Is stock investing risky?

To be able to answer that question, one has to understand the meaning of risk. The problem is: there is no clear cut definition of risk, or the best way to measure risk.

Volatility is often considered a measure of risk - particularly by inexperienced investors. But seasoned traders thrive on volatility and make most of their money from it.

One often thinks of a bank fixed deposit as 'safe'. Why? Because there is very little chance of losing your principal amount. 

Compared to a bank fixed deposit, stocks seem more 'risky'. Why? Because during a bear phase the price of a stock can fall below the price at which it was bought.

Many small investors fall into the trap of such a simplified view of risk and choose the 'safe' option. What they fail to realise is that safety also comes at a price.

Returns from fixed deposits are taxable and subject to fluctuations in interest rates. A 3 years deposit earning 8% interest may seem like a good safe return, but the real rate of return is only 2% if inflation is 6%.

There are a couple of ways that risk can be reduced when investing in stocks. The first is by diversification: (i) across market capitalisation, i.e. investing in a mix of large-cap, mid-cap and small-cap stocks; and (ii) across sectors, i.e. buying stocks from auto, pharma, FMCG, financials, etc.

The second is by portfolio diversification through investment in different asset classes, like stocks, funds, fixed income, gold.

Another way to reduce the riskiness of stock investing is by learning the basics of technical analysis. 

While fundamental analysis is a must in understanding the financial robustness and competitive advantage of a company, technical analysis provides signals of when to buy, when to sell and when to sit tight.

Plus, the concept of a 'stop-loss' allows an investor to exit with a smaller loss when a stock's price is tumbling down.

If you are not adept at picking stocks, you can still invest in stocks and diversify your portfolio by buying units of different mutual funds.

By choosing the 'dividend option' in a fund, risk is reduced because the periodic dividend payments act as partial profit booking and freeing up some cash that can be utilised elsewhere.

So, the answer to the question is: No - provided you know what you are doing.

To learn more about risk, here is an interesting article from investopedia.com.

Nifty chart: a midweek technical update (Aug 10 '16)

RBI Governor kept interest rates unchanged, as was widely expected by economists and analysts. Dr Rajan's policies have kept inflation under control, helped to clean up balance sheets of PSU banks and put the economy back on the growth track.

Government's robust tax collections during the Apr-Jul '16 period is a clear sign of improved economic activity. Direct tax collections grew 24%. Indirect tax collections grew an even more impressive 29%.

During the first three trading days this week, FIIs were net buyers of equity worth Rs 1700 Crores, as per provisional figures. DIIs were net sellers of equity worth Rs 2200 Crores.

Nifty touched a new 52 week high of 8728 on Aug 9, but has once again corrected down to seek support from its rising 20 day EMA. Will the index bounce up again, or will it correct some more?

Note the following comments from last week's technical update on Nifty: 

"If the index falls below its 20 day EMA, it can drop quickly to the support zone between 8300-8400. Can Nifty fall even lower? Sure it can, but a couple of technical reasons may prevent a fall below 8300. The first is of course continued buying by FIIs on every dip. The second is a 54 points upward 'gap' between 8353-8407 formed on Jul 11. The 'gap' area can act as a support zone." 

The index had bounced up after receiving support from its 20 day EMA last week, but is once again on the verge of falling lower. Will it be different this time? 

Increase in DII selling, plus lack of any immediate bullish triggers can lead to some more profit booking. All the positives - like good monsoon, decent Q1 (Jun '16) results, passing of the GST bill in parliament - have already been 'discounted' by the index.

Note the 'gap' zone between 8353-8407 marked on the chart. The 50 day EMA has risen almost to the upper edge of the 'gap'. That suggests bulls may start buying aggressively on any dip towards 8400.

Daily technical indicators are still in bullish zones after correcting overbought conditions. But their downward momentum and combined negative divergences (marked by blue arrows) may lead to some more correction. 

Nifty's TTM P/E ratio is still high at 23.44. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone - hinting at more correction.

The current chart set-up does not suggest a deep correction towards 8000 - as suggested by a couple of fundamental analysts. However, the stock market has a knack of doing the exact opposite of expectations.

Nifty is trading above its three EMAs in a bull market. Any further correction will provide an adding opportunity.

So, stay invested, but keep a stop-loss at 8350.

Is the stock market rallying only on hopes of a repo rate cut? - a guest post

Sensex and Nifty had touched lifetime highs in Mar '15. A year-long correction led to both indices touching 52 week lows on Feb 29 '16 - losing 25% from their Mar '15 tops.

The stock market did a sudden volte face from the beginning of Mar '16 - as bears (i.e. FIIs) turned bulls and bulls (i.e. DIIs) became bears. What triggered the abrupt change in sentiment?

Was it belated awareness of market players that the global economy was not doing as badly as they thought? Did FIIs get encouraged by the governments decision of sticking to its fiscal deficit targets? Or, was it a mix of both? 

In this months guest post, Nishit argues that expectation of a repo rate cut by RBI in its policy meeting on Apr 5 '16 may be the real reason for the current market rally.

