Market weekly Review - 25th October 2008.

Friends, It has been a long time I am writing and the market has been upside down during the period.  Arguably one of the worst fall of our life time we saw in current month of October. The fall had been colossal.  It may be a subject of endless debate as to what cause this cause of this fall. We can cite multiple reasons like international financial crisis, over valuation. domestic problem resulting from international financial crisis, or etc. One thing I firmly believe that market as a whole knows much more than any individual and therefore price is the best indicator of times to come.  

The question haunting most of us is what to do next. Is it the right time to invest or the market will go down further. Frankly speaking right now giving any technical support levels on index will be fruitless as negative sentiments are too powerful to over come any kind of technical support. 

So I did one exercises to determine the stress level valuation of Indian markets. I got the data form January 99- October 2008.

The stress case valuation of Indian markets have been 10.5X its TTM EPS and a Book value of 2X.  Indian markets have never traded below these levels even during the dot com bust. I be live that Indian corporate are in much better shape and Indian economy is double the size. The gearing ratio is low compared to 99-2000. 

Right now Trailing Twelve Months EPS of Nifty is Rs. 235 so my stress case valuation will be 2450. while the book value for nifty is Rs 1250. and it results into a stress case valuation of 2500.

So if we analyze the market historically the markets should bottom out at these levels and this may a good buying opportunity. But before we jump in the well let us understand few more dimensions and risks of the analysis.

This analysis dose not mean that markets will not fall form here. Markets can correct very severely for example in 1929 Dowjones corrected by 90%. From the top of 6150 we have just corrected 60% so this may not be the end of correction.

I believe that the worst case scenario Sensex can fall upto 8000 and 6250  levels. And for long term investor (3 -5 years) that will be once in a life time buying opportunity. 

If I analyze the risk and return form here the market may fall down by another 20 to 25 % in the worst case but a investor with five year holding period can see his money doubling or tripling.  So the risk reward ratio is at 1:4 or 1:8, which is very compelling.

I don’t expect any sharp recovery. I think price wise correction may be over but we still see time wise correction. I do not mean that a sharp V shape recovery is not possible, We may witness a very sharp pull backs form here but I believe that its better to be prepared for the worst. So I will assume that markets will not move up form these levels for next two years. So the minimum time period I will advise you to invest is Five years. 

I will advise you to buy stocks or companies which have very low debt on its books. Compay with high debt to equity ratio. like Aban Loyd, Tata Steel, Suzlon, Unitech, Hindustan Construction are already bearing the burnt.  

Buy stocks whose business is not going to be affected by economic down turn. For example One company which comes to my mind is Educomp solutions. I believe this company has got fantastic business model and is available at very attractive price. I think this is a must have company in your portfolio.

It will be better to stick with large cap companies as they will be the first to bounce back in the market. I will choose to invest in Nifty Bees. Its an ETF of Nifty. So by investing in Nifty Bees I am investing in top fifty stocks.

Invest in a staggered way. Don’t invest all the money tomorrow. Buy 25%  - 30 % of what you want to invest. If market falls by another 1000 points than buy another 30 %.

Don’t invest all your savings in equities. Equities gives you higher return but with increased risk. so invest prudently and in good stocks. Have some cash and debt investment as per your risk profile.

WHAT CAN GO WRONG FORM HERE.

I think that there is only one scenario in which the markets will remain subdued even after five years form here.  Looking at the current geo political situation it may happen that we may face a large scale global war. If I am not exaggerating the results in case such a situation occurs your entire investments in equity markets will washed away. 

Although the possibility of this happening is very low and right now there may be no reasons to believe that such circumstance can even exist. But things can change very fast so its advisable to be prepared for any circumstances.  I think Gold will be best investment in these circumstances so all investor should have some investment in precious metals like gold.   

To conclude I will borrow words form the legendary asset manager Mr. John Templeton. "Equity is the only asset class where people are happy to buy higher and sell lower".  So let us not get fooled by the current crash. Markets are not going to close down tomorrow.

And remember the words of another legend Mr Buffet, "Be fearful when others are greedy, and Be greedy when others are fearful," It time to be greedy.

