October 06, 2015

Nifty Futures Experiment

No analysis trade setup.

Strategy is simple:
i) At 10:15 AM, look at Nifty futures. 
ii) If it is in +, we BUY. If it is in -, we SELL.
iii) Target 30, Stop Loss: 20.
iv) The moment we reach -200 in a month, we stop for that month.

Date             Signal           Entry           Exit          P/L          Cumulative

8-Oct-15       SELL             8162            8132          30               +30
9-Oct-15       BUY              8236            8216         (20)              +10

July 03, 2015

Nifty Valuations - Q1 FY15-16

The 1st Quarter of FY 15-16 has ended and companies will soon be coming out with their numbers. Let's look at the valuation of Nifty based on it's EPS, P/E, P/B and DY.

Let's first look at the P/B (Price to Book) ratio and DY (Dividend Yield)

PB Ratio:

The average PB Ratio of the index is 3.56 when taken for the period of 1st January, 1999 to 2nd July, 2015. The current PB Ratio of Nifty is 3.51 which is a tiny bit lower than it's average. Usually the market is considered ripe for investments when P/B ratio is 3 or below and overvalued when P/B ratio is 4 or above. From the past 1 year the market has sustained above the 3.5 mark and the market has not seen any major crash from these levels of PB Ratio. From mid 2009 to end of 2010, the market traded in a PB ratio range of 3.5 and 4 and after that corrected to the levels of 2.8-3 in the beginning of 2011. So as per historic PB ratio valutaions, we can say that the market is fairly valued and this indicator doesn't indicate a crash but doesn't leave much room for an upmove too!

P/B Ratio Chart - Click to expand

Dividend Yield:

The average yield of the index is around 1.46% and the current yield is 1.42% which is a little above average. When the yield is above 1.7% it is usually considered good for investment and below 1.3% it is considered expensive. Before the 2008 crash the yield had fallen to below 1% mark and after the crash it was close to 2.2% levels. So as per DY, the market is fairly valued and doesn't give much room for an upside.

DY Chart - Click to expand

Now let's take a look at two important parameters of valuation: EPS (Earnings per share) and P/E (Price to earnings) ratio.

Earnings per Share:

EPS Chart - Click to expand
For the first time after the 2008 crash, the market has seen a big fall in the EPS of the Nifty index. Similar to that phase, the EPS has fallen close to 10%. A fall in EPS is a danger sign in a bull market as it shows divergence between the market's expectations and ground reality. The earnings of companies are just not picking up! But the market is rising. Infact, on a QoQ basis the EPS of the index has fallen from 368.6 on 1st July 2014 to 360.7 on 1st July, 2015. In this period the market has rallied from 7650 levels to 8500 levels. In the next couple of quarters if the earnings don't pick up then expect serious trouble for the market. In a scenario where consider the growth in EPS doesn't pick up and the market creates new highs of 9200+ levels then we can expect a big crash coming. Let's see how the EPS moves after the Q1 numbers of companies. TCS has warned of a fall in earnings growth due to Visa costs and other factors which will severely impact all IT company earnings. Falling EPS indicates no scope for a rally and is a WARNING symbol for investors.

Price to earnings ratio:

P/E Chart - Click to expand

P/E is probably the most discussed, dynamic and disputed ratio. Long story short, it is a gauge of investor expectations. The average P/E of Nifty is 18.56 and currently it is trading at 23.4! 23.4 is a high P/E and shows that the investors are expecting high EPS growth, maybe more than 16%-17% while the market is giving negative growth. As per P/E, the market is too expensive for investing now. Usually a P/E above 24 is considered over valued. On 4th March, 2015 the market made it's all time high of 9100 levels and the P/E at those levels was 23.86. Now, the market is near 8450 and the P/E is 23.56 already! If we are to break the previous high in a falling EPS scenario the P/E will expand to 25.5-26+ which is a very expensive valuation. The market has crossed the 25 P/E thrice as shown in the chart. All the times, the market rallies very fast at such high valuations and crashes deeply later. The current levels don't look sustainable as per the P/E approach.

Now What?

Well you cannot just go out now and start shorting as the market can stay expensive longer than you can stay solvent. When trading at a P/E above 24.5, the market usually rallies fast and stays above this level for 2-3 months as per historical data. We aren't there yet. The Q1 earnings will not give the EPS the required boost as per our analysis and expectation. By the end of Q2, we could see the market head close to the 9000 mark near it's previous highs and then an eventual correction. Till then for the next 2-3 months expect consolidation and a 8200-9000 range Nifty. We have been talking of consolidation at these P/E levels in our previous valuation reports. This time, we say a rally till the previous high is very much possible. There is more chance of 9000 than 8000 at these levels and bullish sentiments. But watchout, there will be a storm approaching when we touch those levels.

June 02, 2015

RBI Policy Meet - What Next?

Nifty Futures Daily Chart
There was a cut of 25 bps in the RBI policy meet today. The index has shown weakness and is heading lower. The index has broken crucial support at 8260 levels and could drift lower to 8100 and 8000 levels. As long as the index sustains below 8300 the trend is bearish. An intraday bounce can be expected from 8180 levels.