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The Government recently slashed interest rates on Small Savings, thereby dealing a very big blow to Senior Citizens who depend on interest income. Postal Saving Schemes have suffered big cuts. The whole idea was to bring interest rates in line with Bank Fixed Deposit rates and thus make it a level playing field for banks.

The Government should have excluded special schemes - like the Senior Citizen Savings Scheme and the Girl Child scheme - which were specifically targetted at financially vulnerable sections of the population.

The Government has also committed to stick to its fiscal stability road map. With inflation under control, this has set the stage for a 25 basis point (0.25%) rate cut in the RBI policy meeting on April 5th. Optimists are expecting a 50 basis points (0.5%) rate cut.

Reduced Fixed Deposit interest rates are going to put a lot of people in difficulties - especially those who have retired and depend on Fixed Income.

Repo and Reverse Repo rates are most likely to be reduced by 25 basis points now and 25 basis points in June, depending on the progress of the Monsoon. The markets have rallied based on this. The 10 year Government Bond is trading at an yield of 7.51%, which is the lowest in past several years.

The Government will have to kick start several infrastructure projects if demand has to be generated. Only slashing interest rate is not enough. Road projects are a prime example.

Cheap funds for the banks to lend out are just one aspect. What the Government is ignoring is the social aspect as well of welfare schemes.

A stock market rally based only on expectations of an interest rate cut is a temporary phenomenon. Unless backed by pickup in demand and increased Government spending, the rally will fizzle out.

The Government is helping the RBI cut rates, but the transmission of lower rates to borrowers and huge NPAs of PSU banks need to be factored in. The current market rally should last till the RBI policy. What happens next should be a period of consolidation.

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(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. You can reach him at nish.stockid@gmail.com)

Will Modi kickstart reforms to reverse the bearish market sentiment? - a guest post

Global stock markets have seen one of the most bearish January trading in history. Some experts are calling it a 2008-like bear market.

Bull markets are supposed to climb a wall of worries. The big worries in 2015 were a possible exit of Greece from the Eurozone, tensions in Ukraine and an interest rate hike by the US Fed.

Those worries have been absorbed by the market. This year's worries are a shrinking Chinese economy, continued turmoil in the Middle East and plummeting oil prices.

In this month's guest post, Nishit opines that falling oil prices will be a boon for the Indian economy, and passing of the GST Bill will boost bullish sentiments in the stock market.

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The New Year has begun with a massive fall across global stock markets. It is the China fear factor which is causing investors to take out money and flee. The information about China is nothing new. All this has been known for quite some time. Most selloffs need some trigger and then it becomes self sustaining.

India is well placed due to low crude oil prices. The year 2016 has to be the year of major reform. Major reform means passage of the GST bill in the budget session. If the GST bill goes through then it will be a major sentiment booster for the folks who pour money into Indian markets.

Every bull market has corrections and this is no different. 2016 is also the year of elections in various states where BJP does not have major influence, viz. Tamil Nadu, West Bengal, Kerala and Assam. Whatever they gain out there is a bonus.

The real electoral test for BJP comes in Uttar Pradesh in 2017. This is the last budget where major reform is expected, post this it will be just building on what has been initiated.

The money being pulled out is not India specific but all across the globe. Global risk trade is off and the money will seek safe pastures like US bonds or US markets.

Modi has initiated several reforms in the Power sector, Telecom sector, and subsidies that will benefit India in the long term. There is a game changer which every Prime Minister needs; for Modi it is the GST bill. Modi has aligned the smaller parties isolating the Congress. Now, it is only a question of playing his cards right.

Tax reform is what India needs as major portion of the population does not pay taxes. Increasing service tax is one way of plugging the tax gaps.

Politically, with the Dalit student suicide and various untoward incidents, the Modi Government is being cornered by opposition parties. Elections are won on sentiments and 2016 is the make or break year for Modi.

The current dip is a buying opportunity. It does not take much time for sentiment to turn and the markets to rise again. Even if the markets go in for a longer term correction, good companies will continue to thrive.

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(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. You can reach him at nish.stockid@gmail.com)

Stock Chart Pattern - Balrampur Chini (An Update)

Sugar stocks are not really my cup of tea - though I do add a spoonful of sugar to my evening cuppa. 

The sugar business is cyclical and weather dependent. To make matters worse, policies and prices are subject to frequent interference by the government.

That makes the business unpredictable, and I stay far away from it. But a young, risk-taking trader interested in making quick gains may find sugar stocks attractive.

The 2 years closing chart pattern of Balarampur Chini clearly reflects the cyclical nature of the sugar business. How cyclical? A look at the net profit figures of the past 5 years should suffice.

For year ending Mar '11 and Mar '13, net profit crossed Rs 160 Crores. For year ending Mar '12 and Mar '14, net profit was Rs 6.6 Crores and Rs 3.6 Crores respectively. For year ending Mar '15, there was a net loss of Rs 58 Crores.

Debt/Equity ratio is 1.43. High interest expenses continue to affect the bottom line. In other words, fundamentals do not warrant long-term investment.

But have a look at the returns that a trader could have made. From a low of 36.80 touched on Jan 31 '14 to a high of 85.15 touched on Jun 23 '14, the stock gave 130% return in less than 6 months.

