Pithaly

14th March 2008

It's known to technicians everywhere as a death cross, and it is happening on the Shanghai Composite Index. That's the index that has jumped by over 450% during the last two years--a sure sign of a speculative bubble.

A death cross is formed when the 50-day moving average of a stock falls below (crosses) the 200-day moving average. It indicates that there are currently more people selling than buying the stock. It is as bearish as it gets.

And it's not the first time the exchange has seen the "death cross," either.

As you can see, the death cross came twice on the index over the last five years, first in 2003 and later in 2004. Each time, of course, the index dropped dramatically, culminating in a 50% decline over all.

And while a third death cross hasn't actually completed yet, the Shanghai Composite continues to drop even as a Bernanke-inspired rally pushes the Dow higher. The index actually lost nearly 3% on the same day the Dow rallied 440 points.

http://seekingalpha.com/article/68518-why-it-s-not-too-late-to-short-china?source=side_bar_short_ideas Read more on this article...

There’s no point in burying your head in the sand like an ostrich and waiting for a miraculous rebound. An active interest in the state of affairs is a must. The first thing you should do is take a long, hard look at your portfolio.

"Does it have more of established companies with proven track records, or does it consist more of stocks like Nagarjuna Fertilizers & Chemicals and Reliance Natural Resources (RNRL), which you bought because they were ‘momentum plays?’

Having done that, get rid of the momentum stocks. After all, with the momentum gone, it’s time for these stocks to go as well. The rule is simple: ‘Never hold on to something that you wouldn’t buy now’ . Never ‘hope’ or ‘pray’ . It is either a ‘buy’ or a ‘sell’.

So, it doesn’t matter at what price you bought such stocks — just dump them and collect whatever cash you can. If you have blue-chips in your portfolio like Reliance Communications, Bharti Airtel, Hindustan Unilever or ICICI Bank, to name but a few, you can actually choose not to sell them. In the long run of say, 3-5 years, there is a good chance that you will still earn a return higher than what a bank deposit can give you in the same time period."

http://economictimes.indiatimes.com/Investors_Guide/Cash_is_King_Tips_for_small_retail_investors_/articleshow/2872872.cms Read more on this article...

11th March 2008 Update: Infrastructure shares look good. Market in a bounce. Recoup losses.


10th March 2008

There is no doubt left in my mind that a bear market is underway. Other than short covering in the Sensex, a 50 basis point interest drop in the USA (which itself would have very little positive effect on the market) and considering that we are still highly coupled to the world financial situation (if not its economical situation), I think we are now headed to the Mid August '08 lows when the Sensex was 14,000.

To this effect, I sold off a few minor midcap holdings today at approx. average 20% loss as energy release.

The reason for this minor sell-off if I may call it that, is the fact of what I now term as the :Inverted Sparrow Head", a technical term that I have invented(!). Wild as it may sound, but I have seen at the beginnning of the bull run, a bollinger band formation which I call "Compression" shaped by a narrow bollinger, which becomes pincered and shaped like a walnut- breaker) leading to a huge initial expansion of the share price (in the shape of a "Sparrow Head"), and then the formation of a "Beak", which leads to some consolidation, and once agin into a larger expansion.

The slope of the beak has many times indicated the bullishness of the next move. for example, in the case of a pharma co., the slope of the beak was upwards, which lead to a huge upmove subsequently.

Currently, many shares have now an "Inverted Sparrow Head" exactly inverse of that formed during the bull run. The 'Beaks of many shares is now not horizontal, but pointing downwards. This implies that after trading for a short time within the narrow bollinger, a large break-out has to occur downwards, and keeping in line with the overall market heading towards 14,000.

The double (long term and short term) bollinger buy signals (first on the daily charts, and then on the weekly charts) would be the first indication that one could risk a purchase. A single bollinger band on the daily charts as has occured today in SBI), may lead to a price closer to the upper bollinger, but no more, unless further confirmation of the long term bollinger is also available. The prime principal of "Safety of Capital" (and not mazimising of profits) applies to the bear phase, so it is prudent to only make purchases on double bollinger band buy signals on the Weekly charts and not on the daily charts and hope that they are not false signals. Such signals still seem to have some time to be generated.

