Accumulation / Distribution an important indicator

Now that our markets seem to have stabilised, and thankfully my calls went  right :) its time to do a revaluation of the current scenario. . .

Most of the stocks are now trading in their positive MACD's which basically means that the short term trend for these stocks is positive, but the important thing to understand is which of these stocks would outperform. . . I think an important criteria to look at this point of time would be the accumulation / distribution criteria. For e.g. A case in point would be the 2 stocks I own. Indiabulls and Zylog systems. . . Whereas Indiabulls has started to show a good accumulation pattern and it has reflected in its price moving from a low of 77 odd to around 140 within a span of 2-3 months. . . whereas Zylog has not been showing any such pattern and the stock price also has not moved beyond the 100 odd, from a low of around 80 odd. . . 

Going forward, there are a couple of things that should be kept in mind:

Fundamental Perspective:

1) Earnings estimates: Assured earnings and some growth

2) PE & EPS : Realistic wrt Industry and markets in general

3) Dividend yield: If it comes to levels above the risk free interest then the stock has to be a good buy. I would keep it at around 10% 

4) Stability: Low leverage

Technical Perspective:

1) MACD: Should be positive or atleast moving out of negative territory

2) Accumulation / Distribution: Need to be accumulation patterns

3) RSI: Should be within reasonable limits.

 

Markets to move up....last leg of bear market?

OUTLOOK: VERY POSITIVE

Now with the Nifty and Sensex up in the green (on the charts), some happy times should be here....Specially considering that this uptrend is coming after a long time. The last uptrend that we saw was on 29 th of July, and it did not last for a very long time, lets hope that this uptrend lasts longer...

MACD : Just getting above the zero into the positive territory

Also as I have written in my many previous posts some of the stocks have already seen there bottom and now have started to consolidate, this can mean that smart money could be finding its way back into these stocks....

As the classical definition of the last leg of a bear market goes: " When the markets would not react to bad news, and latch onto any good news to move up".....this definitely seems to be coming true wherein the bad news of IIP nos was shrugged off by the markets and the good news of inflation coming down was lapped up by the markets....

Its time to be cautiously optimistic at last...keep an eye on MACD, we need to trade above 0 to remain in the positive zone....

More Downside to Come???

Although most of the analysts are unanimous with the earnings downgrades, there are only a handful who are actually putting their hands up and quoting levels for the markets. Earlier today I was reading an interview with Shankar Sharma, wherein he is predicting a 20-30% downlevels from the current levels for the market!!! Some excerpts of his interview as published in moneycontrol.

"Markets will not discount this substantial slowdown in advance so I reckon somewhere in the middle of the month i.e. this month the market will begin to get a sense of how bad their numbers are going to be. I wouldn’t be surprised if a few major companies across the world came out and issue earnings warnings that they are not going to be able to meet the numbers that they had forecasted for this quarter. Therefore we see the market beginning to sell-off probably in the middle of December and this could continue I reckon to the middle of January or end of January."

There are some reports emenating from the US that the recession fears are getting stronger than ever before, and this recession would be the worst that the world has seen after WWII. As published in an article in the bloomberg:

The U.S. economy may be headed for its deepest and longest recession since World War II as mounting job losses take their toll on consumer confidence and spending.

"Employers cut payrolls last month at the fastest pace in 34 years as the unemployment rate rose to 6.7 percent, the highest level since 1993. The 533,000 drop brought cumulative job losses this year to 1.91 million, the Labor Department said yesterday in Washington. At 12 months, the recession is already the longest since the 16-month slump that ended in November 1982. The recession is the 11th since a downturn that occurred in 1945, the year that World War II ended."

Another factor that needs to be kept in mind the rising US dollar. This is not particularly good news for the developing economies, whose currencies are falling in sync Vs the US dollar on a rapid pace. Hence till such time that we see a cooling off the US dollar or atleast stability there seems to be slim chances of EM's recovering swifty, add experts.

Sensex Analysis

OUTLOOK : POSITIVE

From the looks of it, we might be out of the woods, if we can have a couple of days of decentupmoves. The upmoves of the past few days has ensured that we are close on the charts ofpositive territory. Now with the news flow of the rate cuts coming in, the markets should gain some traction. Until there is a sharp downmove, we can safely assume that we would be out of the short term bearish trend if we close in the greens for a couple of more days!!!