A 15 months long bear phase followed (marked by the blue down trend line). The stock dropped to a closing low of 38.90 on Jun 16 '15 - giving up almost all its gain in one year, but providing good trading opportunities.

After forming a 'double bottom' reversal pattern (marked B1 and B2), the stock price embarked on another bull rally, touching a 2 years high of 87.85 on Jan 13 '16 - giving 120% return in less than 5 months from the low of 39.60 (B2) touched on Aug 31 '15.

The stock is trading well above its rising 200 day EMA in a bull market, but such a sharp rally is unsustainable. 

All four daily technical indicators are looking overbought and a couple of them are showing negative divergences by failing to touch new highs with the stock price.

Get ready for another stomach-churning roller coaster ride. Like I said, not really my cup of tea.

Nifty chart: a midweek update (Dec 02 ‘15)

FIIs were net sellers of equity worth Rs 9000 Crores during Nov 2015, as per provisional figures. DIIs were net buyers of equity worth Rs 8500 Crores. Nifty lost about 135 points (1.6%) on a monthly closing basis.

RBI Governor left interest rates unchanged during the policy meeting on Dec 1. The decision was widely expected, and therefore, came as no surprise for the market.

Auto sales for Nov ‘15 were a mixed bag. Maruti, Hyundai, M&M showed double-digit growth on a YoY basis. Toyota, Honda, Tata Motors showed de-growth. Tractor sales picked up after several months.

The daily bar chart pattern of Nifty touched a higher bottom and rallied past its 20 day EMA, but is facing resistance from its falling 50 day EMA.

The bear phase from Mar ‘15 – marked by the blue down trend line – continues to dominate the chart. Nifty is trading almost 400 points below the down trend line.

The ‘death cross’ of the 50 day EMA below the 200 day EMA in early Sep ‘15 had confirmed a short-term bear market.

However, the index is trading nearly 900 points above its rising 200 week EMA (not shown). The long-term bull market remains intact.

Daily technical indicators are giving mixed signals. MACD has crossed above its signal line in negative zone. RSI is seeking support from its 50% level. Slow stochastic has entered its overbought zone.

Will the US Fed hike the interest rate next week? Will that have an adverse impact on market sentiments?

Nifty may tread water till those doubts get satisfactorily resolved.

Indian economy poised to take off – a guest post

The stock market has been in a down trend for almost 9 months. FIIs have turned sellers. Already some experts are predicting a long bear market.

The economy seems to be in doldrums. Corporate revenues and profits are sliding. Investments are yet to pick up.

Amidst the doom and gloom, Nishit has identified several signs of an economic revival. He enumerates them in this month’s guest post.

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The Indian economy is showing signs of ‘green shoots’ and we are in the take off stage right now. Let us see the leading indicators to see if we are about to see good growth:

1. Fuel consumption has increased which is always a sign of pick up in industrial activity. Goods transport has increased.
2. The Automobile industry is showing signs of revival. When people have money to spend, they buy cars.
3. The Capital Goods space is showing good traction at the moment. Capital goods space always does well when industrial activity increases.
4. The IT industry is showing good results. It has been the sector employing maximum people in last 15 years. Affluence of the new IT middle class will lead to increase in consumption.
5. Low fuel prices mean that a major inflationary pressure is off. I see at least 100 basis points (1%) cut in interest rate over the next one year.
6. Low Interest regime is conducive to growth. Borrowings increase, industrial activity increases. It is a self-feeding economic cycle. The interest cycle has yet to bottom. The bottom of the rate cut cycle often coincides with a bull run taking place. In March 2009, the rates bottomed and the markets picked up.
7. The building blocks are in place for a super bull run for the next 5-8 years. This correction is the last buying. opportunity. I see a scenario similar to the one in 2002-2003. The rest is history.
8. History often is a roadmap for the future. With good governance, favourable economic conditions globally and conducive domestic growth factors, this is a Black Swan event.
9. Tax collection has increased. This means there is uniform tax collection. I would say increase the Service Tax t o 16% so all bear the burden and reduce Income Tax slabs, do away with exemptions, simplify the tax structure.

We all know what happens when a Black Swan event happens. Nifty may go down to 6800 to 7200, but eventually we are headed to 10500 minimum on the Nifty and over the next 10 years we may even touch 18000 to 20000 - which will be the end of the super cycle as per Elliot wave analysis. Nations take birth, grow, mature and fail. This is true for everything in life, the time span differs. India’s time is now. The next 10 years will be India’s golden age and the party is just about to begin.

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(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. You can reach him at nish.stockid@gmail.com)

Will the likely interest rate cut by RBI be a non-event? – a guest post

Will he, or won’t he? That seems to be the question. Experts of different hues are expecting a 25 bps (0.25%) interest rate cut by the RBI Governor. That means, there will be no positive surprise for the stock market if the rate cut does come through.

There is also a possibility that the RBI Governor maintains status quo. That will be a negative surprise for the market and initiate a sell-off.

What if the rate cut is 50 bps or higher? The probability of that – based on Dr Rajan’s track record so far – is low. But it will be a definite positive surprise for the stock market.

In this month’s guest post, Nishit explains why the three tranches of interest rate cuts by Dr Rajan has failed to stimulate the Indian economy, and why he doesn’t expect the RBI Governor to be dovish in his announcement.