It pays to be very stock specific this time, and also to purchase for the longer term, leaving the shorter term buys in Sensex scrips and not in mid caps. That does not mean, however, that we should totally lose track of the mid caps sectors, andhence miss out the quick 25% rise from bottoms.

The one sector, which is not exotic (like solar cells) and which is bound to do well in the future is Infrastructure. To maximise profits one needs to look at the fundamentally good and emerging midcaps in this sector.

Two such midcaps, I feel, are GMR Infra and J P Associates. I'm sure there are more. So, a strategy would be to inddenitfy fundamentally good emerging mid cap scrips, which have a running business, and whose projects are soon to go on-stream (as is the case of GMR Infra with their Air port projects, and take a purchase decision on double weekly bollinger and buy signals with about 25% of the total investment you intend to do in a particular scrip so that a false signal is downplayed.

Short term plays may be done on commodity scrips like ONGC and yes, SBI.

HNI individuals should book some of their long term profits now, and channel the money into gold ETFs.

Kakstearns Read more on this article...

It's interesting to read history. Here is what three of India's top technical analysts had to say in January 2008 (!!)

If what they claim to be true technical analysis, then history has proved it so terribly wrong, should the entire method needs to be thrown into the sea?

Not really. The fact is that it is very difficult to have a foresight on turning points in markets as well as in history, by mere procedural analysis. The emtire process is a combination of fundamentals, technicals and human behavior all rolled into one, finally creating ONE insight.

What did I say in October?

"The sensex has peaked and will crash in January 2008."

And this is what I'm saying now.

"The sensex will bottom out in September 2008, albeit with some bear rallys in between".

Read...!!

"How will 2008 be? To know what the charts indicate, The Smart Investor gets three technical analysts to predict what's in store for the current year. Neowave analyst Milind Karandikar, stock market consultant and analyst Devangshu Datta and Orpheus Capitals CEO Mukul Pal predict the market in 2008. Read on to know more. . . "


1. Milind Karandikar

January 07, 2008

This puts the Sensex target at around 27,000 mark. The breakout could be as big as 2.618 times the largest leg, leading to a mind boggling figure of 39,000. Even if we keep aside this over-optimistic view, the target of 27,000 could be achieved and that too most probably in the first half of 2008. ......

2. Devangshu Datta

January 07, 2008

Summing up, the first eight months of 2008 should be positive, and there's no technical signals suggesting that the market is due for a major correction. Intermediate corrections should find support and peter out around 5,600 levels. Breadth looks good and relatively smaller stocks could outperform. ......

3. Mukul Pal

January 07, 2008

After Sensex 20,000, the market expectations are for 30,000, but I don't see the Sensex extending beyond 24,000 this year with the benchmark making a decade high this year.
This year, the BSE Capital Goods index should move its last leg up to complete the cycle trend the sector started in 2002. The index should complete the last leg up from current 20,000 levels to 25,000. ......

To read the complete article, visit:

http://ia.rediff.com/money/2008/jan/07bspec.htm

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Guys, here's my take on the markets. The article below does resonate much of my thinking, and also gives reasonable levels. A word first, on this bullish-bearish thingy though.

Yes, we have broken the DAILY chart 200 DMA, not the WEEKLY chart, (in fact, we have just broken the 50 DMA on the Weekly charts, but this could recover very fast after a steep decline, like it happened in June '06 and never again till now), and may continue to ride below that zone say for a month or so.

The article states that this is an Elliot wave 4 correction. Now, Elliot wave counts are very complex and many times the count has been proven wrong, but seeing the structure of the sensex, it seems more like a rounded top rather than a vertical blow-out aswould be expected in an Elliot wave 5. So at the moment, I would accept this as a wave 4 correction. In which case, the good news for LONG term holders is that on completion of wave 4 the final bullish wave 5 will start. (That may take some time though!)