What needs to be seen now would be whether the FII selling subsides (which in any case it does due the Christmas break abroad), and if it does then there is enough domestic money waiting on the sidelines to take the markets up in a hurry. Only a cap of caution being the quarterly results which are not expected to be good...If we can have some decency on that count also then we can safely say that we might have seen the worst behind us.

As written in my previous posts, last series has held up well, and the retesting and holding of the lower levels of around 8500 have augured well for the markets. Now with the tripletesting of the bottoms, we might have formed a base from which we can aim for higher levels. . . provided that the levels of 8500 hold up. Also a couple of other factors seem to be in the favour are, that we have started to trade above the Moving Averages line and if we can trade in this region for some more days, not giving up the gains then we would have firmly gone out of the bear phase, at least for the short term.

MACD: slowly trying to get into positive territory, now left with just some more ground to cover

image courtesy:indiabulls

Sensex outlook

Outlook : Neutral

MACD: Moving up from the lows set in October. Still not in the positive territory. Till the time it does so it cannot be said that the movement has turned positive

Stochastics: Till such time the red line is above the black line it indicates short term strength. 

With the market not doing anything for some days perhaps its not such a bad thing after all. We all get to hear about periods of consolidation and markets not falling, well for some days we have experienced something like that. Interesting thing to note what exactly is happening in the Accumulation / Distribution patterns. What this means is that if the accumulation chart patterns are showing accumulation, then it means that smart money is accumulating stocks at these low levels. However this not true for all the stocks as some stocks still are showing distribution. 

It comes as a relief, that the markets did not collapse on Friday and the series went off peacefully. I had taken a punt in my post on 8th Nov, that the series might be able to hold its own for this series and thankfully it did. It did not sell off, the way it has been doing...so does it guarantee that we are out of the woods? Well not really...we still are in the negative territory,MACD is still showing negative diversion, we are still trading at below the Moving averages curve so it is still it is not happy days for the markets...

Now with the new series starting, it would be interesting to see whether the individual stockshave started to show accumulation patters, that would indicate that smart money has started to accumulate stocks...If not then we might have somewhat lower to go...But for that to happen first the lower bottoms have to be broken and that is a glimmer of hope for all of us...On the positive side if the accumulation has started to happen, then we might see another positive series, that would mean that shares would start to see positive gains and some traction would return to the markets. It is difficult to predict the movement currently for a long period, as we are in a no mans land right now...

SENSEX BOTTOM?

In my previous post I had written markets might retest bottoms, and that is exactly what happened. The markets touched 8400 odd whilst last time on a closing basis they had touched 8500. The good part is that the bounce back happened from these levels, which in essence means that if we can hold this bounce back then it might spell an intermediate bottom for the markets. However if these levels are broken then its an all together different matter of markets collapsing further down. Lets hope that we can hold these levels, and bounce back from here. The closing of the markets was a positive signal with the markets closing at the highest point of the day, also the American markets provided some good news with an impressive close on the Dow Jones....

Also another interesting fact is that when we moved up from 7500 levels to 10,500 odd levels a gain of 40%, this was achieved in 6 trading days, however the fall from 10,500 to 8300 has been achieved in 10 days and the 11th day saw a bounce back. This might be an indication that the rush to the bottom is slowing down a bit!!! Although the momentum charts are trading below the positive territory still it is trading at a level of around 85, whereas in the earlier weeks it had touched levels of 75, indicating a strong negative trend. (anything below 100 shows a negative trend, with the trend gaining momentum on either side the index trends away from 100. E.g. a 60 is a very strong negative trend, whereas a 110 is a medium positive trend. 100 is flat trend).

In the meantime, the news continues to be mixed, whereas now fears of Citibank getting into trouble has started to surface, along with GM and Ford, at the same time there have been voices of a stimulus package coming from Indian Govt coming are becoming stronger...so its a mixed bag, but lets hope that this contagion does not come into Indian companies...

So where do we go from here, if the markets fall below the 8500 levels convincingly on a closing basis, would mean that we would have made a new bottom. That would mean that we would go down further, then possibly bounce back, then again would retest the new bottom, and then if that new bottom holds then the markets would start to stabilise....whew!!! nowthat's a long process...however if this bottom holds then it would mean that we would seen the bottom for the time being and the markets can start the rebuilding part...