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Over the past few weeks, the impression given in the media is that an interest rate cut by RBI will stimulate the Indian economy. This is a wrong picture being portrayed. Tweaking interest rates is just one of the tools for stimulating the economy. More important are tax reforms and simplifying ease of doing business in India.

Implementation of GST will be the single biggest factor for growth of the Indian economy. Now, let us look at the interest rate cuts. Since, January the RBI has cut rates by 75 basis points (0.75%) in three tranches. The Banks have passed on barely 30 basis points (0.3%) to the end customer, citing high cost of deposits. The only exception has been HDFC Bank which has passed on 0.5-0.6% rate cut to the consumer.

What interest rate cuts do is lower the cost of deposits for Banks (has anyone noticed how quickly Banks are lowering fixed deposit rates?), but banks are not passing on the benefit of lower rates to people who borrow from Banks. This will only lead to Banks making more profits.

Also, if the RBI Governor cuts rates at a faster pace and tomorrow inflation rises how does he deal with it? In US the rates are near to 0 and they can stimulate the economy by ‘Quantitative Easing’, i.e. injecting huge sums of money into the economy by printing Bank notes. Is India in a similar position to do so?

Instead, by cutting rates slowly and allowing Banks to first transmit the rate cuts to its borrowers there are two advantages. The Governor gets more time to evaluate the inflation scenario and rate cuts get fully passed on to borrowers.

Hence the drama dutifully played up by television anchors is actually harmful in the long term. Simply cutting rates is  not the solution to all the problems in the economy. If it was that simple the World economy would not be where it is now and the US would not look at raising interest rates.

On Tuesday (Sep 29 ’15) I expect a maximum 25 basis points (0.25%) cut and I would not be surprised if there is no rate cut also.

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(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. You can reach him at nish.stockid@gmail.com)

Add some stability to your stock portfolio with bonds/debentures

For the past few months, the stock market has been all over the place – rising 300 points one day and falling an equal amount a couple of days later. The end result of such gyrations have left Sensex and Nifty with negligible gains since Jan ‘15.

An investment portfolio that is overweight in stocks may have given zero or even negative returns. Though a stock market seldom moves in one direction – even during rampant bull or bear markets – periods of uncertainty and volatility often come as a jolt to small investors.

To ensure a less volatile and more stable investment returns, it is imperative that investors appreciate and understand the need for a proper asset allocation plan. That means, balancing your stock portfolio with fixed income instruments like bonds/debentures.

As per my interactions with many small investors, very few of them fully understand the benefit of bonds/debentures. To most small investors, fixed income instruments mean bank fixed deposit, or Post Office MIS, or NSC.

Debt oriented mutual funds and tax free bonds often provide better post-tax returns, and have the added advantage of being liquid. That means they are more easily tradable.

If you want to learn the ABCs of investing in bonds and how interest rates affect returns, check out a set of links to articles published in investopedia.com:

1) http://www.investopedia.com/articles/bonds/08/bond-market-basics.asp

2) http://www.investopedia.com/articles/bonds/08/credit-invest.asp

3) http://www.investopedia.com/articles/bonds/07/price_yield.asp

4) http://www.investopedia.com/articles/bonds/08/bond-risks.asp

Related Post

How to reallocate your assets

Add some stability to your portfolio with bank fixed deposits – a guest post

The younger you are, the more should be your allocation to equities. Why? Because the longer you stay invested in equities, the greater is going to be your likely returns. Also, your financial commitments are lower when you are younger. So, you can afford to take more risks.

As you grow older, start a family and care for elderly parents, you will need more stability in your investment portfolio and additional cash flow to support your primary earnings from business or profession.

In this month’s guest post, Nishit argues in favour of bank fixed deposits. The downside to bank FDs is low returns which are taxable. The upside is safety of principal amount and facility of regular cash flows through quarterly interest payments. Using some simple investment strategies, the unexciting bank FD can add stability to your portfolio.

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Interest rates are falling. That is being touted as good news for the economy and for borrowers. Lower interest rates mean higher growth and more jobs. More jobs mean more income and more purchasing power. This whole cycle of spending, consumption and growth is likely to be triggered off by the cutting of interest rates by RBI.

RBI has already reduced rates by 75 basis points (i.e. 0.75%), and is further expected to reduce rates by about 1-2% before this cycle is over.

One of the casualties of this rate-cut cycle who goes unlamented is the senior citizen, who depends on fixed deposit (FD) interest for his livelihood. Banks are very quick to cut deposit rates and those FDs which were giving interest of 9.7% have already been reduced to 9%. In fact a study across PSU and Private Banks shows that maximum interest on FD which can be obtained now is 9%.

How does one work around this? To explain the impact, if a senior citizen has Rs 10 lakhs in FD, 9.7% interest gives him Rs 97000 and 9% gives him Rs 90000 per year. How does he make up for this Rs 7000 shortfall?

One way of doing it is locking in FDs for a period of 5 years when the rates are high. 5 years is a sufficient long period for one cycle of rate cuts to play out.

Also, once the rates start being cut, the 2-3 year FDs offer the highest rate of interest. At such times, one can go for such shorter-duration FDs.