Market Weekly Review:- Correction

With reference to my yesterdays blog, I would like to bring to your notice that the trend line I have considered to be broken is still intact as evident from the charts. Only on the breakout form the level of 12900 - 13000 we will wittiness a real uptrend in the market.

Market weekly review 21/04/2008

DOWJONES DAILY CHART

Today I am only presenting a chart of Dowjone Index. As observed form the charts Dowjones have broken above the long term down trend line as well as there has a been a clear break out form the a very bullish pattern of inverse H&S. If the index is able to sustain above these levels the market will be in bullish mode and my next target on Dowjone is around 13500 to 13800 levels. Keeping this into perspective my present view is bullish on Nifty and target is 5200. The view will change if Nifty breaks the support of 4800 on the lower side.

View:- My over all view is Bullish on markets.

Market weekly review 13/04/2008

DOWJONES DAILY CHART
SENSEX DAILY CHART

Today instead of pasting the regular price volume charts, I am using Moving average charts to determine the strength of the present downtrend. The green lines are long term moving averages which symbolizes long term trend of the market, While the rend lines are short term moving averages which signifies short term trend of the market. We can observe that Sensex there is a broad based selling represented by green lines while a narrow buying by traders is also emerging. But unless the short run moving averages represented by red lines crosses over the long term moving averages represented by green lines. A long term up move is unlikely.

Now if we observe Dowjone's chart short term averages are just moving above long term averages. This may prove to be a inflection point form where the market may resume the uptrend but still the cross over is very weak at this juncture and the probability of it proving to be a false breakout is very high (marked by a yellow arrow on charts). A strong breakout will be a definite sign of an uptrend.

Market Weekly Review 6/04/2008

SENSEX Daily Chart

As evident from the daily chart markets are facing strong resistance and during the current week market tested the trend line twice but failed to cross above that. On the down side markets are having a strong support at 15300 which is marked by a blue horizontal line. This is the low which was formed on January 22, 2008. This is the fourth time markets are testing this support.

Looking at the daily chart the view for current week is very much unclear and a lot depends on US markets. Our markets are exhibiting a lack of strength inspite of global markets doing well. According to me markets may test the bottom of 14700 once again. Any break out below 14700 will signal further down side upto 13700 and 12700.

The only positive signal is form Dowjones which had shown considerable strength during current week. If US markets are able to sustain higher level, we will see its effect on our markets. Considering candlestick pattern Dowjones is forming a Morning star pattern in current month which is one of the most bullish pattern observed. Dowjones will show considerable strength if it is able to close above 12800 which will result into major upside for our markets.

Market Weekly Review 31/03/2008

SENSEX DAILY CHART

As per expectation and last week review market made some sharp gain and has nearly hit the target of 5000. I feel that this is only a pull back and and there are very rare chances that this is a start of a new bull run. The market will move up to 17000 and 17500. Further upside is possible only if market can sustain above 17500 levels otherwise probability of a down move is very high.

Gold:- Bull or Bear

Gold Daily Chart

Gold made a high of 13397 and broken off the channel it was moving since last December. My second target on Gold had been nearly achieved and the short term correction had started. According to my counts this is the fourth corrective wave of a larger degree fifth wave. Therefore the last leg of the bull run on gold will start which will take this metal to new highs.

Gold Weekly Chart

From the weekly chart we can observe that Support exists around 12000, 11350 and 10850 leve. The support at 11350 will be crucial as it coincides with the support of trend line. I don't expect gold to go beyond 10800 levels in near term. Therefore Long term Investors can go long on Gold at around 11350 with a stop loss of 10450 and target around 13500 and 15000.

Nifty Weekly Review 23/03/2008

NIFTY DAILY CAHRT

Nifty closed the week at around 4573 level and as observed form the above chart it is trading at the lower end of the downward sliding channel. Many momentum indicators have started showing positive divergences in hourly charts. I expect that market will witness a pull back form the current levels which will go upto at least 4800 levels and 5000 levels. A selling pressure is expected to emerge form there.

DOWJONES DAILY CAHRT

The only positive things for equity markets is that Dowjones has refused to close below 12000 levels for three consecutive weeks which was necessary for a decisive break down of that level. More over Dowjones made a low above its previous low of 11600 levels. Although this may not be a very vital sign of strength but surely it may result into a minor pull back form here will give temporary relief to market. Major resistances for Dow are at 12400 and 12800 levels. Major supports exist at around 12000 and 11600 levels.