Next, on the DAILY and the WEEKLY charts the market is terribly oversold. I have never seen the WEEKLY Stochastics in such oversold regions (approaching 0) in the last four years. Earlier, a WEEKLY buy signal, (and there have been very few such opportunities ie., once a year, giving a lot of credo (is this a word?) to the fact that a buying opportunity really takes place once or twice a year. (As shown on the chart, May '05, July '06, April '07 and now, when the signal appears, the buying opportunity for '08.) which implies a wait of another 6 to 8 weeks on the WEEKLY Sensex or Nifty, confirmed with early buy signals in the daily charts sometime before that. Sentiment at that stage would still be very BEARISH and would turn BULLISH only after the cream 25% to 30% of the rise has taken place.

From this virtual ground zero levels, there has to be a technical bounce-back! Exactly how high would it go, is a matter of conjecture, but could be as high as 18,000. Again, reaching that level may take some time (and 'm speaking in terms of months).

Before it gets there, there is some bad technical news. The next support after 4900 (which has been broken), is 4300 on the Nifty. That means one has to be ready to sit through another fall of 600 points on the Nifty and hope that holds. That's the point when we will see the real blood bath. This is merely bruising, since long term investors are still in considerable profit.

Having said that, the potential to correctly guage the entry point if you exit now has a very low probability, since the level of FEAR will be so great at that point, that only extremely fool-hardy and contrarian persons (like me!) will even think of entering.

So, the long term strategy is to HANG IN THERE and this may mean for over a year. After all, as a long term player, your interest is to catch the greatest rise, which will take place in the 5th minor wave of the 5th major, (provided it is not truncated by some DISCONTINUITY which is the prime cause of not being able to predict anything in the markets), and the indices at that time would be of the "shock-and-awe" type.

As the article mentions, and rightly so, only a break of Nifty 4000 (gulp!) would declare this as a LONG TERM BEAR MARKET.

As I had mentioned earlier, (and this seems to be coming true now), is that every developing nation has to go through a depression (read a bear market), before a secular BULL can start.

One would need to sit out the hell that is going to happen to the world markets in September '08.

Do read the blog post below this, where Roubini has listed out the 12 stages of economic hell. (Quite akin to the 12 days of Christmas!)

Next post: Another very interesting person to follow. Ms. Meredith Whitney.


Quote, courtesy DNAINDIA: Both the Sensex and Nifty appear to be tracing out an Elliot Wave-4 correction CHENNAI: Technically, indices have fallen enough to cleanse the excesses created during the earlier rally. The key ones such as the Sensex and the Nifty have corrected from deep overbought levels in the monthly time frame and have nearly reached the oversold zone. Benchmark indices have also reached extreme oversold region in the daily and weekly time frames. Hence, technically, the correction that was required has been accomplished with the fall on Monday. Markets have hit crucial support levels in both the indices and have staged an intra-day bounce off those levels. It would be crucial for the indices to hold above the intra-day lows recorded on Monday for a sustainable recovery to materialise in the short-term. A breach of these lows could lead to the test of the next major support levels in these indices. In the Sensex for instance, a drop below Monday’s low of 16951 could lead to the test of 16390-16500 range. In the Nifty, the support levels are at 4900-4950, followed by 4240-4300. Though these support levels may appear scary from current levels, the long-term uptrend will not be affected even if these levels were to be tested. Both the Sensex and Nifty appear to be tracing out a Wave-4 correction (in Elliott Wave parlance) to the earlier rally and the next segment of uptrend would take these indices to new heights. As there is a case for a lot of churning and base-building to happen before the next leg of uptrend begins, we may not see new highs in the index in a hurry. The long-term uptrend would be under threat if the Sensex closes below 15000 and the Nifty below 4000. From a short-term perspective, the scenario is ripe for a sharp technical rally and those who are holding short positions may tighten stop loss or take partial profits. Traders may also wait for short-term “buy” signals and take long positions for a quick 12-15 per cent bounce in the index. The key here would be risk control and entry at the opportune levels. http://www.dnaindia.com/report.asp?newsid=1146698

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KaksStearns FREE MARKET DIGEST
(For educational purposes and private circulation only)


Here is something to digest in retrospect. On 2nd November 2007 I had written the trailing long mail, claiming that a top had been formed, and the reasons why:

It's 20th January 2008 today and an article dated 18th January 2008 now confirms that indeed the long term bull market topped out in October 2007. Of course, they have more data (from November 2007 to January 2008) to support their arguement, which I did'nt.