The Senior citizen scheme from the Government, which has a 1 year lock in period, still offers 9.3% rate of interest. This rate changes only in April every year. So, one can lock in up to Rs 15 lakhs in this scheme till April ’16.

Next common question is: what about liquidity? What if one needs money urgently then how does one break the Fixed Deposit? A simple option is to break the one giving the least amount of interest. Even this can be circumvented by ensuring and planning the FDs in such a way that one FD matures every 3 months.

To do this, it requires certain amount of planning and the staggering of the FDs. Also, one can plan the FDs in such a way that every month some or the other FD gives interest. Quarterly credit of interest gives the highest returns and by staggering the FDs one can ensure a monthly flow of income while enjoying the higher returns of quarterly Interest.

The protection of capital is a must and only nationalized or top private banks FDs can be considered. This can be spread across 2-3 banks so that the risk of default is minimised.

These are some simple strategies, if followed scrupulously, can give maximum bang for the buck.

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(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. You can reach him at nish.stockid@gmail.com)

Related post

About Asset Allocation – a guest post

Nifty chart: a mid-week update (Jun 03 ‘15)

The stock market had already discounted an interest rate cut of 25 bps by the RBI. It got what it had expected. That should have satisfied both bulls and bears. Instead, bears went on a selling spree. What is going on?

RBI Governor's hints that inflation may start increasing again and GDP growth may be lower than earlier expectations were not well received by the market. Coupled with the possibility of a deficient monsoon were enough reasons for bears to head for the exit door.

During the first three trading days of the month, FIIs have been net sellers of equity worth Rs 1200 Crores. DIIs were net buyers of equity worth Rs 730 Crores. Anecdotal evidence suggests that retail investors have sold heavily. That may explain today's huge volumes.

The daily bar chart pattern of Nifty broke out above its three daily EMAs on Jun 1, but lacked volume support and failed to cross above the May '15 top of 8490. Resistance from the blue down trend line also proved strong.

That was just the excuse that the bears may have been waiting for. Heavy selling has dropped the index below the 'support-resistance zone' between 8630 and 8180 and the 200 day EMA into bear territory. The May '15 low of 7997 may get tested, and broken.

How much further can Nifty fall? There is a support zone between 7700 and 7850. The index may test support from that zone if 7997 gets breached.

Is the bull market getting over? Not yet. The economy is still growing at a better rate than last year. Inflation has been contained. Interest rate is falling - though banks have been reluctant to pass it along to borrowers. These are bullish signs for the longer term. But the market is definitely under pressure in the near term.

Daily technical indicators are looking bearish but not oversold. MACD has crossed below its signal line in negative zone after facing resistance from its '0' line. ROC has fallen to the edge of its oversold zone. RSI and Slow stochastic have dropped below their respective 50% levels. Some more correction seems likely.

Stay invested. This may be a good time to start accumulating some good large-cap stocks that have corrected more than the index.

Is the stock market defying conventional logic?

Interest rate has started coming down. So has inflation. WPI inflation is actually negative. IIP number is positive and inching up – indicating manufacturing growth.

Forex reserves are at an all-time high. Sales of medium and heavy commercial vehicles are rising – which is an indication of a recovering economy. Passenger car sales grew after 2 years of de-growth.

These are all signs of an economy that is returning to a path of growth. As per conventional logic, a growing economy should lead to a rising stock market.

So, why is the stock market defying logic? It is like asking: “Why do mosquitoes sting?”  The answer is: “It is their nature to do so.”

Experts and analysts try their level best to explain the reasons for a market correction. As if they really know.

Some said that expectations of poor Q4 results led to the correction. But everyone has been expecting poor Q4 results for quite some time.

Others said that PSU divestments and IPOs are sucking out cash from the secondary market. Weren’t these same experts saying a couple of weeks back that a lot of ‘cash is waiting in the sidelines’? 

(By the way, ‘cash waiting in the sidelines’ is one of those enduring myths in the market. Unless the cash gets invested in FPOs or IPOs, it always remains in the sidelines. Think about it.)

One talking head on a business channel said: “The market has been boosted by a liquidity driven rally.” Wonder what kind of a rally will occur without any liquidity!

The market has a tendency of going against consensus estimates and expectations. Which increases the probability that Q4 results will throw up some positive surprises.

IndusInd Bank has declared very good results. TCS came out with a decent set of numbers – if you look beyond the one-time bonus payment to employees.

Smart investors look for opportunities to buy during such corrections. That doesn’t mean you need to jump in feet first. Do your homework, be patient and wait for opportunities.

Have you looked at hospitality sector stocks lately? Most small investors are shunning them. The “e-Visa on arrival” scheme should be a huge boon for the sector.

Nifty chart: a mid-week update (Apr 08 ‘15)

RBI maintained status quo on interest rates, and nudged banks to lower their lending rates. Banks had been reluctant to pass on the benefit of RBI’s two earlier 25 bps interest rate cuts to borrowers.

SBI, HDFC Bank, ICICI Bank and Axis Bank have lowered lending rates by a modest 15 bps (0.15%) each. More banks are likely to follow suit. There are some signs of increasing capital expenditure activity – going by recent corporate announcements.

