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Thursday, September 30, 2010

A really long-term Sensex chart – what signals is it conveying?

Didn’t feel like writing much – was engrossed in the Ayodhya ‘tamasha’ unfolding across various TV channels. Of all the completely useless and unproductive causes that one can think of, this one surely will hold the pride of place!

But this is not a blog about political or religious commentary. It is about the stock market and the Sensex. I took a look at a really long-term Sensex chart, and decided to put it up here. I will try to reveal some of the not-so-secret information emanating from the chart on Saturday. Till then it is the readers’ turn.

Sensex_Sep2910_LT

What signals are coming from this chart? Is it bullish or bearish? Why?

Does the volume pattern reveal anything?

What is the 200 day EMA suggesting?

Would you like to buy, sell or hold? Why?

Wednesday, September 29, 2010

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

In this month’s guest post from the USA, Kiran asks a fundamental question: What is the real purpose of our investing? If your answer is: To make a lot of money, have you really thought it through? How much is a lot, and do you have the plan, attitude and discipline to achieve that goal?

Kiran provides some interesting insights. He would love to get some feedback from you.

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What is the End Goal of Investing?

There are a lot of investors in the world out there, but do they have an End Goal of Investing? A lot of investors invest because they just have a positive cash flow, and need to achieve higher levels of returns; others invest to make a living out of it at some point in their lives; and yet others invest to multiply their investments to become wealthy. Of course, there are many more permutations of this, especially in the under-developed countries where inflation is eating away the value of the currency and creating a huge loss in valuation of the underlying investment. Mexico, Zimbabwe are countries that come to mind instantly, since they have done the revaluations affecting the lives of many people in a direct manner. Is the US heading for the same destiny? I don’t think it should happen in my lifetime, but anything is possible when a country keeps printing money as if paper and ink are free! The joke in the US is that at the rate we are going, we will run out of paper!

End-State of Being a Millionaire

Well, when it comes to the primary reasons for investing, the most common goal that comes to mind is ‘to make a lot of money’. So, let’s look at some of the traits of people who have achieved a common end-state of being a millionaire (lakhopati or now, carodpati as commonly labeled in India). What are the most common characteristics of a millionaire/lakhopati/carodpati?

1) All millionaires have a totally unbelievable work ethics and a deep desire to succeed in their life. It is all about working smart, putting in long days, working 6-7 days a week and having a hand in many ‘cookie jars’ simultaneously. Millionaires work about fifty-nine hours a week (not including commute time) whereas the average Joe (or Pyarelal) works less than forty and shows exhaustion after the 3rd work day of the week! Ask anyone who works as an investment analyst for one of the big 6 firms like UBS, ING, Fidelity, Citi etc. They hire young dudes and work them 6-7 days a week, and give them big bonuses ($20K to $300K per year), on and above the salary.

2) All millionaires understand the power of leverage. They leverage other people’s time, talents and money for wealth accumulation.  A real estate investor has multiple sources looking for great deals for them. An entrepreneur spends a fair amount of time having people look for their next business idea. In general, all of them leverage the power of networking, by meeting with a wide range of their own contacts, and picking their brain for their own benefit. It’s simply leveraging. Just watch movies like Wall Street or Guru to understand this well (my two favourite movies).

3) All millionaires are passionate about what they do. They create and continue to create a dynamic level of activity around their passion, improving their skills constantly and as a result their outcomes. They are successful because they put in the time, energy and effort into their businesses, more than the average Joe.  It is easy for them to do because it doesn’t seem like work to them, and it does not exhaust them either. The movies Guru and Wall Street portrays this the best.

4) All millionaires have multiple strategies working for them, all at once. We have all heard the term multiple streams of income.  Well imagine multiple strategies working for them at the same time that brings in small to large incomes at any given point in time. Many streams are making a profit for them at any given point in time.  Most have several businesses and many millionaires just don’t tackle one project at a time. Most people should deploy this strategy in life since there are many choices available to an average person (especially in the US). Warren Buffet owns 50-60 companies under his empire, and Mukesh Ambani creates his wealth by having his hand in many different businesses.

5) All millionaires are surprisingly conservative in their actions. They make and keep their money and resources with a long term plan behind them and hence achieve success. They tend to spend way less than they earn, living well below their means, mainly because of lack of time to spend it, or lack of motivation to show off.  Don’t confuse conservative attitudes with an inability to take risk. They are definitely risk takers into ventures that they investigate or get expert advice from their leveraged resources. My Dad’s friends circle was all of this and more, although outsiders would never know it. Investors taking risk in US Real Estate today will be called tomorrow’s new millionaires – I know a few who have already reached there!

6) Now a big group of them have become automated millionaires, based simply on their day to day actions. They pay themselves first, even before they pay the government.  They may take 10-20% of their multi-source-income and have it automatically withdrawn from their income to invest into a retirement bucket or for a future goal and therefore, they never miss that money. They learn to live with this lifestyle for a lifetime, and as a result have become an automated millionaire. Millions of NRIs around the world are already doing this well, and this might also be happening in India.

7) Millionaires around the world love to give. A new generation of wealth has been created since mid-1990’s and, yet, they still fall in the category of giving to many needy projects. Many millionaires are giving at least 10% of their income to a charity of their choice. This helps enrich their lives and the lives of many others.  It also helps them manage their money. Warren Buffet and Bill Gates will be names that everyone remembers when it comes to giving, but Tatas and Ambanis are doing their share also.

8) Millionaires are people who have very high family values, and pass their ideals to the next generations. This comes from having a strong family, beginning with their parents, and sometimes, even living with/close to their parents. This includes putting their kids through a higher level of education, maintaining a higher value system within the family, raising them successfully, and also putting a lot of focus on religion. It is this higher value system that virtually guarantees that the kids will continue their legacy to also become millionaires, even without the wealth of the previous generation. A lot of my family members have shown this trait to be true.

9) Above all, every millionaire has mentors. Yes, all successful people seem to have mentors that have helped them avoid the pitfalls and, the trial and error technique they may experience on their own.  They love to learn from those who have been there before them and save time and money learning from the mistakes of others. Real estate millionaires are out there in bundles, and have achieved this level of success simply due to having mentors. Today’s inter-networking with Blogging, Yahoo/Google Groups and Social Networking is creating a new way of creating mentorship for the young generation, although the original technique has tons of merit by being taken under the wings of ‘the successful’.

10) Finally, “millionaire” is a mind-set. It comes with a high level of commitment, accountability, responsibility and a sense of achievement that one enjoys, however small the achievement. It grows over time, compounds with each achievement, and finally, given a time-line of successful events (with many temporary set-backs), turns into one big success, called being a “millionaire”. My analyst friend in Mumbai is a huge example starting from failing 5 times to get his CA (Accountant), to currently paying 100% cash for multiple Mumbai Apartments from stock market gains.

Today’s Wealthy

Based on the success that our world has seen, the word Millionaire (achieved $1 Million) is slowly changing to a Penta-Millionaire (achieved a net worth of a minimum of $5 Million). This is almost synonymous to Lakho-pati being a word of yesterday, replaced with Carod-pati. This is a level that becomes a goal of many, especially, after achieving the millionaire status. Ten years ago, the high net worth category (commonly called HNI in India) was a niche demographic bunch, clustered around a handful of wealth centers in westernized (developed) countries. Today, the very wealthy are spread around the world and are growing most quickly in new emerging markets such as India, China, Brazil, Russia, Philippines, Africa, Israel, Mexico - countries where they barely existed just 10-20 years ago. Brand new industries have come up recently to service their needs, and their influence can be felt strongly in the world of investment, real estate, consumer goods, property and philanthropy. Just look at the top 100 wealthiest individuals in the world at:

http://www.forbes.com/lists/2010/10/billionaires-2010_The-Worlds-Billionaires_Rank.html

The most important factor of all is that wealth has never been so openly democratized as it is today. I think it is simply due to the globalization, and the fact that the Internet has made it openly available for the common investor to invest far and wide. Investors all over the world are reaping the benefits of a well diversified portfolio of businesses or investment vehicles. As a result, there are millions of people that have amassed a level of net worth today that they have to pinch themselves to believe it!

Still Wondering

As an avid investor, I often ask myself the question, of what the end goal is with the time and energy spent for my global investing. Portfolio goes up, comes down, moves sideways, and then returns back to the lofty levels (India’s Sensex back above 20K). But, where is all of this going? One then comes to the conclusion, that we are all trying to achieve the Millionaire or Penta-Millionaire levels, regardless of whether this gives us a status symbol, or fame, or even higher level of comforts. When the goal is achieved, the goal then changes, and when those levels are achieved, once again our minds play the trick and change the goals. Now, what if the portfolio or business exceeds all of those goals. Then what?