Mayhem!!!!! Mayhem!!!!!

NIFTY MONTHLY CHARTBull market has been observed to last for four years. Nifty had also completed four years of bull cycle which started form 2003 to 2007. As I mentioned in my last weeks review that this is the first major correction we are witnessing since the start of this bull market in 2003 and now this correction has turned into a intermediate term bear market.

NIFTY MONTHLY CHART (January 2003)

The first question arises is How long will this bear market last? Since the underlying fundamentals of our economy are very bullish, I expect that this bear market will get over in 8-13 months. I would have expected a shorter period but due to adverse global factors it seems that our market will be in a bear phase longer than warranted.

The second question is how deep will it go? Here if we observe the corrections which occurred since the start of this bull market we will find a trend in the intensity of correction.

First Correction begin in October 2005 the markets fell from high of 8821 to low of 7656 which is 10.25% form the high of 8821.

Second correction begin in May 2006 the markets fell from high of 12671 to low of 8799 which is 30.50% from the high of 12671. Here we may notice that the intensity increases wich every subsequent correction.

This is the third correction and it may go even beyond 30.50%. I expect this correction may go upto 50% i.e. upto 12055.

It’s not that the markets can’t go below 12055. It may go beyond this, but that will completely depend on state of our economy. To the best of my knowledge the underlying fundamentals of our economy are extremely sound and positive for next 3-5 year period. Therefore I expect that this correction will not go beyond 12055 and even if this level is broken it won’t stay below this level for long period of time.

DowJones OR Down Jones

DOWJONES MONTHLY CHART

Its no seceret that Dowjones had borken the four year uptrend which started in 2003. It is a historical observation Bull markets generally last for four years and the Bear market for on an average of one and half year. This cycle largely depends on the underlying macro fundamentals. That is if the underlying economy is more bullish than the uptrend cycle will be longer while down trend cycle will be shorter. US markets they have just ended four years of up cycle and subsequent down cycle which has started may last for one and half year or more depending on the state of underlying economy. Now if we analyze US markets in this light, we may be witnessing the apex of sub prime crisis or we are just few months away form the top (of subprime crisis). I feel that the ongoing sub prime crisis will take at least another eight to ten months to sort out. Looking at charts it is more than certain that Dow Jones will break the support of 11600 and will head further down to 10800 and 10000 levels. This means that there is still a lot more bad news to come form abroad.

Nifty Weekly Review 9/3/2008 - The Onslaught Continues

NIFTY MONTHLY CHART
NIFTY QUARTERLY CHART

The worst fears have come true and the market had decisively broken the 17000 support and is now heading towards 14500 -14000 levels. This is 38.2% retracement of the entire rise form 2939 to 21200. As the rise was meteoric the fall will also be colossal. From the monthly chart it becomes very clear that the market had broken the channel it was in since start of this market rally. The most pessimistic target form here is in the range of 11500 – 12000. Looking at fundamentals of our economy even if market falls to those levels, I don’t expect market to sustain there for long time period.

This is a first major correction since the start of bull market since 2003. There is huge difference between correction of January 2008 and May 2006. Global economy was on much more sound footing during May 2006 and sub prime ghost was not hunting the market. Right now the global scenario is much grimmer rather worse than it was in 2001 or back in 1997. This is a major systematic failure of market in pricing the risk (It resembles to what it was during the systematic failure of 1987) and eventually we all have to pay for it because of integration of financial markets. Sorting out of this mess will take time and therefore, I do not expect the market to resume its northward journey anytime soon. It may take six months or a year before market will be able to cure itself and start moving on fundamentals. But right now markets are moving on sentiments rather than fundamentals and sentiments can take market to any levels. Just as at 21000 our markets were overvalued but still we were trading at that level just two months back similarly, 14000 or 11000 may be an unjustified price for our markets but we may see that level.

