Friday, May 29, 2009

Tring!... Tring!... Tring!...

Time is Ripe to Exercise Caution

Tring!... Tring!... Tring!... No, its not a School Bell. Well, not even a Telephone Ring. Than What? May be, an Alarm Bell.

Actually, I just want to convey that stock markets don't ring such 'bells' before they start correcting. They do not provide warning bells stating that, "This is enough mate. Now, pack your bags & stay away from markets." We ourselves have to catch the market signals the cues of which can be in various diferent forms, not necessarily explicit in nature.

Yes! Be cautious... Read this post till last to understand what I mean to say. We may already be in the last stage of the ongoing 'Mini' bull phase which has followed directly from the lower tip of bear market phase. The momentum is strong. Stock are flying high resembling the exuberance of the tip of any bull phase. The momentum may last a bit longer. But, who knows till when? Can you time the exit at the right moment? Not really!... you have to exercise caution & strategise your part-exit plan.

Current Market Scenario:

1) Large-caps are quoting at Expensive Valuations.
2) Mid-caps already catching up & Some even Fully Valued.
3) Small-caps have been moving up from Circuit to Circuit.

Exuberance Levels: High, with Sensex gaining 80% in 3 months.
Nearest Event: Budget & Corporate Results after 1 month.

Part 1: Denial Mode

First the markets recovers from the depression with an all round pessimistic mood and sentiment. Usually, Insurance companies, especially the Bid Daddy L.I.C., keeps munching equity stocks at such times. It plays an important role to support markets at lower levels with the mandate from the Centre. At such time, investors are in denial mode to buy, they think markets will further move down. Then the markets further recover all of a sudden leaving most investors in the lurch. There is a feeling of being left out due to such unexpected rise. They still don't buy aggressively as mood is largely negative.

During this stage, all the counters from different market capitalization are largely under-valued & in over-sold territory.

Part 2: Feeling of being Left Out:

Just as the rally grows into larger proportion investors jump in expecting another big up move. No, the markets still don't go down from there. It rises further to give the feeling of optimism to the cash waiting on side lines. Investors pump-in yet another bout of funds to capture the bullish trend. Regarding Mutual funds, they are the wiser people who entered during the first or second round of euphoria. Foreign funds usually enter aggressively when markets show some signs of positive recovery.

By this stage, Large-cap counters are not under-valued. Though, mid-caps & small-cap are relatively under-valued and in the grip of pessimism.

Part 3: The Real Exuberance

During this stage, the real exuberance is witnessed in terms of buying. Straight gains are made day after day. Positive cash inflow is continuously witnessed with every passing week. Large-cap counters become fully valued during this stage. Still, there is further room for up side in them on the back of momentum.

Mid-caps are the flavour of the season during this stage of market ruled by sheer momentum and exuberance. Small-caps gradually find their feet and they rise the fastest with a series of up circuits on the bourses. Large-cap counters usually rise at a slower pace but their up ward momentum is not completely lost.

Part 4: The Final Countdown:

The last phase of the exuberance is characterized by Analyst visions going forward into future for the company's prospects and earning potential. Large-cap counters start being valued on not current year valuations, but 1 or 2 years down the line. This is the first and perhaps the last sign to exercise complete caution.

During this stage, Mid-caps catch up with their lag to large-cap counters. This stage witnesses participation of the retail traders more actively with the perspective of making some quick gains from the market momentum. Small-caps, usually, are in up circuits with unavailability of sellers on the bourses.

The extra exuberance in the last stage is often forged and supported with new 'logic' that are put forward by the Analyst community such as 'Decoupling Theory', 'Upgraded Fundamentals', 'Strong Potential for the Economy' and so on. The momentum of the last few weeks is attempted to be stretched as much as possible.

Prolific Gains, witnessed in individual stocks, to the extent of whooping 10-15% are notched on an almost daily basis. The proportion of returns which usually take 1 year in Debt instruments like FD, PPF, etc. are usually acquired in time as short as few countable sessions from equity markets. Till when can such times last?

Exercise Discipline & Control:

During this stage, caution should be exercised with utmost discipline, patience and perseverance. Investors would find the situation extremely terrible of being missed-out by huge extent. They have to control the urge of entering the markets at such moments. Traders should apply Strict Stop losses to their each and every trade. If they don't do so, markets will retract in a big way some time or other & at such times traders will be left with their trading favourites which shall eventually turn into papers when their value goes down. When the value starts falling, traders won't feel like exiting their positions at nominal gains or even losses.