In Conclusion

Assuming that most readers of this blog are Indian, I can say that we all have the Indian value system deep inside ourselves, which bring forth the concept of family. Creating a higher level of comfort for our immediate and extended family is the ultimate goal of many. Adding charity work for the betterment of society and mankind also sets in as the gray hair comes to show its true colors. At one point of achieving senior citizenship, we move away from the ‘passion of achieving’, moving closer to ‘enjoying the finer moments of life’. Satisfaction, joy and peace sets in next, as we watch the success of our kids and, then grand-kids. And, eventually we will all join the angels in the sky leaving behind a legacy of thoughts, innovations, and achievements, for others to embark on, in an even more intriguing level of mentorship through the new open social channels of the net. I recently lost a legendary investor (my Dad) and there is not a day that goes by when I don’t ask the question “What would he have done” or “How would he have accomplished it”.

When you reach the point in your life where you can celebrate the freedom to work, instead of the freedom from work, that’s true success, or even an end goal.

So, what is your end goal?

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

Tuesday, September 28, 2010

Sensex at 20000 – why isn’t the index moving up?

As I have mentioned before, 20000 is a nice round number and the Sensex has reached that level after 32 months. It is almost like a person completely focussed on climbing up a mountain who reaches a ledge within handshaking distance of the peak. He pauses to catch his breath and then looks around to see the view below, before attempting the final climb to the top.

Many investors who joined the bull market late in 2007, or started buying too soon in early 2008, are elated that they are getting back their ‘buy’ price and selling out. Not realising that the market is unaware of their ‘buy’ price. Others are following the ‘what goes up-must come down’ theory and booking profits to conserve cash for buying the correction that ‘has to come’.

What happens if there is no correction any time soon? It is possible that the Sensex continues to move up till it tests, or even surpasses, the all-time high of 21200. That could take a while if the FIIs decide to wait for the Q2 results in Oct ‘10.

It is also possible that the correction has begun already. The Sensex is still making higher tops and bottoms, but the upward momentum has slowed down. Or, it may be just a period of consolidation – the pause before the final assault.

Is this 20000 Sensex level different from the previous 20000 in Jan ‘08? If you look at it from investor-emotion point of view, there was more greed in Jan ‘08. If you look at it from the macroeconomic point of view, the western economies were already reeling from the effects of the subprime mortgage collapse in Jan ‘08. Their anaemic recoveries are just about starting in Sep ‘10. The recovery may take longer than expected, but the cycle is nearer to the bottom. It was closer to the top in Jan ‘08.

What about the situation in India? The interest rates were higher; so were the commodity prices in Jan ‘08. In Sep ‘10, interest rates and commodity prices have started to move up, but they haven’t yet reached levels that could cause a trend reversal. There are no Communists retarding the decision-making in Delhi. Not that it has helped policy reforms a whole lot!

On balance, the situation calls for more bullishness now than we see all around us. May be the debacle of 2008 is too fresh in investor minds. As I have mentioned often, it is better to be cautious near an all-time high.

The economic situation may not warrant a huge correction, but a ‘black swan’ event might. May be the Israelis decide to take a pot-shot at the Iranian nuclear reactor. Could be that Pakistan launches another terrorist attack on India. Who knows? These things happen out of the blue.

Stick to your asset allocation plan. Book partial profits and move cash to bank fixed deposits or balanced mutual funds or index funds. Start, or continue with, monthly SIPs. Wait for better opportunities to buy in lump sum. No need to worry about what may or may not happen to the Sensex.

Monday, September 27, 2010

Stock Index Chart Patterns – Dow Jones (DJIA), FTSE 100 – Sep 24, '10

Dow Jones (DJIA) index chart

Dow_Sep2410

As expected last week, the Dow Jones (DJIA) index chart pattern scared off the last of the bears. On Mon. Sep 20, ‘10, the index climbed above the Aug ‘10 top of 10756 intra-day, before closing just a bit lower. The next day, it touched 10845 and closed higher at 10761.

The Dow slid below the 10756 level on the next two days on profit booking. Bulls came charging back on Fri. Sep 24, ‘10 on hopes of another round of quantitative easing. The index closed the week at 10860 – a weekly gain of more than 250 points (2.4%) – and formed a bullish ‘higher tops and higher bottoms’ pattern.

The 20 day and 50 day EMAs are rising above the 200 day EMA. Volumes were decent, if not strong. The final target for the bulls will be the Apr ‘10 top of 11309. Do the bears have any hope at all? Not much – though the technical indicators are signalling a possible correction in the near term.

The slow stochastic is in the overbought zone. The MACD is positive and above the signal line, but failed to make a higher top. The ROC is also positive, but made a lower top. The RSI fell from the overbought zone to make a lower top as well. These are negative divergences.

The economic news continues to give conflicting indications. Weekly jobless claims rose unexpectedly. Companies are sitting on cash but are wary of new hiring. Existing home sales increased by 7.6%, but the residential real estate market is still in the doldrums, with depressed prices. Warren Buffet thinks the US is still in a recession, and it will be a while before real recovery takes place.

FTSE 100 Index Chart

FTSE_Sep2410

The FTSE 100 index chart pattern closed just above the 5600 level on Mon. Sep 20, ‘10 – its highest close in almost 5 months. The next day it touched a slightly higher top but a lower close. The index dropped down to 5472 intra-day on Thu. Sep 23, ‘10 – where it received good support from the rising 20 day EMA.

The FTSE 100 finally closed 90 points (1.6%) higher on a weekly basis at 5598, and formed a bullish ‘higher tops and higher bottoms’ pattern. Both the 20 day and 50 day EMAs are rising above the 200 day EMA. The Apr ‘10 top of 5834 will be the next target for the bulls.

The technical indicators are bullish, but showing some weakness. The slow stochastic has slipped to the edge of the overbought zone. The MACD is positive and above the signal line, but has dipped a bit. Both the RSI and ROC have made lower tops – indicating negative divergences. The bears may not give up without a fight.

Bottomline? The Dow Jones (DJIA) and FTSE 100 index chart patterns are back in bull territory, even as the economies of the US and UK seems to be recovering in fits and starts. Buy selectively, with strict stop-losses. The April ‘10 peaks need to be overcome before the bulls regain complete control.

Sunday, September 26, 2010

Stock Index Chart Patterns – Singapore Straits Times, Australia All Ordinaries, New Zealand NZX50 – Sep 24, ‘10

Straits Times (Singapore) index chart

Straits Times_Sep2410

Two weeks back, the Singapore Straits Times index had completed a bullish cup-and-handle pattern. The technical indicators were also bullish. It is no great surprise that the index has moved up steadily, and all three EMAs are also rising in tandem. The bulls are in total control.

The Straits Times index touched a 52 week high of 3116 on Sep 22, ‘10 and closed the week a little below the 3100 mark – gaining 70 points (2.3%) in two weeks.

The ROC and RSI are showing negative divergences – drifting down while the index moved up to touch the new high. The MACD is above the signal line and rising in positive territory, but failed to reach a new high – also a negative divergence. The slow stochastic is in the overbought zone, but has moved down. 

A bit of profit booking can be expected near a 52 week high. Any dip towards the rising 20 day EMA can be used to buy.

Australia All Ordinaries index chart

Australia_Sep2410

The Australia All Ordinaries index reached and went past an important milestone – the May ‘10 top of 4680 mentioned two weeks back. The index moved slightly higher to touch 4692 on Sep 17, ‘10 and closed at 4685 – its highest closing level in 4 months.

As often happens near a previous top, profit booking sent the index sliding downwards. The week’s closing level of 4651 meant a gain of about 50 points (1.1%) in two weeks.

The 20 day EMA has crossed above the 200 day EMA, and the 50 day EMA is about to do the same – heralding the bullish resurgence. The technical indicators are still bullish, but last week’s profit taking has taken its toll.

The slow stochastic is about to drop below the overbought zone. The MACD is positive and above the signal line, but slipping. The ROC has dropped towards the ‘0’ level. The RSI is above the 50% level, but falling after touching the overbought zone.

The Australia All Ordinaries index has made a bullish ‘higher tops and higher bottoms’ pattern. Use dips to add, but maintain a tight stop-loss.

New Zealand NZX50 index chart

NZX50_Sep2410

The New Zealand NZX50 index chart has made a bullish rounding-bottom pattern and is getting ready to test the Apr ‘10 top of 3349. Both the 20 day and 50 day EMAs have crossed above the 200 day EMA.