Silver lining amidst falling markets

Silver made a high of Inr 26300 and closed at Inr 24890 on Tuesday. This more than double of my expected target of Inr 23000 when I gave a call on silver on 14th January 2008. Silver has moved up by more than 20% form Inr 20500 to Inr 26300. This supports my view of a multi year rally in precious commodities and a gradual decline in Dollar. Just like gold Silver is also looking weak perhaps much weaker and will correct to 23000. Again I will advise investor to buy these commodities at dips with 3 to 5 years time horizon.

Gold :- Prophecy Fulfilled

Barley I have expected before two months when I wrote an article on January 3rd “Gold Way to Safe Future” that gold will hit my price target in two months instead of a year. I have given a buy recommendation on gold at INR 10500 with a target of INR 12500 and INR 13500. Few days back Gold made an all time high of INR 12700. Current chart patterns suggest some weakness in Gold and may correct up to 12000 from here and if the trend line which gives support at 12000 is broken gold may correct significantly in the intermediate term. But, According to me commodities like Gold and crude oil are on multi year rally and they will keep on making significant new highs. But intermediate corrections are inevitable and a trader can use these corrections for his benefits. Any fall form here will be definite buy for a long term investor with 3 to 5 year time horizon.

A Risk Worth Taking

IT seems that 4800 is proving to be very strong support for Nifty. It is the last frontier and if fallen will lead to another carnage in the market. But According to me this moment markets is presenting with a good but a risky opportunity. Tomorrow the market will make a low at around 4800 and one can go long on nifty at these levels with a very strict stop loss of 4750 and a target of 5200 in two to three weeks.

Nifty Weekly Review 03/03/2008

SENSEX WEEKLY CHART

Dowjones was down by 2.5% on Friday closing. Hence it is implied that there will be gap down opening in our markets on Monday. I am pasting the weekly chart of Sensex. We can observe that Sensex is having a strong support at around 17000 levels. Its very important for the market that Sensex do not break this support other wise we will witness another round of sell off in the equities market.

SENSEX DAILY CHART

If we have a close look at Sensex daily chart we can observe the formation of a symmetrical triangle on charts. Sensex is hovering dangerously close to the support levels which exist at around 17300. If there will be a decisive break out form this pattern the only support which exists is at around 17000. Dowjones is looking very weak at this juncture and it seems that there will be another round of selling in the US markets which will in turn trigger another round of sell of in Global markets. If there this proves to be true there will be significant corrections in Indian Markets. The next major support exist at around 14500 levels. The probability of a negative break down can not be ruled out at this juncture so its better to keep your portfolio tilted towards cash allocation. I will also advise traders to keep strict stop loss in all their derivatives position.

Turbulent Time Lies Ahead

On Friday evening the US markets took very ugly turn and it corrected by 2.5%. From the above chart we can clearly see that DJ Index found resistance at 12770 levels which is exactly at the resistance line. From the second chart can also observe that 12770 was a very important resistance and it was at this level market made its temporary top during the month of 20th February 2007. We can also observe that the market found support at this same level around 26th November 2007. Failure to cross this level will have a very vital implications for global equity market. The only major support below 12000 is at 11600 and if these supports are broken, we will see the second round of correction in the global equity market.

Dowjones V/S Nifty

DAILY CHART OF NIFTY
DAILY CHART OF DOWJONE.

Weekly CHART OF NIFTY

Weekly Chart OF DOWJONES

I have pasted four charts. The first two charts are daily charts of Nifty and Dowjone. We can clearly see the similarity of pattern in both these charts. Both Charts are forming a triangle after a steep fall. Currently both indices are trading at the upper end of triangle pattern and faces stiff resistance at current levels. Therefore we will see some correction(not very Sharp) in days to come probably withing this week. Triangle is a consolidation pattern and if Nifty is able to sustain above 5400 level(the corresponding level for Dow jone is 12700-12800) we will see some quick gains in both the indices. I expect that there is more than 65 % probability of markets rising in the month of March.

Next two charts represents weekly charts of Nifty and Dowjones respectively. We can clearly observe that Nifty has been successful in closing above 5000 level during last four consecutive weeks. Similarly Dowjones have been able to sustain above the most important level of 12000 since last five weeks. These levels represents a very important long term support level for Nifty and Dowjones. The market will not enter a long term down trend till Indices trades above these levels.