The government has been proactive with its share divestment plan for the new financial year. The REC OFS (offer for sale) went through smoothly. Expect more such offers in the near term.

FIIs have been net buyers of equity worth Rs 800 Crores during the first 4 trading days of this month (though they were net sellers today). DIIs have also been net buyers of equity worth Rs 80 Crores during the same period.

The daily bar chart pattern of Nifty corrected below its 20 day and 50 day EMAs and the Up trend line 2 to the lower edge of the ‘support-resistance zone’ during Mar ‘15.

It has bounced back spiritedly to retrace more than 50% of its 850 points fall. The 200 day EMA continued to rise during the correction – indicating that the long-term bull market was intact.

Nifty has managed to climb out of the ‘support-resistance zone’ with rising volume support – which is a bullish sign. However, Up trend line 2 has not been convincingly crossed yet.

Daily technical indicators have corrected oversold conditions, and are turning bullish. MACD has crossed above its signal line, but is still in negative zone. ROC has crossed above its 10 day MA to enter positive zone. RSI is facing some resistance from its 50% level. Slow stochastic has risen to the edge of its overbought zone.

Bulls still have a little work left. A strong move above 8850 should send the bears packing.

The likely effects of a US interest rate hike on global markets – a guest post

The US economy has been on a revival path for quite some time. The Quantitative Easing programme to stimulate a sluggish economy was gradually tapered off last year. With inflation showing signs of inching up, the stage is getting set for a possible interest rate hike by the US Fed.

Why should that be of any interest to Indian investors? Because the global economy has become a lot more interconnected. A rate hike in the US, coupled with a strong Dollar, may be a signal for FIIs to withdraw money from emerging markets (including India).

In this month’s guest post, Nishit discusses the current economic scenario in the US, and the possible effects of an interest rate hike on world markets.

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World markets were on tenterhooks – awaiting the US Fed announcement of a possible interest rate hike. Why are markets so obsessed with the US Fed decision to hike rates and how does it affect world markets?

The US Fed’s answer to the 2008 economic crisis was throwing cash to plug the gaps. They printed money and called it ‘Quantitative Easing’. Large amounts of money were made available at very low interest rates. This money found its way into many emerging markets, like India, and boosted their stock markets.

The idea was simple: borrow in the US at almost zero interest rates, invest in stock markets worldwide and mint profits. Since the rate of interest was almost zero, the currency risks were taken care of.

Quantitative Easing seemed to have worked and the US economy in the past 2 years has shown signs of recovery and growth. It is no more in recession, jobs are being added and the crutches of stimulus are no longer needed.

The US Fed had to account for this surplus printing of money and as a first step they tapered off the Quantitative Easing programme.

The next step is to hike up the interest rates as easy money can lead to inflation and creation of bubbles. Low interest rates helped to provide stimulus to the economy. Now, when the economy is up and running, the rates have to go up gradually for two simple reasons.

First is to prevent the formation of economic bubbles, and second is to provide room and buffer for providing another stimulus if the economy goes into recession again. After all, one can cut rates only up to zero.

In an isolated scenario this is fine. But in the case of the US - since it is the global leader - this extra money has been invested into various asset classes across the world. If the Fed starts hiking rates, then this money may be withdrawn from the various asset classes and will flow back to the US. The US Dollar has already started strengthening in anticipation of this.

Such a situation can lead to recession in other parts of the globe. Since the global economy is interconnected and the US companies also get a major part of their income from places other than the US, the Fed needs to tread cautiously.

To counteract the likely US withdrawal of stimulus, we have the Japanese stimulus and now the European Central Bank stimulus.

This is one of the anticipated reasons our markets are falling. One needs to keep an eye on how this plays out.

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(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. You can reach him at nish.stockid@gmail.com)

Gold and Silver charts: an update

Gold Chart Pattern

The daily bar chart pattern of gold tried to cling on to the 1200 level for a few days, but the force of gravity (i.e. bear selling) pulled it all the way down to 1150 – where it is trying to find a temporary bottom.

All three technical indicators are inside their respective oversold zones – which may lead to an upward bounce. But this is not the time for bottom fishing. Bears appear to have a stranglehold on the chart.

The next positive trigger for gold bulls may be an expected interest rate increase by the US Fed. No one really knows when that will happen.

On longer term weekly chart (not shown), gold’s price closed well below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones. The Nov ‘14 low is likely to be tested and breached.

Silver Chart Pattern

The daily bar chart pattern of silver breached the support level at 16 and dropped below 15.50. It is trying to find an intermediate bottom at 15.50.

Daily technical indicators are in the process of correcting oversold conditions, but their upward momentum looks weak. MACD is inside its oversold zone, but has stopped falling. RSI has bounced up from the edge of its oversold zone. Slow stochastic has just emerged from its oversold zone.

On longer term weekly chart (not shown), silver’s price is trading below all three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones. A fall below 15 may test the Dec ‘14 low.