The index touched a high of 3253 on Sep 21, ‘10 and closed the week at 3211 – a gain of 50 points (1.6%) in two weeks. The rise above the 200 day EMA has been a little too steep. The ROC is showing negative divergence. The slow stochastic and RSI are both in their overbought zones, but drifting down.

The MACD is positive and above the signal line. It has reached a higher top than the one it touched in Apr ‘10, when the index was higher. This is a positive divergence. A further drop in the NZX50 index can be a buying opportunity.

Bottomline? The Asia Pacific index chart patterns are back in bull markets. Buy the dips, but maintain trailing stop-losses.

Saturday, September 25, 2010

Stock Index Chart Patterns - BSE Sectoral Indices, Sep 24, '10

I had written a detailed analysis of the NSE Nifty index chart pattern yesterday. Hope you liked reading it. On Tuesday and Thursday, I had written about the investment tactics to follow after the Sensex chart touched the 20000 mark.

Instead of writing a detailed analysis of the BSE Sensex index chart pattern today, I thought of taking a look at the BSE Sectoral index chart patterns. My previous look at the BSE Sectoral indices was back in May ‘10, when almost all the indices were under some selling pressure.

It will be interesting to see if the Sectoral indices are near their 52 week highs or not. The ones that are not, could be on the sector-rotation target of the bulls. Here are the charts:

BSE Auto Index

BSE Auto Index

The BSE Auto index is in a confirmed bull market – making higher tops and bottoms. No sign of the prolonged consolidation of the Sensex. Consumer vehicles, cars, two-wheelers are all enjoying booming sales.

BSE Bankex

BSE BANKEX

The BSE Bankex consolidated sideways till Jul ‘10, before breaking out in Aug ‘10. After a brief pullback, it has raced away along with the Sensex. The banking system is the backbone of a strong financial system. Thanks to prompt RBI interventions at appropriate times, the banks have emerged stronger from the 2008 downturn.

BSE Capital Goods Index

BSE Capital Goods Index

The BSE Capital Goods index consolidated sideways till Jun ‘10; gave a false breakout in Jul ‘10; consolidated some more in Aug ‘10 before finally breaking out to touch its 52 week high last week. The Capital Goods sector hasn’t performed as well as the Auto index and the Bankex – but their time will come.

BSE Consumer Durables Index

BSE Consumer Durables Index

The BSE Consumer Durables index has been one of the better performers in the past 12 months, and remains in a strong bull market.

BSE FMCG Index

BSE FMCG Index

The BSE FMCG index went nowhere till May ‘10; broke out upwards in Jun ‘10; consolidated sideways in Jul ‘10. From Aug ‘10 onwards, it has been rising in a parabola, and looks like it isn’t done yet.

BSE Healthcare Index

BSE Healthcare Index

The BSE Healthcare index has been in a steady bull market with occasional corrections. The upward momentum seems to be slowing down a bit.

BSE IT Index

BSE IT Index 

The BSE IT index has understandably not performed all that well – due to the poor recovery of the European and US economies. It broke out of a long sideways consolidation earlier this month.

BSE Metal Index

BSE Metal Index

The BSE Metal index has been one of the poor performers, and is far below its 52 week high touched in Apr ‘10. That may be an opportunity for savvy investors.

BSE Midcap Index

BSE Mid-Cap

The BSE Midcap index broke above a long sideways consolidation in Jul ‘10 and has since been moving up steadily, rather than sharply. Looks like there is steam left in this rally.

BSE Oil & Gas Index

BSE Oil & Gas Index

The BSE Oil & Gas index has gone neither up nor down, and been one of the disappointments – thanks to meddling by the Government in the oil PSUs, and lacklustre performances by Aban and RIL. Diesel price decontrol may improve the sector’s prospects.

BSE Power Index

BSE Power Index

The BSE Power index has been an underperformer and remains below the 52 week high touched back in Jan ‘10. This sector has been hyped up too much and has delivered too little. Power theft and transmission losses need to be curbed.

BSE PSU Index

BSE PSU

The BSE PSU index has formed a cup-and-handle pattern which could lead to a strong up move. The index comprises companies that are a part of many of the other sectoral indices – like Bankex, Power, Oil & Gas.

BSE Realty Index

BSE Realty Index

The BSE Realty index, one of the stars of the previous bull market, has been the worst performer in the past year. It is trying to emerge from a severe bear attack, and is not out of the woods yet. Just because it is performing badly does not make it a good contrarian play.

BSE Smallcap Index

BSE Small-Cap

The BSE Smallcap index is in fine fettle, and going from strength to strength. Please remember that there are more than 500 stocks that comprise the index – some of them are real gems, and others are complete junk. So stock selection has to be done very carefully.

Friday, September 24, 2010

NSE Nifty Index Chart Pattern – Sep 24, ‘10

Regular readers may be surprised by the title of this post. I have never written about the NSE Nifty 50 chart pattern for two main reasons:

  1. For reasons best known to NSE authorities, the day’s opening level is taken to be the same as the previous day’s closing level; in other words, any upward or downward gaps at opening are not considered at all. Without ‘gap’ analysis – which forms an integral part of technical analysis - it is difficult to set upward or downward targets and figure out support and resistance levels.
  2. My friend Nishit writes about the Nifty chart pattern on his blog regularly, and I didn’t see any point in duplication of efforts.

Of late, I have received several requests from readers to analyse the Nifty chart pattern in a similar way that I analyse the BSE Sensex index. With heightened interest and activity in the stock market as the indices approach their all time highs, it would be unfair on my part to ignore reader demands. After all, the blog is meant for readers’ benefit.

So, here is my maiden attempt at analysing the one year bar chart pattern of the NSE Nifty index:

Nifty_Sep2410

The index had been consolidating in a slightly upward sloping channel with a width of about 600 points for the past one year, till it broke out on Sep 6, ‘10. Such a long consolidation period is invariably followed by a strong break-out in the direction of the index prior to entering the consolidation zone. In this case – upwards.

The minimum upward target for the breakout is the width of the trading channel added to the break out point. In this case, it is about 6150 (= 5550+600). This week, the Nifty has consolidated in a narrow rectangular band of 105 points (between 5932 and 6037).

Such narrow bands don’t give clear indications of the next move. It can go in either direction. Even an upward break out from this narrow band can be followed by a pullback. The Nifty is about 5% below the all-time high of 6357. It is better to be cautious near an all-time high – in spite of the fact that the FIIs don’t seem to be cautious at all.

They weren’t cautious in late 2007 either, and we all know how that played out! I’m not saying there will be a repeat performance of 2008. I believe in India’s growth story as much as the FIIs do – notwithstanding the sorry mess created by a few utterly incompetent and corrupt people ruining the Commonwealth Games preparations at Delhi.

But there are very good reasons for being cautious. Check the volume bars. In Jan ‘10, when the Nifty was at 5300 level, volumes were much stronger. The upward break-out earlier this month from the consolidation channel should have been on significantly higher volumes.

The Nifty is looking quite overbought. All three EMAs are rising and moving away from each other. The MACD is rising in positive territory and has created a big gap with its signal line. That could be the prelude to a dip. The OBV is tracking the index – no divergences. The RSI and slow stochastic are both in their overbought zones. The concern is the RSI, which rarely spends much time in overbought territory.

The bigger concern is the food inflation – which just refuses to go down. First, the excuse was last year’s poor monsoons. Then we heard that the base effect would kick in and inflation rate will drop. It didn’t. Now, the excuse is the floods in north India!

With the relentless flow of liquidity from the FIIs showing no signs of abating, inflation control may require further hikes in interest rates. The bunching together of IPOs has also started draining money away from the secondary market.

Bull markets are supposed to overcome a wall of worry – and that is what is happening right now, with retail participation at low levels. But bull markets are sustained by the occasional sharp corrections to restore the health and balance of the market. Without a nice dose of correction, attaining much higher levels above the all-time high will be difficult.

Bottomline? The chart pattern of the NSE Nifty index took a rest this week after reaching the 6000 level. A break below the week’s low of 5932 can take the Nifty down to the 20 day EMA at 5800 or the 50 day EMA and the top of the consolidation range at 5600. On the up side, the target remains the previous all-time high of 6357. Hold on to your existing portfolio with trailing stop-losses. Book partial profits to reallocate assets. Further buying should be done only on a correction of 10-15%.

Thursday, September 23, 2010

The Sensex is at 20000 – I know I should sell, but what should I sell?

Many small investors may be facing this dilemma, now that the Sensex has touched 20000 and started to retrace a bit. They know in their guts that it is a good time to sell, but are not sure what to sell and how much to sell.

In last Tuesday’s post, I tried to segment the small investor population and offered guidelines on what each category of investors should consider doing. But I wasn’t specific about the selling process.