Nifty Weekly Review as on 18 Feb 2008

My last week’s assessment on Nifty was exactly right and market made a low of 4803.60 and after trading around this support level for three days the market turned around. (The short term scenario is very much uncertain. What I feel that there is a higher probability of a relief rally in US and that will give a relief to Indian as well as global markets – From last weeks review) Nifty moved up by almost 10% form the low’s and it closed up by almost 4% form previous week’s closing. This up move in our market was adequately supported by an up move in Dow Jones, which also showed some strength (although not as vigorous as our market) and it closed up by 2% form previous week.

I am pasting the Monthly chart of Nifty here. We can clearly observe that Nifty is taking support at lower band of the channel which lies near by 4800 while 5500 is acting as a stiff resistance. If we carefully observe candlestick pattern, we can observe that the market seems to be forming a Doji pattern this month. So if a Doji pattern if formed (according to me the probability of forming a Doji is very high close to 65-70%) the markets will be range bound for rest of the month I expect the market to close in between 5000 to 5250. So according to me we will still witness very high volatility during the rest of this month. Since this is also a budget month. (Although Budget’s are now merely a shadow of their past and the influence on economy has reduced significantly form what it used to be during controlled regime). Its importance can not be underestimated for a mixed economy like India. Therefore unexpected moves on Charts always remain highly probable.

Will the Fed Rate Cut Save the US Economy.

Let us understand the effect of Fed rate cut on US economy. But before that lets us understand what is Fed rate. Fed rate is the rate of interest at which US banks can borrow form each other. For example if one bank is facing temporary shortage of money to fulfill its reserve requirements it can borrow form other banks at this rate. Fed rate is also an important bench mark which decides the lending rate in the US economy. Something similar to our PLR.

By cutting Fed rate the Federal bank want to ensure that the short term lending rate declines in order to stimulate the short term demand in the US economy in order to save US from recession. As lower rate will induce people to borrow and spend more.

More importantly Fed is cutting rates to stem the current wave of foreclosures in US housing markets and to save the US financial institutions form going default because of the loss form sub-prime mortgages. Because of decrease in Fed rate the Housing loans EMI will reduce and more people will be able to afford to make payments and this will result into decrease in housing foreclosures.

Now here a question arises that the Fed had cut rate form 5.25% to 3.00% and still the loss form housing foreclosures had increased manifold instead of decreasing as per the argument. The reason behind this is that monetary policy has lag effect on economy. It will take 6 months or even 9 months for the effect of a rate cut to filter into economy and to kick start the process. But during this time the pain is inevitable. Although there is a huge fear of inflation going out of control I support the decision of Fed to cut rates to save the financial world form getting into Chaos. The effect of a big institution in US going default on the world economy is unimaginable. It may create a global turmoil which may take years to get shorted and the entire global financial system is at a grave risk of breaking down. Compared to this the risk of inflation although great is not as grave as risk of Financial system breaking down.

Although I believe that because of present cut in Fed rates the situation of housing markets will improve form here in next coming 6 -9 months but unlike the previous time fed may not be able to save US economy form recession. The only effect of Fed rate cut is that Fed will be able to save the financial institution and financial system form breaking down.

Before exploring into the reasons why the Fed won’t be able to save US form recession just like other times I would like to give you a brief facts sheet about US economy.

1. The US GDP is around 13 trillion US dollars.
2. The US GDP constitutes 20% of the Global GDP.
3. US population is around 220 million people which is roughly around 3.5% of global population.
4. US consumes around 48% of Global natural resources.
5. US is the largest borrower in the world. It borrows around 700- 800 billion dollar annually.
6. US consumes 22 million barrels of crude oil daily which is roughly 25% of global production.

Here we can clearly see reason for the affluence of Americans, 3.5% people of the world are consuming 48% of global natural resources and 20% of global GDP is dependent on them, and they are sustaining their higher standard of leaving by borrowing form the world. In order to consume more and more they keep on printing US dollars and the world accepts that value in each new dollar which is being printed.

I will give you a small example to make things clear. There is small village with only one shop keeper (representing the rest of world) who produces and sells all the goods and services. And there is only one wealthy man who buys all the goods and services produced. Now what is happening here is that the shop keeper has to sell its goods and services and there is no buyer expect that one person. So if that person don’t have cash to pay for Goods and services the shop keeper lends him money so that he can afford to buy those goods. This way wealthy man is able to consume the goods by only giving a promise (in the form of Debt) to pay in future.