The above does not mean to convey that a huge correction is on the anvil. Nor does it mean to say that the markets won't go up any more. It simply is a cautionary posting to put the readers of this blog on a 'Warning' note that valuations are no more cheap as may be 3 months ago. On that note, even a small correction of 10-20% should not be ruled in coming times. The momentum can take markets up- to surprising & unexpected levels, but the crux of the matter is that you won't be able to time out during such exuberant times with ease. Greed takes over from the fear factor during such times of euphoria, from which you have to save yourself swiftly.

Same Old Evergreen Strategy:

The last stage is the hogged by the moment of uncertainty. There is lack of clarity as to what the next big leg of trend would be. Whether markets will stay afloat or give up substantial gains? During such scenarios, my first posting of this blog related to 'Strategy for Investment' would come healthy.

This time, you have to follow 'Sell in small qty on Every Rise' and not 'Buy in Small qty on every Dip'. Minimize your risk with every rally. Accumulate cash with every bout of sell-off you exercise on incremental rallies. The main benefit of using this strategy is, you cut your risk to the extent you sell. But if markets rise, you still tend to benefit from the rally as your major portfolio still remains invested and that you have sold only a fraction of your stocks and portfolio. The money and opportunity that you lose from any potential rally is far less than the benefit that accrues to you for your remaining 'invested' portfolio.

Dated: May 28, 2009

Reliance Capital (CMP 945)
Buy in 2 Small Tranches:
1st Buy around CMP 930-950/-
2nd Buy around Rs.860-880/-
Stop Loss: 845/- (Closing Basis)
Target Expectation: 1060-1125

High Risk Trading Call:

Ind Bull Real-estate (CMP 215)
Buy Around 215-220/-
Stop Loss: Rs.190/- (Closing Basis)
Target 1: 248/- Target 2: 280/-

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.


Antriksh Patel said...

Hi Viral,

Once again a lot, lot thanks for your caring about us.Volumes of most large cap stocks like bhel, l&t, etc. have started falling. I don't understand why so much craze about NMDC? Even at this valuations volume seems to increase. Can you give me a very rough estimate as to the levels it may touch pre and post budget? I have around 2000 shares of Sesa Goa and 360 shares of NMDC. Is it advisable to invest in NMDC by exiting Sesa Goa.

jamesvaikom said...

Thanks for the tring. Now the market is good for trading with strict stop loss only and not for investors. Many people are investing at current levels thinking about the future of stock and sector. But they don't understand that earning estimates will change with sentiments. We have not heard any bad news about power stocks in last one year. But what will happen to power stocks if companies like moserbaer sells cheaper solar pannels. What will happen to oil companies if people start buying electronic bikes ( I am sure it will happen in future as youth are addicted to digital products. )

Viral Rajnikant Dholakia said...

Dear Antriksh,

Regarding Technical of NMDC, a major resistance stood at Rs.360/- which is currently swiftly taken out by a big margin. The next resistance stands at Rs.500-505/- zone. Above that the stock is likely to face minor resistance around its all-time high of Rs.535-545 and then enter into a completely uncharted territory with new highs.

Looking at the crucial event of Budget in next 1 month period, the stock can easily test the first resistance of Rs.505/- and even more looking at the small equity base amongst public and institutions.

But, at the same time, we also need to see the scenario on the downside. The stock has been constantly appreciating since Rs.220/- levels without any halt or consolidation in between. From valuations perspective, it is difficult to give a call on this stock. The stock had tested Rs.120/- during December 2008. From there, the rise is whooping 400% till date. So, its difficult to give an investment call at such prices.

For trading purpose, you can buy the stock with Strict Stop losses. Even then, it would be safer to let 1 dip come into it and than buy on smaller dips.


Coming to Sesa Goa, a similar chart patterns are visible on this stock as NMDC. The rise is meteoric from the lows of Rs.65 to Rs.166/- at last closing levels. A crucial resistance lays at Rs.180/- and Rs.195/- levels and final resistance at Rs.215/- at it's all-time highs before it gets to uncharted territory of new highs.