Selling is a very individual activity, and there can’t be a one size that fits all. At the same time, there are a few situations that call for selling regardless of the age, risk tolerance and financial goals of investors.

A lot of small investors do due diligence and pick a fundamentally strong stock, which they buy at a reasonable price. But they don’t have a plan about how and when to sell the stock. Some sell too soon and make meagre profits. Others hang on too long and lose all their profits.

Selling at the right time and at the right price is a much tougher task than buying. It is a skill that needs to be honed with practice and discipline. A few simple tricks-of-the trade can be combined to take some of the guesswork out of the selling process.

Every time one buys a stock, it should be with a very clear purpose. If it is meant for the long-term core portfolio, then don’t turn it into a short-term trading play. In case the price moves up too far, too fast – book partial profits and hold on to the rest. If it is meant for the short-term trading portfolio, don’t become a long-term investor in it by default because the trade has turned against you.

Use a stop-loss. A wider one (15-30%) for the long-term portfolio stocks and a tighter one (5-8%) for the short-term trading portfolio. If the stock prices move up, use a trailing stop-loss; i.e. move up the stop-loss by the same percentage as the rise in the stock’s price.

If the stop-loss is hit, don’t lower the stop-loss or wait for things to improve. Sell and get out. For heaven’s sake, don’t average down. You may lose some money if the stock starts to move back up again, but you will never get stuck with a huge loss. You can always get back in at a higher price and cover your loss.

Have an asset allocation plan in place. When the Sensex nears its 52 week high, chances are that your asset allocation needs to be tweaked. Use your allocation formula to decide how much to sell. If your allocation to equity has risen from 60% to 70%, you have the option to sell the entire 10% in one lot, or keep taking 2.5% off the table in smaller lots.

What to sell? For reallocation, sell equal percentages from all the stocks in the portfolio. In other words, if you have 100 ITC shares and 200 Tata Steel, and want to sell 5% of the equity portfolio, sell 5 ITC shares and 10 Tata Steel shares.

A mistake many small investors make is they tend to sell the shares that are in profit and hang on to the shares in loss. If a stock is in loss when the Sensex is near an all-time high, chances of its providing any returns in the foreseeable future is nil. Better use the price uptick to sell all of it.

If you are one of those unfortunate investors who entered the market in Dec ‘07 and you are stuck with stocks that are near your ‘buy’ price, don’t sell in a panic because you are getting back your ‘cost’. You are not. You have lost three years of interest. Decide if it is a fundamentally good stock to hold for the long-term. If it is, keep a trailing stop-loss and hold on; if it isn’t, sell.

Wednesday, September 22, 2010

Stock Chart Pattern – Diamines and Chemicals

It is no coincidence that the stock chart pattern of Diamines and Chemicals is the subject of this post. In a stock market trading near all-time highs and starved of new stock ideas, a good stock picker like Ashish Chugh can always manage to pull out a few rabbits from his hat.

Invariably, his suggested stock spikes up in value on a high volume surge almost as soon as the name is mentioned. Diamines and Chemicals has been around for quite a long while – incorporated in 1976, and production started in 1982.

It is the sole manufacturer in India of Ethylene Amines for over two decades and Piperazine since 2000. Ashish Chugh has covered most of the fundamentals in this interview. I would like to add my favourite metric – cash flow from operations, which was positive in 4 of the past 5 years.

The cash management has been prudent and the Debt/Equity ratio is now less than 1. Even with the spike in price today, the stock is trading at a P/E of 5.06. That gives an earnings yield (E/P) of almost 20% – more than double the current bank fixed deposit rates, leaving adequate ‘Margin of Safety’.

What don’t I like about this stock? In spite of its monopoly status, which almost ensures high margins, the company’s performance has been uneven. Sales were flat in FY ‘06 and FY ‘07; dipped by 14% in FY ‘08; then rose by 62% in FY ‘09 and 50% in FY ‘10. At the end of it all, the company has still not reached the Rs 50 Crores mark! Obviously, it is the only fish in a very tiny pond.

Let us look at the 3 years weekly bar chart pattern of Diamines and Chemicals:

DiamChem_Sep2210_3yr

For a small-cap stock, it has been a pretty remarkable recovery. From a peak of 78 on Jan 4 ‘08, the price dropped a whopping 78% to a low of 17 on Feb 6 ‘09. The stock had a sharp ‘V’ shaped recovery that retraced 92.5% of the bear market fall, when it touched a high of 73.45 on Jan 8 ‘10.

A good correction took the stock down to the 50 week EMA (equivalent to the 200 day EMA on a daily chart) at 47, where it received strong support. The correction retraced 46% of the rise from the low of 17 to the high of 73.45 – just short of the 50% Fibonacci retracement level.

The stock then jumped to a new high of 80 on Apr 16 ‘10, dropped down to the 50 week EMA again on May 21 ‘10 and has since been consolidating sideways between 50 and 70, till today’s break out. The previous high of 80 is the next target. If that is taken out, and there is every chance that it will be, then the stock will be in ‘blue sky’ territory (which means uncharted, with no known resistances).

The technical indicators are bullish. The RSI has moved up to the edge of the overbought zone. The slow stochastic is about to enter its overbought zone. The MACD is positive and just above the signal line. Expect a test of the 80 level soon, followed by a likely dip down to the 20 week or 50 week EMAs. That may provide better entry opportunities.

Bottomline? The stock chart pattern of Diamines and Chemicals is 10% below its all-time high. One needs to be cautious rather than euphoric when a stock is close to its all-time high. Those who got in earlier at lower prices tend to book profits at higher levels. Use the dip to enter – but remember to maintain a strict stop-loss.

Related Post

What exactly is the Margin of Safety?

Tuesday, September 21, 2010

Sensex at 20000 – what should small investors do now?

It finally happened. The Sensex broke above the 20000 level intra-day, quickly fell below, then played hide-and-seek the rest of the trading day before closing at 20001. A level last seen 32 months ago.

What is special about the level of 20000? Nothing, really. It is just a nice round number. In the good old days of the Indian stock market, shares had to be traded in lots of 50 or 100. Now, one can buy a single share. Or, 37. Or, 169. But most people still tend to buy 200 shares or 500 shares at a time. The human mind likes nice round numbers.

If that be the case, should small investors be bothered at all? Let us listen to some expert-speak, courtesy moneycontrol.com:

  • Ramesh Damani said the Sensex may consolidate for a while before heading to new highs, and advised investors to enter the market even at current levels.
  • Daryl Guppy thinks the Sensex may hit 21000 and then drop to 19000; that will give a better entry point.
  • Adrian Mowat is bullish about the India growth story and considers the 20000 level a wake-up call for domestic investors who haven’t participated in the market.

Three out of three – all bullish. Should small investors dive into this market then? It depends what kind of a small investor you are. Let me try to segment the small investor population.

  1. You are a ‘new’ investor who wants to join the bull party now – Don’t. The party has been going on for 18 months. All the ‘free’ food and drinks are finished. You may have to pay dearly for this late entry. Start a monthly SIP into an index fund/ETF and continue the SIP for several years through bull and bear cycles. In the meantime, read and learn as much as you can about the stock market and how to build long-term wealth slowly and surely.
  2. You are an investor who got ‘burned’ badly during the 2008 bear market, and stayed away from this bull rally – Continue to stay away. Follow SIP advice given above.
  3. You are an investor who lost a lot in 2008, but remained invested and bought some more and have just started to see some profit in your portfolio – Use this opportunity to churn your portfolio by getting rid of the non-performers. Hang on to the stocks that have performed well, or, book part profits and shift the cash to fixed income funds. Use a 10-15% likely correction to add.
  4. You were lucky to enter the market in April/May 2009 and have good profits in the stocks that you still hold, but you haven’t been through a bear market yet – Book partial profits and shift the cash to fixed income funds. Use any correction to add.
  5. You are a more seasoned investor who has been through the previous bull/bear cycle and emerged with a much stronger portfolio and a more balanced attitude towards the market – Stick to your asset allocation plan and book profits only to rebalance your asset allocation. Stay invested with trailing stop-losses.
  6. You are a long-term investor with a strong portfolio and experience of several bull/bear cycles – Hope you are reading this for entertainment value, because you don’t need any advice from me!

Have I missed any one? If you are one of those who can’t fit into any of the six categories mentioned above, drop me a ‘comment’. 

Monday, September 20, 2010

Dow Jones (DJIA) Index Chart Pattern – Sep 17, '10

In last week’s analysis of the Dow Jones (DJIA) index chart pattern, I had mentioned that the resistance level of 10500 was likely to be overcome soon, though the technical confirmation of the bull market was still awaited.