"Bottom Line: Probability is very high that the bull market top arrived in October 2007 and that we are now in a bear market that will continue for another year or more, possibly until mid-2010. Until we have evidence to the contrary, remember that bear market rules apply."

You can read the full article here; (which has some very alarming charts), showing indeed a bear market has started.

Quote:

"In China, the world’s fastest growing economy, the Central Bank is combating inflation with higher interest rates and other measures aimed at tightening credit. Furthermore all indications are that a major market top in China has already taken place - a variety of Chinese stocks climbing 200% in one day during the month of October was a sure sign of a major market blow off top.

While all eyes are focused on the U.S. markets and the looming recession, a stealth Bear market is taking place elsewhere. Above a two year chart of the heart of the emerging markets, Hong Kong’s HANG SENG Index. The index has lost 6000 points in the last three months, down from 32000 to 25800. A close below 25000 will hasten the move down to the 20000 level and will constitute a 30% retrenchment.

The evidence strongly suggests that the emerging market phenomenon witnessed over the last few years is over."

With the S&P at 1333 or so today, the four year cycle chart predicts a low of 750 by mid 2010.

Most Corporate CEOs in the USA now agree that the USA is indeed in a recession. All hopes of recovery etc. are over now. The bear must play out.

Rumours abound at such times, due to fear. In fact, one may expect a rally before the flames die out. Some are claiming a crash on 28th Feb 2008.

So did I make any money out of my convictions? No. But I indeed saved a lot of market losses, by investing in other avenues available. It's virtually impossible for retail player in cash to make money in a bear market.


KaksStearns

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On Nov 2, 2007 3:08 AM, kaks wrote:

KaksStearns FREE MARKET DIGEST
(For educational purposes and private circulation only)


I know I may be putting my foot in my mouth, by going against the "experts", but I do think that a top has been formed and we are in for a violent fall.

The Dow cracked 360 points tonight. Citibank is down 6% with a lot of guys being sacked. (when Citibak breaks $30, runs for the hills. It was $ 41 yesterday, and today a 6% fall).

All this, just two days after a drop in interest rates by 0.25%. compare that with the euphoria last time when interest rates were dropped 50 basis points.

Now, the contrarian contrarian view. Conventional wisdom would say that money would rush to emerging markets if there is a drop in the DOW. Somehow I don't think that that is a rule. With oil at $96, fears abroad that the sub-prime mess is much larger, (an old story, but who listens :), a history of violent falls in emerging markets (not slow secular bear markets, the fact that a whole lot of fresh investors many of whom have not seen the crash of 2000 having entered the market, (I know this for a fact), the sheer sense of "happiness" on the rise of the sensex, (A girl at a bank smilingly cautioned me not to wish for a violent fall in the sensex since so many people had made money, i.e, read that as being long in futures, that .... she left that unsaid, and I completed it for her.), the feeling that because the Indian economy is doing so well then the market must obey fundamentals and rise, strangely the fact that markets do not always follow fundamentals is ignored!, the small red lines forming on the sensex, (they are always small at first), oil at $96, repeated, since the effect of that will be really bad and affect fundamentals, the very important fact that a huge amount of complacency has been built up that no matter what, every correction is to be treated as a rising bottom, the non-sale of real estate in India, the crash in real estate prices in Shezen district, China, where guys call out to you to buy property like pani puri wallahs on the road, the imminent danger of a collapse of China stocks, the rising rupee, which has created a Catch-22 situation for the Indian govt, and in fact for the rest of the world's currencies, with Europe about to, if not already in a recession because of this, the fact that the capitalisation of RPL at 280 is more that the total capitalisation of ALL Indian refinery comanies, BPCL, IOL, HPCL, etc (Businessline paper)!! I mean, what the...!!

Ok, there's more:

On the other side, what's there to temper all this? India is a growth story. Sure. With Larsen and Toubro at a PE of 75 (!!) take a guess where that could land up.

A small hiccup now, can prove to be bronchial pneumonia for the market now. A small hint of a slow down, and wham!, there blows the extreme optimism. Sigh. How many times does the world have to learn the same lesson again and again, that it is never different this time.

Let's see how things unfold!


KaksStearns Read more on this article...