This is a big paradox. Because the Wealthy mans ability to repay his debt is limited and sooner or latter the shop keeper will realize that this wealthy man will not be able to repay him and he will stop giving loans to him and he will stop consuming there by reducing his standard of living.

This is what is happening on the global scenario. Sooner rather than latter people will realize that US ability to repay the loans is limited and they won’t give them cheaper loans. The US will have to pay high rate of interest in order to take loans, so they will take less loan and decrease their consumption which will put their economy into recession. Or they will have to increase their exports and falling value of Dollars is good for their export sector as it will make their goods and services more competitive.

Other factors affecting this problem is because of recent large losses because of sub prime the US banks has tightened their lending standards. The cheap credit which was driving the consumption and the economy is not available any more. Moreover the banks have seen considerable erosion in their capital which has limited their ability to take risk and make riskier loans. There has been a complete change in the lending mentality of institutions which are now afraid to make loans to people of questionable credit, so we will see a period of credit contraction which will again lead to a recession in US economy.

What I believe is that recession in US economy is not bad for long term health of global economy. We all know that the world have been excessively dependent on US consumption for growth. The result of it was the US citizen was experiencing a higher standard of living compared to the citizen of country which was producing all the goods and services but was still experiencing a low standard of living. The result of prolong US recession is that the US GDP as percentage of Global GDP will decrease. This will give an opportunity for rest of the world improve the living standards in their own country if they focus more on internal consumption or export to other nation. All thought this sounds very smooth but the adjustment in global pattern of consumption isn’t going to be smooth. The US won’t accept a low standard of living for its citizen and it will do everything possible to preserve its status in the world. It will also be hard for other countries to believe in their own potential and stop looking at US for world growth. There are many assumptions which goes into my conclusion and the most important of them is the Global GDP will still continue to expand and grow inspite of a US recession. I believe this assumption will hold good as more than 60% of global growth is driven by two countries India and China.

Decoupling:- Reality or a Myth.

Most of us are by now familiar with the word Decoupling. While most intelligent minds in the financial world have expressed their opinion on it, I still want to put my perspective into picture. When we see Indian Economy 20% of our GDP is generated form Exports. Out of that if we remove low value added products like petroleum refining and gems and jewellery polishing and Low value IT services. Therefore only 12% of our GDP which constitutes of high value exports will be adversely affected. Out of total Exports US accounts for almost 20% of our total exports. So we can see that only 2.4% of high value added Indian exports are dependent on US. Now even if we are expecting a slow down in US markets, the demand for only these exports will be adversely affected which accounts for only 2.4% of Indian GDP. (Source UBS report)

Here it is clearly evident that Indian GDP is not that dependent of US like China or Taiwan for growth. Much of our growth is domestic consumption driven. Therefore I believe that Decoupling is inevitable. But than why there was a big plunge in Indian markets when US markets felled. The reason behind is market inefficiency. Efficient market hypothesis says that the market price all securities to perfection. The basics assumption of perfect market is that all people have same information and same interpretation. They have same risk and return expectation. This is completely wrong and is not observed in even the most developed markets of the world.

Here we must understand that Decoupling is not a short term phenomena. For last 50 years the world was dependent on US for growth and only recently the world has started decoupling form US. Therefore Decoupling is not going to happen overnight. It will take decades for the results of decoupling to be evident. And the most conclusive evidence of decoupling will the shrinking share of US GDP as a percentage of world's total GDP, while the share of emerging countries GDP will increase as a percentage of World GDP.

As I already mentioned it might take decades for the results of decoupling to be evident but markets are known for their efficiency to price future into present although not to perfection but to extreme. So the markets should have priced Decoupling by now and the value of Indian and other emerging market securities should have skyrocketed. But clearly we are not seeing this happening. And the reason behind this is it’s a long term process. It may take another five years for markets to price the effect of global Decoupling. So if you are a long term investor in emerging markets I believe that the effects of decoupling will inevitably benefit you in the long term. But in short term our and other emerging markets will swing along with US markets and perhaps the magnitude of the swing will be much more than it is in US. And this is the reason for nifty to fall by 30% compared to a 20% decline in US.