The index went above the 10600 level on intra-day basis on all five days, and closed above the 10500 level on the first four days of the week. On Friday (Sep 17 ‘10), the Dow finally closed above the 10600 level for a 145 points (1.4%) weekly gain.

The 20 day EMA crossed above the entangled 50 day and 200 day EMAs, and the 50 day EMA has also edged above the longer-term moving average. The Aug ‘10 top of 10756 is less than 150 points (1.5%) away, and may not provide too much resistance. On moving above that level, a bullish ‘higher tops and higher bottoms’ pattern will get formed.

The 3 months bar chart pattern of the Dow Jones (DJIA) index shows that the bulls are slowly but surely regaining the upper hand in spite of the less than encouraging economic recovery:

Dow_Sep1710  

Note that last week’s volumes recovered some what, though they are far from strong. The technical indicators are looking quite bullish. The slow stochastic and MFI have entered their overbought zones. The RSI is about to follow suit. The MACD is above the signal line, and rising in positive territory.

The Asian markets traded flat today (except India). At the time of writing this post, European indices are trading about 1% higher. The Dow is trading at the 10700 mark – nearly 1% higher. Is risk appetite returning?

The relentless spike in gold’s price seems to indicate otherwise. The economic news continues to be mixed. Actual unemployment claims have been falling steadily and have reached a 2 year low (as per this article). But the widely-followed University of Michigan Consumer Sentiment Index report was the weakest since Aug ‘09.

Bottomline? The chart pattern of the Dow Jones (DJIA) index is back in a bull market. Crossing the Aug ‘10 top of 10756 should scare off the last of the bears. Buy selectively, and maintain strict stop-losses.

Sunday, September 19, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, Oslo (OSEAX) – Sep 17, '10

FTSE 100 Index Chart

FTSE_Sep1710

The FTSE 100 index chart pattern had promised much a week ago, but delivered little. The index closed at its highest level of 5567 on Tue. Sep 14 ‘10 and touched an intra-day high of 5613 on Fri. Sep 17 ‘10, but ended the week at 5508 – just 7 points higher on a weekly basis.

Bears will be delighted to note that Friday’s trading formed a ‘reversal day’ pattern on the highest volumes since Jul 27 ‘10 (volume bar not updated in chart above). The bull rally has stalled for the time being.

The bulls have taken a strong punch but still very much on their feet. The FTSE 100 is technically in a bull market. The 20 day and 50 day EMAs are both rising above the 200 day EMA. The bullish pattern of higher tops and higher bottoms since the Jul 1 ‘10 low of 4790, is in tact.

The slow stochastic is in overbought territory but showing a little weakness. The MACD is positive and above the signal line but has stopped rising. The RSI is in overbought zone – where it usually doesn’t stay long. The ROC is positive but dropping fast.

The index may correct down to the 20 day or 50 day EMAs. Wait for support at either moving average before buying the dip. In case the index drops below the previous low of 5071 made on Aug 25 ‘10 – however unlikely the prospect may appear – the bears will start calling the shots.

CAC 40 Index Chart

CAC_Sep1710

The CAC 40 index chart pattern shows quite a remarkable change since I analysed it three weeks ago. The index gained almost 300 points (more than 8%) and ventured into bull territory, but failed to make a higher top.

Friday’s ‘reversal day’ pattern (higher high, lower close) on very strong volumes, not seen since May 21 ‘10, took the index down to a close of 3722 – 4 points lower on a weekly basis.

The rising 20 and 50 day EMAs are below the 200 day EMA. Technically, the CAC 40 remains in a bear market. The technical indicators have not turned bearish, but are looking weaker.

The slow stochastic is in the overbought zone. The RSI has started to slide and slipped out of the the overbought zone. The MACD is positive and above the signal line, but has stopped rising. The ROC is falling rapidly in positive territory.

The bulls need to regroup quickly to stop the CAC 40 from dropping below the 200 day EMA. The technical indicators are not holding out too much hope.

Oslo (Norway) All Shares index chart 

Oslo (OSEAX)_Sep1710

The 5 months long bull market correction in the Oslo (Norway) All Share index chart pattern may be coming to an end. The index appears to be forming a bullish ascending triangle pattern and should break out upwards - beyond the 420 level.

The Oslo index and its 20 day and 50 day EMAs are rising above the 200 day EMA. The technical indicators are looking bullish. The slow stochastic is in the overbought zone. The MACD is above the signal line and rising in positive territory. The RSI is just below the edge of the overbought zone. Only the ROC is looking a bit weak.

Bottomline? The chart patterns of the FTSE 100 and Oslo (Norway) All Share indices are looking bullish. The CAC 40 is looking bearish. The Eurozone economies are not out of the woods. Caution should be the watchword. Stock picking skills will be tested. This may be a good time to diversify into emerging market funds/ETFs.

Saturday, September 18, 2010

BSE Sensex Index Chart Pattern – Sep 17, '10

The BSE Sensex index chart pattern rose above all resistances and doubts to close the week at 19595 – a level last seen in Jan ‘08. The index gained 795 points (4.2%) on a weekly basis, riding a tidal wave of FII inflows.

There is long-term resistance at the 20000 level from multiple tops made during Nov-Dec ‘07. Expect the index to pause and correct a bit. If that hurdle is crossed – and there is good reason why it should, then the next target will be the all-time high of 21200. Will that be crossed as well?

For likely answers, let us take a look at the one year bar chart pattern of the BSE Sensex index:

Sensex_Sep1710

Since there are no certainties in life, there are definitely none in technical analysis. Therefore, we will discuss both bullish and bearish possibilities. First, the bullish view.

The year-long sideways consolidation within a slightly upward-sloping trading range of about 2100 points has finally ended. Such long consolidations are almost always accompanied by a strong break out in the direction the index was moving prior to entering the consolidation range. In this case, upwards.

Such range bound consolidations are useful for setting targets. The minimum target is the width of the range from the breakout point. Assuming the break out point at 18500 and the width at 2100 points, we get a minimum target of 20600 (= 18500+2100).

In a strong bull market, with all three EMAs rising and the technical indicators looking bullish, there is every possibility of the Sensex overshooting its minimum target, and testing or crossing the all-time high of 21200.

When? That is a tough question. It could happen next week, or during Diwali trading (by which time most Q2 results will be out), or nearer the financial year-end in Mar ‘11. But I reckon, sooner rather than later.

Now, the bearish view. On a trailing twelve months (TTM) basis, the Sensex is trading at a P/E greater than 23 – which is already above the danger level (like the River Jamuna in Delhi recently) and threatening to wash away investors’ profits in a flood of selling.

The index has jumped way above the 20 day EMA, which is a clear sign that the index is overbought and due for a dip. The 50 day EMA is moving quickly away from the 200 day EMA – another sign of an impending correction.

The MACD is rising in positive territory and has moved well above the signal line, hinting at a correction. The RSI is inside the overbought zone – where it doesn’t like to spend much time. Another hint of a correction. The slow stochastic is also inside the overbought zone, but this indicator can remain overbought for long periods.

On balance, the possibility of a correction is looming on the short-term horizon. It could be that the Sensex makes a dash for the 20000 mark and then starts to correct. Or, the index could start correcting only after testing the all-time high. It could start falling from Monday. In other words, it will happen when it happens.

What about downside targets? The 20 day EMA level of 18700 is the first target, followed by the upper trend line of the trading range at 18600 and then, the 50 day EMA at 18300. A pullback towards the trading range is to be expected after a sharp break out. So, we will go with a drop to 18600 for now.

Whether continuous FII buying will allow a 1000 point drop in the Sensex is a moot point. Interestingly, the Sensex is poised for either a 1000 point rally to meet its break out target, or a 1000 point drop to meet its pullback target.

The repo and reverse repo rate hikes by the RBI was taken in stride by the Sensex, with only a one-day drop after 7 days of rise. Food inflation is showing no signs of correction. Commercial and passenger vehicle sales are booming. New FIIs are entering the Indian market in droves.

Bottomline? The BSE Sensex index chart pattern is poised to challenge the all-time high made in Jan ‘08. This is not the time to jump in with both feet together – but to look for value in fundamentally strong stocks that are off their 52 week highs. Nor is this a time to be paralysed by fear of what happened in 2008. That was the tail-end of a 5 years long bull period. We are just 18 months into a new bull phase.

Friday, September 17, 2010

Stock Index Chart Patterns - Hang Seng, Jakarta Composite, Malaysia KLCI - Sep 17, '10

Hang Seng index chart

HangSeng_Sep1710

The chart pattern of the Hang Seng index appears to have made a bearish double-top pattern – a top at 21806 in Aug ‘10, and one at 21819 a month later. The MACD, ROC and RSI have all made lower tops. The negative divergences further supports the bearishness.

