!)

There is a simple way to get the benefits of stock investing (beating inflation and getting tax-free returns) without spending a lot of time and energy in mastering concepts that may not come easily to you. Build a mutual fund portfolio. Leave it to the fund managers to do individual stock selections, and let them decide about when to buy and sell. The only downside to buying mutual funds is that you are handing over the control of your investments to some one else, and indirectly paying him for the privilege.

There are several types of funds to choose from. Equity funds, sector funds, index funds, debt funds, hybrid funds, liquid funds, open-ended funds, close-ended funds. Not to forget ETFs. Then there are growth options, dividend reinvestment options and dividend payment options. (The combination you choose should take into account your tolerance for risk, requirement of regular cash inflows and tax savings.)

How to find your way through this bewildering maze of funds and options? Here are 7 steps to build a mutual fund portfolio:

1. Visit valueresearchonline.com. There are many other sites that you can visit, but I have been using this particular site and it provides all the information I need.
2. Scroll down to the ‘Research Tools’ section of the home page. In the ‘Funds Selector’ window, select - Type:Open End; Category: All Equity (Exc. Sector Fund); Returns over: 5 years; Returns: Above 10% Gainers; Ratings: 5 star and 4 star. Click on ‘Get Data’.
3. About 55 funds will get listed. From these choose about 10-12 equity funds based on low expense ratio and double-digit 1 year returns (two right-most columns).
4. Repeat step 2, but with Category: Equity: Tax Planning. Choose 2-3 funds from the list of 7.
5. Repeat step 2 once again, but with Category: Hybrid: Equity-oriented (better known as ‘Balanced fund’). Choose 2-3 funds from the list of 8. You can choose other categories of funds also. This is a suggested list.
6. The number of equity funds in the portfolio should get pruned to 3; and 1 each from tax planning and hybrid for a total of 5 funds – which should be more than enough for a fund portfolio. The pruning will require some work. At the bottom of the home page of valueresearchonline.com is a link list of all fund houses. Click on the ones you have chosen. E.g. if you have chosen HDFC Top 200, click on ‘HDFC’ and then from the bottom of the list of HDFC funds, click on ‘HDFC Top 200’. Scroll down to ‘Portfolio Summary’ and click on ‘View additional holdings information’. List out the top 10-12 holdings. Repeat the process with all the chosen funds in your list. Short-list 2 large cap funds, 1 mid/small-cap fund, 1 hybrid fund and 1 tax planning fund (for less risk, select an index fund instead of a mid/small-cap fund) based on minimum common holdings for maximum diversification. In other words, if three funds have 7 common stocks among their top 10-12 holdings, short-list only one fund out of the three. If you don’t follow this process, your equity holding in the funds may get lopsided towards a few stocks.
7. Visit your nearest broker, fund houses, or CAMS centre to fill-up KYC and application forms (or go online) and start investing regularly.