5 reasons why the stock market sold off after the surprise 25 bps interest rate cut by RBI today

The budget lacked any populist measures, and laid emphasis on fiscal consolidation. Inflation is on a downward slide. Many experts had expected a second interest cut after the budget. So, why did the stock market fail to celebrate? Here are five reasons:

1) It was a case of ‘sell on news’. Though the timing was a bit of a surprise – as was the earlier rate cut in Jan ‘15 - a second rate cut was expected around March-April. After the initial surge today, profit booking set in.

2) Nifty had touched the psychological 9000 mark on Tue. Mar 3. Today (Mar 4), Sensex touched the 30000 level. When an index is at lifetime high with no known resistances, there is a tendency for traders and investors to book profits when the index reaches a nice, round level (i.e. with several zeroes).

It happens for stocks, too. How often have you waited for a stock to touch 200, or 500, or 1000 in order to book profits?

3) Some more PSU divestments are lined up this month. Cash will be required – particularly by DIIs – to invest, and/or bail-out the issues in case of under-subscriptions.

4) The 25 bps rate cut in Jan ‘15 was immediately followed by a reduction in fixed deposit rates by banks, but the interest rate benefit was not passed on to borrowers. PSU banks in particular have a lot of NPAs/restructured assets on their books. They chose to utilise the rate cut to shore up their books. They may do so this time as well.

5) Last – but not the least – is the realisation by RBI that economic growth is still sluggish on the ground, despite the government’s ‘new formula’ of calculating GDP that indicated a higher growth. And investors didn’t like the confirmation about slow growth.

This is what L&T Chairman Anil M Naik said in an interview to Business Standard: “It’s too little, too late. For the economy to bounce back as against crawl back, you need a cut of another 50 basis points. Not just that, banks have to pass it on. If banks don’t pass on, consumer demand will not come back. Our infrastructure is high-cost because interest rates are as much as 12 per cent for some groups, which make projects unviable.”

Q. E. D.

Did the stock market over-react to the 25 bps interest rate cut by RBI?

The short answer to the question is: Yes. Why?

Low inflation during the past few months had increased the likelihood of an interest rate cut sooner than later. It was widely expected that RBI will start slashing interest rates from Feb ‘15 onwards.

While some experts were touting a 50 bps (i.e. 0.5%) cut, the consensus estimate was a 25 bps (i.e. 0.25%) cut in the repo and reverse repo rates to start with, followed by two or three more cuts - totalling 1% for the calendar year 2015.

In other words, a 25 bps rate cut in Feb ‘15 was already ‘discounted’ in the stock indices. But the surprise announcement by RBI of a rate cut before the stock market opened for trading today was a positive trigger for the market to get out of its consolidation mode.

It was definitely good news. But was it great news? I don’t think so. A 25 bps cut in the repo rate means that the rate will drop to 7.75% from 8%. That means the corresponding lending rate to companies by banks will drop from say 12.5% to 12.25%, and home loan rates may go down from 10.75% to 10.5%.

Will that cause a stampede towards banks by companies, or towards housing finance companies by home buyers, from tomorrow? Highly unlikely. Companies or home buyers don’t take decisions about large investments merely because interest rates go up or down by 0.25%.

Why then did Sensex gain more than 700 points, and Nifty move up by 200 points? Those holding shorts had to rush to cover. That gave the initial impetus to the market. Technically also, Sensex and Nifty were poised to break out from consolidations within ‘symmetrical triangle’ patterns. The surprising rate cut news provided a positive trigger to bulls.

So, did you miss buying today? Not to worry. Many others did too. And remember that one day doesn’t make or break your ability to make money.

When realisation dawns on market players that today’s buying was a bit overdone, profit taking will emerge. The likely dip can provide an entry point.

Things are getting in place for stronger economic growth. Today’s rate cut was a small step in the right direction. This bull market will be ascending new heights again.

Related Post 

How to use Financial News

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 05, 2014

Sensex and Nifty indices took a much-needed breather after rallying for six straight weeks. FIIs were net buyers of equity worth Rs 850 Crores during the week, but were net sellers on Monday and Friday. DIIs were net buyers on Friday, but were net sellers of equity worth Rs 1170 Crores during the week.

As expected by most market analysts, the RBI Governor left interest rates unchanged – but kept the door open for a rate cut early next year if inflation continues its downward trajectory. Some banks have reduced their longer term fixed deposit rates, as there seems to be adequate liquidity in the banking system.

A 5% equity disinvestment by the government in SAIL got oversubscribed by 2 times. More disinvestments are in the pipeline – including 10% in Coal India and 5% in ONGC – in the current fiscal year ending Mar ‘15. The divestments, and sliding oil price should help in considerably reducing India’s twin deficits.

BSE Sensex index chart

 

Sensex consolidated sideways and closed 0.82% lower for the week. Negative divergences in all four technical indicators – observed in last week’s analysis – had provided advance warning of a possible correction or consolidation. Some investors were disappointed by the lack of an interest rate cut by the RBI, and resorted to profit booking.

Daily technical indicators have corrected overbought conditions, and are still in bullish zones. But their downward momentum is hinting at a continuation of the consolidation. The index has formed a small ‘double top’ pattern that can lead to a test of support from (or a drop below) the rising 20 day EMA.

Sensex is trading above all three EMAs in a long-term bull market. Consolidations and corrections improve the technical ‘health’ of the market and enable adding or entry opportunities. Anticipating corrections and benefitting from them are part of the learning process of becoming a better investor.