But looks can deceive some times. This is what makes technical analysis challenging. Check out the volume bars. Around the time that the Hang Seng made its previous high of 21806 in Aug ‘10, the volumes were lower. The high made on Sep 15 ‘10 was 21819, a slightly higher top, accompanied by higher volumes.

The first criterion for a double-top is that the volumes should be lower during the second top. Also, the second top is typically at the same level or slightly lower – though that isn’t a ‘rule’.

Today’s (Fri. Sep 17 ‘10) trade has put paid to any bearish hopes. The Hang Seng touched an intra-day high of 21989 and closed at 21971 – 700 points (3.3%) higher on a weekly basis. The index continues with its bullish pattern of higher tops and higher bottoms since the May ‘10 low of 18972.

The 50 day EMA has moved above the 200 day EMA which technically confirms the return to the bull market. The Apr ‘10 top of 22389 - just 400 points away – is the next hurdle on the path of the charging bulls.

Malaysia (KLCI) index chart

KLCI Malaysia_Sep1710

The Malaysia (KLCI) index chart pattern shows that the bears are not only down and out, but have lost their will to fight back. The index has been soaring upwards, supported by strong volumes. All three EMAs are moving up with the index well above them.

The technical indicators are all bullish. The slow stochastic has remained in the overbought zone for almost a month. The MACD is above the signal line, and moving up in positive territory. The ROC is positive. The RSI is also in the overbought zone, but made a lower top.

Is it time for the bears to go into hibernation? Not if they understand technical analysis. The index and the EMAs are moving far apart from each other – a sign that bulls have gone a bit overboard in their buying. The KLCI index looks overbought and ripe for a correction.

A dip towards the 20 day EMA will provide entry opportunities, and fresh impetus to the bulls to take the index higher.

Jakarta Composite index chart

Jakarta_Sep1710

The Jakarta Composite index chart spent a week long (Sep 8-14, ‘10) Eid vacation – much to the consternation of the Indonesian President, who felt that overseas investors may get the wrong message about the country’s global ambitions.

If the bears thought the long break will curb the bullish fervour, they were sadly mistaken. Spirited buying during the 3 days of this holiday-shortened week took the Jakarta Composite index to an all time high of 3391 today.

The technical indicators are bullish. The slow stochastic is in the overbought zone. The MACD is above the signal line and rising in positive territory. The ROC is moving up in the positive zone. The RSI is about to enter the overbought zone.

Bottomline? The bulls are ruling in the chart patterns of the Asian indices. Bull market tactics should be followed. Buy the dips, but maintain adequate stop-losses.

Thursday, September 16, 2010

Why did RBI raise the repo and reverse repo rates today?

The RBI has been quite proactive about controlling inflation. For the 5th time since Mar ‘10, interest rates have been raised – the repo rate by 25 basis points (from 5.75% to 6%) and the reverse repo rate by 50 basis points (from 4.5% to 5%).

Inflation has been the dominant concern in economic management for the RBI, and raising interest rates is one way of addressing that concern. There are signs that RBI’s policies are beginning to have some effect – although housewives will surely disagree, as food inflation still remains high.

Market players had ‘factored in’ a hike of 25 basis points in both the repo and reverse repo rates. That means, the rate hike was expected. If there was a surprise, it was the 50 basis point hike in the reverse repo rate – double the expectation.

Was today’s drop in the Sensex a reaction to the rate hike? May be. May be not. After seven days of sharp rise following the break above a year-long trading range, a bout of profit booking is only to be expected. It is healthy for the sustenance of the bull market.

Is the repo rate and reverse repo rate increases good news or bad news for investors?  A bit of both. The good news is that the banks will probably increase their fixed deposit rates. Some have already done so, under the guise of ‘Festive Season Bonanza’, or higher rates for specific periods of 790 or 990 days, or special rates for senior citizens.

The bad news is for those who are paying Equated Monthly Installments (EMIs) on home loans or auto loans or personal loans. Their monthly EMIs will increase.

What should investors do? This may be a good opportunity to book part profits in stocks that have run up a lot and move the cash into a bank fixed deposit. That may sound unexciting to young investors, who prefer to flit around from one stock to another. But that is a sure way to lose the booked profits.

If you do take your profits away from the stock market and invest in a bank fixed deposit, make sure you opt for quarterly dividends. Use a part of the quarterly dividend amount to buy Nifty BeES or Bank BeES or an index fund. That way, you reinvest in the market but do not put your booked profits to any risk.

Related Posts

The RBI has increased the Repo and Reverse Repo rates – should investors be concerned?

Wednesday, September 15, 2010

Stock Chart Pattern - Ratnamani Metals and Tubes (An Update)

In my previous analysis of the stock chart pattern of Ratnamani Metals and Tubes back in Dec ‘09, it was observed that the OBV was moving up while the stock was correcting after touching a high of 118 in Sept ‘09. That was an indication of ‘accumulation’. However, the RSI and slow stochastic were indicating bearishness.

On the longer term charts, the stock was struggling to recover after a huge bear market fall from a high of 302 in Jan ‘08 (adjusted for a 5:1 stock split) to a low of 32 in Mar ‘09. Small cap stocks rarely recover from such a large fall of almost 90%. The fundamentals of the company looked good, but I had clearly mentioned that it was a high risk bet that could touch 150 if it cleared the high of 118.

With the Sensex climbing to new highs, very close to its all time high of 21200, it is an appropriate time to check how this small-cap stock has fared. The one year bar chart pattern of Ratnamani Metals and Tubes reveals that things haven’t gone too well:

Ratnamani_Sep1510

The stock moved up to touch an intra-day high of 121 in Jan ‘10 – which was within the 3% ‘whipsaw’ leeway of the Sep ‘09 high of 118. Note how the stock dropped right back to 95. There could not be a better example of the reason why the 3% technical leeway should be used to confirm any breach of a previous top (or bottom).

The stock chart formed a nice cup-and-handle continuation pattern over the next four months and finally broke above the 121 level on decent volumes in Apr ‘10. Note how the OBV remained flat initially and then started to move up when the ‘cup’ was being formed. More sign of accumulation.

After reaching a high of 135, the stock corrected down to 114 and then started a steady climb upwards from Jun-Aug ‘10, using the 20 day EMA as a ramp. It recently touched an intra-day and 52 week high of 148.55 – close enough to the target of 150 mentioned in my earlier post.

Note that while the Sensex has been moving up after breaking out above a year long trading range, mid-cap and small-cap stocks have been facing selling pressure. No wonder, the Ratnamani Metals stock price has corrected sharply down to the 20 day EMA. At its recent high of 148.55, the stock retraced only 43% of its bear market fall.

The 50% Fibonacci retracement level of the bear market fall is at 167. That hurdle needs to be crossed for the stock to re-enter a bull market – even though it is trading above the three rising EMAs. The slow stochastic has dropped below the 50% level and the RSI is about to follow suit. The stock may correct some more before it resumes its up move.

Fundamentally, things weren’t so good last year. Sales dropped by 10% in FY ‘10 though profits were maintained. Cash flow from operation turned negative. Debt burden has increased but remains within manageable limits. Promoter holding is now 57%. It was 60% when I looked at the stock in Dec ‘09. FII holding has gone up from 1% to 5%. The stock is available at a P/E of less than 8, and can be looked at on dips for accumulation.

Bottomline? The stock chart pattern of Ratnamani Metals and Tubes almost attained the first target of 150. The next target is 180. The stock isn’t my favourite in the pipes and tubes space, and remains a high risk bet.

Tuesday, September 14, 2010

Hotel Leela: the next takeover target? – a guest post

In this month’s guest post, Nishit speculates that following the stake purchase in East India Hotels by Reliance, a possible consolidation in the hotels sector may follow with Hotel Leela as the likely target. Leave a comment to let us know if you have a different view.

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Right from the time of Mahabharata, man has been in the pursuit of land. Land is finite and cannot be produced in huge quantities. The stock I am going to discuss today deals with real estate in a way but is not a realty stock.

I am talking about the hospitality business and a company, Hotel Leela, in particular. The Indian market mainly comprises of the big boys - Indian Hotels and East India Hotels; then come the pretenders to the throne - Hotel Leela and ITC Hotels; then an assorted bunch of niche players who have a few properties which are good, but none having a pan-India presence.