May 28, 2015

5 Mistakes New Traders Make

While opening the demat accounts of new traders, we see a lot of excitement, aggression and bullishness in them. We ask them which instruments do you plan to trade, they say Futures & Options. We ask them do you know how to analyse charts and take trades based on them? They say not really. In this article we will highlight 5 common mistakes which we see every newbie making in the market.

Stock markets have caught the fancy of many people over the ages. Almost everyone must have tried dabbling in stocks much to the disgust of their family. Most of the people have burnt their hands in the markets and gone on to blame operators and tooth fairies for their mistakes. You had a capital of 50,000 and on day 1 you start trading stock futures and a week later your capital is 25,000. The fault is yours, not the markets!

1) Trading futures and options in the beginning:

High Expectations...

Every trader will see some beginners luck which will sooner or later fade away and losses will set into your account. When you are new to the markets, you shouldn't go beyond risking an amount you don't mind losing and all you should trade is positional cash. Futures and Options are instruments which can bring down big financial institutions, how do you think you will mitigate that risk?

The desire to trade in F&O shows a dangerous level of greed. You should first learn to manage risk, analyse charts, lose some cash as fees to the market, improve your maturity levels, get your emotions under control before you start exploring F&O. Usually, 18 months in cash segment will make you enough mature to start exploring F&O.

Every active trader has melted capital trading F&O and will keep doing so unless rightly guided to. Your broker will never tell you not to do it! It's the law of the jungle.

2) Your money, his knowledge:

If you were to buy a car, will you ask a random to go the showroom, check out all the models and then will you buy whichever car he suggests? Well unless he is a proven car expert you won't. Even if he is an expert you will atleast have a look right?

It's your hard earned money! Think of all the pain you have endured to earn your money, think of the purpose it should be solving - Daughter's education, Retirement plans, Health requirements, etc. How can you risk all this  money on trading based on someone else's tips? Yes! There are a few good advisory firms out there but most of them are one's with fake girls display pictures on facebook who promise 80%-90% accuracy. Donate money for charity rather than blowing it up on them.

If your advisor suggests you something, check if he is putting his money there too! Check the logic behind the same, it will help you gain knowledge too.

Also, the cost of choosing a wrong broker is very high. High brokerage rates will eat into your profits and also multiply your losses significantly. And the worst  part is your broker will want you to keep doing this as this is how he will make money. Those opening their brokerage account through us can be assured that this won't happen to them as the rate is one of the lowest in the country!

You really think so?

3) Trader to investor to trader to investor to... Fixed Deposit:

Mr. X saw the movie Wolf of Wall Street and decided to be a cool trader. He opens a demat account and buys 10,000 shares of XYZ Ltd because he feels the stock could go up in the short term by 100% to 200% and he will be rich soon. The stock goes starts going down and loom what happens:

  • Stock down 5% - Just a little correction, will trap the bears and squeeze all life out of them!
  • Stock down 10% - 200 DMA will come to the rescue, bulls will rule!
  • Stock down 25% - Fibonacci retracement will provide support and stock will go up!
  • Stock down 50% - Reads Warren Buffet's philosophy on investing and holding companies for long term. Also gets his hands on company's annual reports and starts analysing the fundamentals.
  • Stock down 90% - Stock market is gambling, utter waste of time. Operator destroyed the stock.

Meanwhile, his portfolio will be full of junk stocks like these.

Now take another situation where Mr. X reads DalalStreetBull's portfolio pick column and buys a stock called ABC which DSB has suggested for 15% returns p.a. He has decided to hold the stock for the next 4-5 years. That week the stock rises 10% and he immediately books the profit to lock the gains. His purpose was defeated.

This is Greed and Fear - The major elements of trading psychology. Greed is holding losing positions to not lose money. Fear is booking profits early as you are scared that "Jo aaraha hai, utna bhi nahi ayega"

Eventually, unless these 2 gentlemen, unless they learn from their mistakes, will lose their hard earned money and end up putting everything in Bank FD's for 6%-7% p.a. post tax returns.

You don't want to be on the wrong side of the market...

4) Analysis Paralysis:

A few newcomers realise that they need to learn analysis of price movement to become successful in trading. They start following blogs of successful traders. Some of these successful traders use RSI, some use Moving Averages, some use price action, some use MACD. So these hungry-to-learn newcomers load up their charts with RSI, Stochastic, MACD, Moving Averages, Candlesticks, Bollinger Bands, etc (Surprisingly they manage to not faint seeing these charts). What follows is an analysis paralysis. They forget their aim to make money trading and unknowingly get stuck in the maze of over-analysis. For successful trading you need simple techniques, good money management rules, the right attitude and a level of ego which lets you accept that you have made a mistake. It takes years for these newbies to realise this. Our Technical Analysis Course has been designed keeping this in mind. Why break your head if it is a hammer or doji or hanging man?

Rather toss a coin to decide BUY/SELL than look at this chart!

5)  ___________________ :

Fill in the blank with a mistake you made that I haven't mentioned. Everyone of us has made mistakes. Some of us have learnt from it, some of us have not. So this blank is yours to fill. Think of the mistake you made in your trading & investing career, then think if you have taken the right steps to not make these mistakes again. If you haven't it still isn't late.

Correct your mistakes as soon as you realise them..


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