NSE Nifty 50 index chart

 

Nifty closed 50 points lower for the week and formed a small ‘reversal week’ pattern (higher high, lower close) that stalled the 6 weeks long rally. The index is trading above its two weekly EMAs and the blue up trend line in a long-term bull market.

All four technical indicators are inside their respective overbought zones. However, three of them – MACD, RSI, Slow stochastic – are either moving sideways or starting to slide down. ROC is the only one showing increasing upward momentum.

Volumes were strong on a ‘down’ week, which means some more selling or profit booking may be on the cards. That may improve technical conditions for the sustainability of the bull rally.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices took a pause last week after soaring to touch new lifetime highs. No need to be afraid of a big crash. Take part profits, or set a trailing stop-loss – if that will help you to sleep better. Riding out corrections in bull markets will help to build wealth for the long-term.

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 28, 2014

Sensex and Nifty indices soared to new lifetime daily, weekly and monthly closing highs on strong buying interest from FIIs, who were net buyers of equity worth Rs 3100 Crores during the week. DIIs were net sellers of equity worth Rs 1300 Crores.

The Q2 GDP number (5.3%) was lower than the Q1 number (5.7%), but higher than the consensus market estimate. That should boost bullish sentiments even if the RBI Governor refrains from proposing any interest rate cut on Dec 2.

In spite of sluggish economic growth, India is in a ‘sweet spot’ among BRICS nations, as per this article. Slumping oil price has considerably reduced our import bill. An interest rate cut – expected some time in Feb-Mar ‘15 – will propel the Indian market even higher.

BSE Sensex index chart

Sensex touched new intra-day (28822) and closing (28694) highs on Fri. Nov 28. The index is in ‘blue sky’ territory with no known resistances. In such a situation, resistance often comes from round index levels. So, the next likely resistance may be 29000.

Note that all four technical indicators are showing negative divergences (marked by blue arrows) by failing to touch new highs with the index. Some consolidation or correction can be expected at any time. There has been no meaningful correction since the index touched its Oct 17 ‘14 low of 25911.

All three EMAs are rising and Sensex is trading above them in a long-term bull market. However, be very selective in your stock picks near a lifetime high.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty again touched new intra-week (8617) and closing (8588) highs, and closed higher for the sixth straight week. A pick-up in volumes augurs well for the bull rally.

All four technical indicators are inside their respective overbought zones. Remember that markets can remain overbought for long periods.

Though valuations look a bit stretched, the index is not wildly overvalued. That means a big correction is unlikely. It also means that one should not get needlessly greedy or fearful. Hold on to your good stocks, and start weeding out the non-performers.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices soared to touch new lifetime highs. Be patient. The bull market is far from over. There will be money-making opportunities along the way.

A re-look at Gilt funds – a guest post

Both WPI and CPI inflation rates have been moving down. However, there are questions whether inflation is low because of a higher base effect. As the base effect wears off from Jan ‘15 onwards, inflation may rise again.

Industrial growth continues to be tepid. India Inc. have been clamouring for an interest rate cut to spur growth. The RBI Governor has so far left rates unchanged till inflation gets firmly under control.

If inflation stays low during Jan-Feb ‘15, then a 25 or 50 bps rate cut in Feb ‘15 is a possibility. That should provide impetus to the stock market and gilt fund returns. In this month’s guest post, Nishit suggests a re-look at gilt funds as a safe diversification avenue for your investments.

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The 10 year Government Security yield has come down to 8.15% from a peak of about 9.10% in April. So, should one invest in Gilt funds now?

Gilt funds offer an interesting diversification from equity and Gold investments. They work best when interest rates are coming down and bond prices go up. For example, if a Rs 100 bond is yielding 9% interest and if the interest rate comes down to 8%, then the same Rs 100 bond will cost Rs 112.50 to yield 8% interest.

So, one stands to make a return of say about 12-13% if the interest rate comes down by 1% in about 6 months.

Inflation is going down and so are fuel prices. An interest rate cut by RBI is expected - if not in December ’14 then definitely in February ‘15.

The Government prefers low interest rates as industry can borrow at lower rates and make more investments leading to more employment and growth in the economy. The Finance Minister has already tried nudging the RBI Governor to reduce interest rates. The fear of inflation re-emerging is what is holding back the RBI from reducing interest rates in a hurry.

Interest rate is expected to come down to 7.75% in the next 4-6 months. Currently it is at 8%.

For those who have already invested in Gilt funds, now is the time to enjoy the profits. Those with a horizon of 6 months also can look at Gilt funds as a measure of diversification. Over the last 3 years, gilt funds have given an annual return of about 10%.

In a complete cycle of top to bottom when the interest rates start falling, they typically give about 25% returns out of which 10-12% have been realised already.

Interest rates usually bottom around 7%. Gilt funds can be used to optimise returns from fixed income instruments and one can invest about 5-10% of total allocated funds for investment.

The risk to Gilt funds arises from interest rates going up and at such times, the funds give very low returns.  For those who want to play the interest rate cycle, gilt funds offer the perfect medium.

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(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. You can reach him at nish.stockid@gmail.com)