Indian Hotels belongs to the Tatas. Its pedigree is unquestionable and it is not for sale, not for money or for love. East India Hotels, which has built a great brand name with its luxurious hotels in Rajasthan and other parts of India, has a White Knight in Reliance to protect against the big bad ITC. I have no doubt in my mind that Reliance will take it over someday.

ITC is the flashy new kid on the block, with a sack full of cash to throw at its chosen targets. Sadly, with EIH it remains an unrequited love with Biki Oberoi preferring the charms of Reliance. ITC has built up a good chain of hotels but it wants to grow and grow fast. This is where Hotel Leela comes into focus. ITC has almost a 10% stake in Hotel Leela. The promoter, Captain Nair, is almost 90 years old. He has two sons nearing their 60s, Vivek and Dinesh Nair, who run the show. Recently there was a news article in Economic Times about how Captain Nair was working out a settlement such that neither of the two sons could sell out without the other’s approval. ITC’s taking over Hotel Leela remains a long shot, but can never be ruled out.

Hotel Leela by itself has intrinsic value. Its properties at Mumbai, Goa and Bangalore are the epitome of luxury. They recently started a property at Kovalam and Udaipur and plan to start off in Chennai, Delhi, Agra and Pune. Of these, the Delhi property should be operational by the time the Commonwealth Games start. The Chennai property on the Marina Beach is expected to be operational by 2011. For Pune, the plans are yet to take off. Longer term plans include starting operations in Hyderabad and Agra.

The Bangalore property contributes about 35% to Hotel Leela’s revenues and Mumbai contributes about 32%. Hotel Leela has a market cap of around Rs. 2100 Crore. EIH market cap is Rs. 5540 Crores. The ITC stake in EIH should be worth Rs. 800 Crores at CMP. If ITC gets out of EIH at a premium, they may look at Hotel Leela. The weakness of Hotel Leela is that on its own, it does not have enough financial muscle to play with the big boys - EIH and Indian Hotels. It has a fragmented presence. It would have a room inventory of around 2100 rooms by the time the Chennai and Delhi operations are underway. Its rivals like EIH and Indian Hotels have multiple brands like Ginger and Trident to capture different price points.

NV Sep2010 chart

The EPS for FY ‘10 was Rs 1.09 (Face Value: Rs. 2) and expected to go up to Rs 2 for FY ‘11 and Rs 3 based on the projections of added rooms and lower capex. At CMP of Rs 56, it is at a forward P/E of around 18-19. Not exactly cheap. There are strong supports at he 200 day EMA and around Rs 40-42 level at which further additions could be considered. The Indian hotel industry is in for a consolidation and one needs to keep that in mind. Setting up a premium chain from scratch is an almost impossible task. That is why existing chains become attractive takeover targets.

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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.)

Monday, September 13, 2010

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

The bulls returned from the Labor Day holidays with their batteries fully recharged, and shook off the last of the bears from the Dow Jones (DJIA) index chart pattern.

The better-than-expected unemployment news helped the bullish cause. A closer look at the data may reveal that a number of states did not report the actual figures due to the holiday, so the figures were ‘estimated’.

Volumes were on the low side. Friday’s close of 10463 was Dow’s highest close in a month, but on the lowest volumes of the week and barely 15 points higher on a weekly basis.

The 3 months bar chart pattern of the Dow Jones (DJIA) index shows the probable beginning of another bull rally without much volume support:

Dow_Sep1010 

Tuesday (Sep 6 ‘10) saw the index open near the previous Friday’s close, but drop down to test support from the entangled 50 day and 200 day EMAs. That was a last ditch effort from the bears.

From Wednesday onwards, the Dow rose to test the long-term support-resistance level of 10500 – but closed slightly below it. Note that the 20 day EMA has moved up to touch the 50 day and 200 day EMAs.

The resistance from the 10500 level has been tested three times in quick succession. A fourth test may breach it. (At the time of writing this post, the Dow is trading 50 points above the 10500 level – but needs to close above it for 2-3 days for the breach to be valid.)

The technical indicators are looking bullish. The slow stochastic is about to enter the overbought zone. Both the RSI and MFI are above their 50% levels. The MACD is above the signal line and just turned positive.

Is the bull market here to stay? It would seem so, if you believe the author of this article. Should you throw caution to the wind and start buying? Not till the Aug ‘10 top of 10756 is crossed.

Most Asian and European indices are back in bull territory. The fears of double-dip recession and sovereign defaults are receding to the background. If the Republicans win the November elections, the bulls may start to sing ‘happy days are here again’.

Bottomline? The chart pattern of the Dow Jones (DJIA) index is all set to re-enter the bull market. Only the technical confirmation – the 20 day and 50 day EMAs moving above the 200 day EMA – is awaited. Buy selectively, and maintain strict stop-losses.

Sunday, September 12, 2010

Stock Index Chart Patterns - FTSE 100, DAX, Stockholm General – Sep 10, '10

FTSE 100 Index Chart

FTSE_Sep1010

The FTSE 100 index chart pattern had given enough indication a week ago that the momentum had swung towards the bulls. The receding volumes and negative divergences in the technical indicators were a concern.

The index failed to progress during the first three days of the week. Volumes were tepid on Mon. Sep 6 ‘10, and picked up on Tuesday’s down day. Volumes rose on the next two up days, as the FTSE 100 first crossed the 5500 level intra-day, and then closed the week at 5501 – its highest close in more than 4 months.

The 20 day EMA has moved above the 200 day EMA and the 50 day EMA has got its nose above the long-term moving average. A bullish ‘higher tops – higher bottoms’ pattern has formed since the index hit the low of 4790 on Jul 1 ‘10. The FTSE 100 is technically back in a bull market. The Apr ‘10 top of 5834 is the lone hurdle in the path of the bulls.

The technical indicators are looking bullish. The slow stochastic is in the overbought zone. The MACD is above the signal line, and rising in positive territory. The RSI and MFI are both above their 50% levels and climbing. The negative divergences in the MACD and RSI, which failed to make new highs with the index, remain the only hope for the bears to stall the bull charge.

DAX index chart

DAX_Sep1010

The DAX index chart had spent 3 trading sessions below the 200 day EMA in early Jul ‘10. In end Aug ‘10, a slightly longer spell (of 6 days) below the 200 day EMA was followed by a jump up into the bull market.

The DAX closed the week above the 6200 level, and looks all set to make a new high past the Aug ‘10 top of 6387. The 20 day EMA has crossed above the 50 day EMA, and all three EMAs are moving up with the index above them.

The technical indicators are supporting the bulls. The slow stochastic has entered the overbought zone. The MACD is above the signal line and has turned positive. The RSI and MFI are both above their 50% levels.

Stockholm General index chart

Stockholm_Sep1010

The Stockholm General index chart pattern spent just a day below the 200 day EMA before resuming its bull charge. It closed the week at 335, which is less than 1% below its Aug ‘10 top of 338 and less than 2% below the Apr ‘10 top of 341. One can expect a new high very soon.

The 20 day EMA has moved above the 50 day EMA, and all three EMAs are moving up with the index above them. The technical indicators are looking bullish. The slow stochastic is in the overbought zone. The MACD is above the signal line and rising in positive territory. The RSI is above the 50% level and the ROC is rising in positive territory.

Is it ‘game over’ for the bears? Take a look at the higher bottom made by the Swedish index in late Aug ‘10. The MACD, RSI and ROC made lower bottoms. The negative divergences may lead to a correction down to the 20 day EMA. That would be an opportunity to add.

Bottomline? The chart patterns of the European indices are back in bull markets after decent corrections. They are within handshaking distances of their 52 week highs. One can buy the dips, but with strict stop-losses.

Saturday, September 11, 2010

BSE Sensex Index Chart Pattern – Sep 09, '10

In last week’s analysis of the BSE Sensex index chart pattern, subtle differences in the RSI and slow stochastic were observed when comparing the Apr ‘10 and Sep ‘10 patterns. I concluded that the likelihood of a correction down to the lower end of the upward sloping trading channel was diminishing.

In a week shortened by the Eid holiday, the Sensex tested the upper end of the trading channel on Mon. Sep 6 ‘10 and then gradually moved above it during the next three days on the back of FII buying. The index closed the week at 18800 – 1.75% higher than the Aug ‘10 top of 18475.

Why is that relevant? Well, technically a breach of the previous top should exceed the 3% ‘whipsaw’ lee-way. Till the level of 19030 is crossed, the Sensex will remain vulnerable to a pullback towards the year long trading channel.

Is the Sensex on its way to test the all time high of 21200, or is it now poised for the correction that every one has been hoping for? Let us look for clues in the 6 months bar chart pattern of the BSE Sensex index

Sensex_Sep0910

All the three EMAs are moving up, and the Sensex is moving higher above the EMAs – a clear sign of a strong bull market. In May ‘10, the Sensex had dipped below the 200 day EMA for a day, only to jump back above the long-term moving average the very next day. That was at the end of the Apr-May ‘10 correction.