I was grossly wrong on my assessment of Nifty on 14/01/2008. (I still expect the markets will continue to show strength and there will no major correction in the front line Indices. Although market may consolidate at these levels for this current week and resume the upward journey form the next week. From Nifty weekly Review as on 14/01/2008) On the contrary markets lost more than 10% in that week and the fall was even worse in the next week. But my assessment of the global scenario was fairly right and Dowjone Index fell to 12000 and made of low of 11640 levels before bouncing back to 12764. Currently it is trading into range form 12800- 12000. As per my expectation there was global sell of in equities in all the major markets of the world. (Refer to my last blog on Will Dowjone Spoil the party on 14/01/2008). If I got the global situation right than what went wrong with my analysis of Nifty. I underestimated the impact of global sell of on Indian markets. Since Indian markets were showing extreme resilience till then, I expected that to continue in the face of adverse global situation which was contrary to my own expectation that money will flow out form Emerging markets at lightening speed. This was a valuable lesson to be learnt. But as Warren Buffet says "The market like Lords helps those who helps themselves, but unlike Lord the market don’t forgive those who don’t know what they are doing."

Current Scenario:-

I am pasting long term quarterly chart of nifty. From the chart we can observe that the markets are trading at the most important support zone since the rally started in 2003. And if this uptrend has to continue the market must not trade below 4800 levels for considerable period of time. Now the question arises will this happen. The answer lies in Dow Jones and American economy. I am afraid that Dow chart is still looking very scary and if the down trend has to reverse Dow Jones must not break below 12000 levels. I am expecting a relief rally in US markets sooner or latter. We should also remember the fact that US markets had already fallen by 20% form its recent peak and now are trading at a P/E of 14 -15. Which don’t look terribly over valued. Although I accept that there are very serious problems with US economy and the recession is unavoidable and it will be good for the world economy in long term. But the short term pain is inevitable and we have to bear with that. We should also remember that US companies generates revenues not only form US but form across the globe. Companies like Qualcom or Intel which generates 50-75% of revenue form outside of US are available are really attractive levels.

The short term scenairo is very much uncertain. What I feel that there is a higher probability of a relief rally in US and that will give a relief to Indian as well as global markets. But on the contrary if 4800 is broken on Nifty than there can be a further fall upto 3700 levels. Now only time can tell the markets will turn.

Small caps and mid caps had washed out of all the gains they have made since last one year. And fundamentally good stocks are also available at attractive prices. But looking at the global uncertainty I will advise traders and short to medium term investors to stay away from them. Even long term investor should consider keeping their 25% of portfolio in Cash to take benefit form a potential fall in the markets.

Gold at All time Highs What about Silver???

Since my last article on Gold dated 03/01/2007, Gold had Rallied more than 5% and is making new highs every day. Although there may be a intermediate corrections but I am very bullish on long term and I expect gold to reach at 1400$ level that will be equivalent to RS 15000 - Rs 16000.

Silver which has been a laggard till now had also caught up very well with the trend and had gained by 5% in last weeks. Silver is also looking very Bullish on charts and I will advise Investors to remain long. I expect silver to touch 23000 RS in coming weeks. Any dips can be used to accumulate these commodities whith long term view in mind.

Will Dowjones Spoil the Party

I am pasting two charts of Dowjones. From the Quarterly chart we can observe that the uptrend which started in 1990 is being tested currently. We can clearly observe that the trend line of that uptrend is being challenged and candlestick pattern is looking really week for current quarter. 12000 -12600 is very crucial level for Dowjones and if Dowjones stay below these levels for a considerable period of time there can be a big sell off in the US equity markets which will trigger a sell off in Global Equities. Although the faith of investors in Emerging markets had been high and specially so in India since only 20% of GDP is derived form exports in comparison of 40% for China and more than 50% for Korea and Taiwan. But i believe that if there is a global sell off in Equities money will flow form risky assets to safe assets like gold and money will flow away form emerging markets at a lightning speed.

From the Daily chart we can observe that Dow Jones has broken the support line at around 12900 levels and if it fails to recapture the lost territory it may fall up to 12000 levels in days to come.