Comparing both the stock prices... It is more likely that NMDC makes new highs rather than Sesa Goa. The Government has a little over 98% stake in NMDC and this leaves hardly a very small stake in public hands. So, it is easy to jack-up the prices of such counters for punters & speculators.

From Investment perspective, instead of accumulating Sesa Goa, it would be advisable to exit & book profits in small parts at every rally. NMDC has a bit more speculative element, especially, until the announcement of Union Budget. If the stock moves up sharply before few days of Budget announcement, it won’t be that bad an idea to start booking gains in NMDC also.

After all, it wont be absolutely worthless to book part-gains & cut your risk before the announcement of budget. This, in anticipation that if FM does not oblige on Disinvestment issue in line with Market Expectation, you get to be on a safer side, if u would have booked part-gains.

In last effect, I would conclude that strategize your Risks and Reward Prospects rather than driving them on Greed and Fear aspects.

Thondaiman said...

Thank you sir for yet another enlightening post. It provides a good perspective of the upcoming. In fact am 50% invested with decent gains and was considering to gradually deploy more cash. But seeing the strategies in your post it may not be wise thing to do instead should wait patiently for the market to provide another opportunity which may not be far off. Anything which goes up in sky very fast has to fall back even faster. Hence sensex has gone up real fast (more than 80% in last 3 months) and widely expected to rise further for some more time. Once the valuations become unsustainable (very shortly), it will loose its steam and fall without any support and only the patient investors will get the best opportunity.

Viral Rajnikant Dholakia said...

Dear Thondaiman,

You have very well summarized the whole posting into 1 compressed paragraph. And stiil captured the 'crux' idea I intended to pass-on to the readers.

Ajay said...

I like your title the most in this post :)

Shabu's said...

Excellent again ... I was really in hope of such a warning post from you. The reality must hit in coming days. "When everyone is in greed ..we have to fear" ...

Thanks for your contineous effort to care the readers ....

jamesvaikom said...

What is your view on gold price. Gold usually goes up either when inflation rises or stock market crashes. But now gold is going up against dollar because people lost faith in dollar. People don't listen to bad news when market goes up. They will start listening to bad news only when market start going down.

Vikas said...

Hi Viral

Thanks for your input always to the point.

I want to ask you , now there is too much talk on "PSU disinvestment" during Budget session this year by our PM and also Murli Deora was saying that there will be some benefits for GAS companies. Can you help us in identifying which stock should we focus in?

Awaiting reply

Viral Rajnikant Dholakia said...

Dear Vikas,

Keep an eye on most of my Short-term Trading Calls. Most of them have been recommended keeping in view the Railway & Union Budget.

Kalindee Rail, BHEL, PFC, Alok & Gitanjali are the most recent calls that I have given which have chances to benefit from Budget Announcements and/or Proposals.

You can Buy PSU counters like IOC to benefit from the speculation that Oil prices may be partly deregulated. Though, it is recommendable to exit such counters in part before actual budget announcement, if these stock yield profits before the event.

Keep a tab on every single call which are given with some rationale or other, as may be felt fit by me. At the end of the day, all traders taking a call as listed on this blog must remember that all Trading calls should be safely executed with strict Stop Losses.

Wherever investment calls are recommendable from my side, i have specifically mentioned as 'Investment Calls'. These calls need not be confused with 'Trading Calls'.

Viral Rajnikant Dholakia said...

Dear Jamesvaikom,

Gold price movement is related directly or inversely to many aspects like dollar movement, inflation, gold reserves, Crisis scenario in the world, etc.

Right now, the crisis scenario has been put under the mat for a while. But, it will possibly crop-up in some form or other not too away from now.

Gold is tradationally a low-return yielding asset which has the knack of beating inflationary pressures at best in the long-run.

So, right now, with equity back in the vogue, there is little reason we see for Gold to move up sharply. No doubt, equity will go for big consolidation sooner or later, but the big bet on Gold plays out only if a major crisis again break-down on the world.

So, may be, we should review Gold as an investment asset when we see some sort of pessimism back into the world markets. Even a war can see Gold prices shoot.

Right now, nothing like that, lets wait and watch. Take every step as it comes. No need to speculate right away regarding prospects of Gold.



AND I AGREE WITH Dear Thondaiman