The Jun ‘10 top fell just short of the 18000 mark, but was accompanied by good volumes. Note that the previous peaks of all the four technical indicators were touched in Jun ‘10 – within a few days of the Sensex top.

The Sensex has steadily moved up, making higher tops in Jul, Aug and Sep ‘10. Now check the technical indicators. They are looking bullish, but instead of reaching higher tops, they have made lower ones. Also check the volumes – which have drifted down, and on some of the down days have been quite strong.

The negative divergences in the technical indicators and the receding volumes may lead to the much expected correction. However, the way any drop in the index – even on an intra day basis - is attracting buying means that a correction may not drag the index down very far.

Seems that only the FIIs are convinced about India’s growth story. The DIIs have been selling mainly because investors have been redeeming their fund units. Anecdotal evidence, and a recent discussion with a broker friend indicate that many investors have booked profits and are sitting on the cash, waiting for a correction to re-enter.

The FII buying may continue to propel the Sensex upwards, but at some point they will realise that valuations are beginning to get stretched. Higher inflation and higher industrial production is likely to force the RBI’s hands into raising interest rates. A slew of planned IPOs can suck out a lot of the money flowing into the secondary market.

Bottomline? The chart pattern of the BSE Sensex index is making new highs on FII inflows. Stay invested with trailing stop-losses and enjoy the ride. Part profit booking is always a good idea near a market top. But there is no need to be pessimistic. There is no euphoria of the end-2007 kind. If you are one of those who missed this rally, miss it some more. Enter only after a 10-15% correction – if and when it happens. Look for value in individual stocks.

Friday, September 10, 2010

Stock Index Chart Patterns – Singapore Straits Times, Australia All Ordinaries, New Zealand NZX50 – Sep 10, ‘10

Straits Times (Singapore) index chart

Straits Times_Sep1010

The Singapore Straits Times index chart pattern had dropped from the Aug 3 ‘10 top of 3043 and sought support at the 50 day EMA, when I analysed it a month back. The technical indicators were looking weak and the correction in a bull market was expected to last a little longer.

It was more of a sideways consolidation between the 20 day and 50 day EMAs during the rest of Aug ‘10, followed by a bullish cup-and-handle pattern. All three EMAs are rising with the index above them, and the bulls are back in control.

The technical indicators are looking bullish. The slow stochastic is in the overbought zone. The MACD is positive and rising above the signal line. The ROC is positive and rising. The RSI is above the 50% level but dropped after reaching its overbought zone.

Australia All Ordinaries index chart

Australia_Sep1010

The Australia All Ordinaries index chart pattern has been consolidating sideways for the past four months after it dropped below the 200 day EMA. Periodic forays above the 200 day EMA and the 4600 level has been immediately resisted by the bears.

The chart pattern in Sep ‘10 is giving hopes of a longer spell above the long-term moving average. The 20 day EMA has crossed above the 50 day EMA and trying to move above the 200 day EMA. That will be the first confirmation that bulls are regaining control. The index closed the week exactly at the 4600 level.

The technical indicators are looking bullish but displaying negative divergences. The index went past its Aug ‘10 high of 4619 when it touched an intra-day high of 4630 on Sep 7 ‘10. But the technical indicators made flat or lower tops.

The slow stochastic is in the overbought zone. The MACD is positive and above the signal line. The ROC is positive and rising. The RSI is above the 50% level but drifting down. The index made a higher bottom in Aug ‘10 than the one made in Jul ‘10. But the bulls should remain circumspect till the May ‘10 high of 4680 is crossed.

New Zealand NZX50 index chart

NZX50_Sep1010

The New Zealand NZX50 index chart pattern was struggling in a much stronger bear grip, but has emerged above the 200 day EMA for the first time in four months more confidently than the Australian index.

The technical indicators are looking bullish. The slow stochastic is in the overbought zone. The MACD is above the signal line and rising in positive territory. The ROC is positive, and interestingly, has made a higher top than the one it made in Apr ‘10 when the NZX50 was much higher. A positive divergence. The RSI has dipped slightly after reaching its overbought zone.

Bottomline? The Singapore Straits Times index chart pattern is in a bull market after a short period of correction. Buy the dips. The Australia All Ordinaries and New Zealand NZX50 index chart patterns are emerging from bear grips but awaiting bull market confirmations (20 day and 50 day EMAs moving above the 200 day EMAs). Buy selectively with strict stop-losses in place.

Thursday, September 9, 2010

Can a growing, profitable company go out of business?

Yes, even a growing, profitable company can go out of business. Most small enterprises fail because of various reasons like - a poor business model, lack of distribution skills, inadequate market research, improper SWOT analysis. But the majority fail because of one simple reason. They run out of cash.

My favourite niece, a student of economics, came to me during her summer break to help her plan a small enterprise. She is very good at preparing cakes and pastries, and wanted to supply them to the myriad sweet-meat shops within a 3 KM radius from her home.

I told her to visit some of the more popular shops with her samples and find out whether they would be interested in stocking and selling her products, and what kind of terms they would offer. After about 10 days or so, she came with a beaming smile and a print-out of a spreadsheet.

“Uncle, we have a winner on our hands. You just need to fund my first month’s expenses. From the second month onwards, the venture will be in profits!” Without pouring cold water on her enthusiasm immediately, I decided to look at her figures. Here they are:

 

Month 1

Month 2

Month 3

Sales

6000

9000

13500

Raw Materials

3600

5400

8100

Gross Profit

2400

3600

5400

Expenses

3000

3000

3000

Net Profit

(600)

600

2400

“Looks pretty good. What kind of terms did you get from the grocer and the shops?” I asked. Being a smart kid, she had an answer ready. The grocer had extended a 30 days credit for the raw materials. The sweet-meat shops wanted 60 days credit from her.

“What are the expenses for?”, was my next question. She wanted to hire a person to help her in the kitchen, and to deliver the pastries and cakes to the shops and collect payment. The expenses included the cost of transportation.

“OK. But you do realise that you are not going to get paid for your efforts for two months? Have you figured out your actual cash requirements?” This time, she wasn’t prepared with an answer.

So, I started to explain patiently. In Month 1, the ‘Sales’ are on credit. The entire 6000 won’t be received. The ‘Raw Materials’ also won’t be paid for, and will remain due. But the expenses of 3000 need to be paid.

In Month 2, the ‘Sales’ are again on credit. No cash is received. The month’s ‘Raw Materials’ are not paid for, but the earlier month’s ‘Raw Materials’ worth 3600, plus the expenses of 3000 – a total of 6600 has to be paid out.

In Month 3, finally some cash comes in, the first month’s ‘Sales’ of 6000. But that isn’t enough to cover Month 2’s ‘Raw Materials’ of 5400, plus the expenses of 3000. A net amount of 2400 (= 8400 – 6000) has to be paid out.

From the Net Profit figures in the table above, the aggregate profits after Month 3 is 2400 (= –600 + 600 + 2400). An enterprise growing at 50% and making profits. But these profits are not ‘real’, just an accounting sleight of hand.

Actually, the cash paid out will be 12000 (= 3000 + 6600 + 2400). That is the only ‘real’ thing that will happen after all the activities of baking and delivering cakes and pastries for 3 months!

What would happen if some of the shops defer their payments? More cash would be required to cover the shortfall. What if my niece decides that such a growing and profitable business should be quickly expanded to other parts of the city? That would require additional expenses, multiplying the cash requirements.

This is a simplified example of a small enterprise, based on an imaginary conversation with my fictional niece. Now, change the ‘Month’ to ‘Year’ in the above table, and the figures to Rs Crores. Next, add a column for Year 4, where the sales drop by 50% while the ‘Raw Materials’ are already in inventory and ‘Expenses’ stay the same. What do you get? Suzlon Energy!

The point is: profits do not mean cash. Profits are more often than not fudged by company management and pliable auditors. It is much more difficult to fudge the cash flow statement – because it shows up in the ‘Cash and Bank balances’ of the Balance Sheet.

This is one of the main reasons that investors should check out the Cash Flow statement in an Annual Report before looking at the Balance Sheet and Profit and Loss statements. Needless to say, such due diligence should be done before buying a single share.

(Note: A friend who works as an accountant at a telecom services company, was late for a get-together last Saturday. “Were you working overtime with month-end closing figures?”, I asked. “No, no”, was his response. “We have kept August sales open till the 7th of Sept!” This kind of fudging is standard practice in many organisations.)