Whats Happening to Small caps and Mid Caps

This is a Chart of BSE MidCaps/SmallCaps Index. We can see that a rally had started form September 2007 and had continued till first week of January 2008. We can see that the Index had got support at around 9400 levels and the mid cap should bounce back form here. At least there will be a relief rally which will take midcaps to 9750 levels and it may also touch its previous highs of 10200. If the midcap index do not cross its previous highs than there will be another round of sharp correction and the index will again touch 9400 levels. Further weakness will be observed only if midcap index breaks 9300 it may tumble upto 8200 levels which will be a Golden buying opportunity in the midcap stocks. I don't expect Mid caps to surpass this previous highs and in current month.

Nifty Weekly Review as on 14/1/2008

Sensex has given a breakout form a Diagonal Triangle and is showing strength by maintaining itself above 20500 levels which is a crucial support. As per my expectation there has been no major correction in the Large Cap index. (*Although i don't expect the market to correct but it will certainly pause around 6250 levels and any breakout form these levels will see swift gains in the index From Nifty Weekly Review as on 31/12/2007). I still expect the that markets will continue to show strength and there will no major correction in the fornt line Indices. Although market may consolidate at these levels for this current week and resume the upward journey form the next week.

GOLD: - WAY TO SAFE FUTURE

With reference to my previous mail a Global sell off in equities is looking in eminent. The question is only related to the timing. The world gdp has seen its best time in last five years growing at 5% yoy, but is expected to slow down form current year. Fed is cutting interest rates and this resulting into weakness in the value of dollars vis a vis other currencies. Global inflation is rising on the back of record Crude price and Food price. To put things into perspective Wheat prices have risen 70% in last year. China is facing a all time high inflation due to 55% increase in pork prices. India is set to become a net importer of rice form the largest exporter. Historically gold has served as the best store for value to fight inflation. It will also act as a protective asset to fight global sell off in equities markets. If we look at the chart gold has given a tremendously bullish breakout of a round bottom pattern. With one year timeframe in mind the next target for gold is 12500 and 13500. This will result into a cool 25% return on one of the safest investment. I will advise investor to shift at least a part of their investment into gold and other precious metals to wither the possible sell off in the global equity markets.

DowJones:- What Lies Ahead

The global equity markets are looking indecisive. As we all know that America consumes 20% of the world production anything that happens there will have big impact on all other markets. Although exports consist of only 20% of Indian economy and Indian economy is relatively aloof to a global downturn when compared to other Asian economy. But a sharp downtrend in American economy will lead us to sell off in Global equity markets including India. We all know that our market is so much dependent on FII money and any dampening on sentiments will result into FII’s pulling their money out of India and a resultant correction in our markets. Here we can argue that domestic investors are pumping money into the markets but I feel that the domestic demand will be grossly insufficient to arrest the resultant selling. And if markets starts falling domestic investors will be the first to panic and pull out their money.

If we look at valuations currently we are trading between a range of 20-24 times forward earning, China is trading 53 times forward earnings, Hong Kong is trading 16 times, Dow Jones is trading 15 times forward earnings. With the exception of China all other markets are trading at much lesser P/E. Here we can argue that since we are growing at a faster rate we deserve a higher P/E. But we ignore one fact that we are also having a lot of unsystematic risk which stems form weak political system, inefficient government administration and judiciary and other factors. So after adjusting these factors a forward P/E of 25 looks expensive. Although historically it has been observed that bubbles have formed a much higher P/E of 30+ and so we can say that We are not yet into a bubble market, but a bubble in certainly in formation. Moreover US economy looks very frail and may succumb to recession in next few quarters. Oil is trading at all time high of $100 per barrel. All these factors demands caution form equity investors. Just to have a technical perspective of where the Dow Jones is heading I have pasted monthly chart of Dow Jones Industrial Index. Now we can see that a uptrend started in January 2003 and is continuing since then. Historically it has been observed that the secular bull markets last for four years this has also completed four years and so the trend may reverse any time soon. Moreover the trend is very near to the support of its trend line and If Dow Jones falls below 12000 American markets will see a round of Correction. If we remember here Bull Run in Indian markets also started in 2003 and we have also completed four years of our bull run. So putting all these things into perspective I think that we should remain cautious as tough times lies ahead.