Sensex to retest lows?

Now with Europe officially getting into a recession, Hongkong also there and USA showing the lowest ever retail sales data, the picture is not exactly perfect..With the markets rebounding from the lows of 7600, and going upto 11,000 the journey back of the markets has now started to look little scary. Although there is nothing on the charts that suggests that we are capitulating, its the individual stock prices that are nearing their 7600 lows that is begining to worry me...Also now as the stock prices are again nearing their bottoms suddenly they don'tlook so attractive anymore, guess its a function of their earnings also. However as stated in my previous posts, that for any bottom to happen the markets have to retest the previous lows and only once that happens do we see a recovery...markets still have to retest the bottom and stop there!

On the technicals side today's day was not particularly good as today was the day when we broke the recovery uptrend on the MACD that we had nicely established. Again from the charts its virtually impossible to predict tomorrows setup as we are not on the extremes, but the news flow is negative and that is not concerting....

Its difficult to invest in such times, specially when one knows that if one is playing in the derivatives markets its much easier to make money there by going short or by selling covered calls rather than making long investments in stocks...Lets hope for the best, that this series is able to hold its own, else we are entering troubled waters!!!

To go Long or Short? Tricky Call...

Markets are still showing a negative MACD curve, but the good news is that the negative MACD is rising fast to come into the positive territory...Once the MACD moves into positive territory then what I have observed is that usually the stock momentum goes up and stocks start to see some meaningful gains! As I have written in my previous posts that some of the stocks seem to have seen the worst for them. .. Also another interesting thing to note is that the recovery in NIFTY was very meaningful...For e.g. I had bought TISCO at 152 odd and saw some 50% gains over the next one week, though its a different story that it has retraced back a bit, but still it is still at 20-25% gain!!! similar is the story with other stocks that have gained smartly in this pullback. 

Now the point to note is that how does this series go...from the indications it doesn't look like that the series is breaking away on the downside immediately. The signs are looking alright, and my punt is that the series might hold its own. However that does not take us out of the bear market that we are witnessing...so waiting and watching is the best policy with perhaps a tilt towards being cautiously optimistic for some days...

I am currently not trading in F&O for some time now, but I am sure there would be interesting opportunities like buying or selling straddles or collars to play with now, rather than taking unidirectional positions...

Futures and Options and Sensex

Its nice to be right ! When you predict that the markets are going to go a particular way and markets oblige ! If you see my previous posts on 27th October and 11th October, both predicting an upmove, we indeed went into an upmove from the very next day... Actually in technical analysis it is much easier to predict the short term bottoms than to predict the tops...so it was not too much rocket science predicting the bottoms...but yes it indeed feels nice, to be a good student of the markets...

If you notice that most the upmoves and downmoves are based around the series of F&O. So once the series are over on the last thursday of every month, the positions are cut and new positions are built, which I am sure have a lot of role to play how the markets behave in the next series. For e.g. once this series got over on Wednesday we have started ourupmove...and this phenomenon is noticed across many series as well...a word of caution though that in many series a trend that starts at the beginning of the series gets reversed after the first 5-6 days!!! 

So is the worst over? Well its very difficult to answer it...if you read the newspapers or hear the experts on TV, all of them seem to be indicating that the worst is yet to come. However what I am worried about is some of the statements coming from the worlds leading institutes predicting that the worst might be over for the developed countries but the worst is yet to come for the emerging economies!!!

From an index perspective, we still are in a negative trend!!! and it will take a lot to get out from here...infact we cannot say that we are out of the woods till such time we test the bottoms and the bottom holds....now with the RBI's move of cutting repo rate the markets are expected to take the cue and rally for some time, however till the time we are over 3100 on the Nifty we would not be even in a small uptrend...so these small sharp rallies need to be played but played with a lot of caution...infact I think its a nice time to rejig ones portfolios and start building some nice solid portfolios, that would give long term results. For e.g. in my previous posts I had written about TISCO, which was trading at crazy valuations at 150!!! This would have meant that if one would have picked TISCO at 150, he / she would have got 11-12% risk free dividend income throughout !!! no wonder that it bounced back 40% from those levels within a couple of days (as such valuations do not last for long). So its time to enjoy the uptrend as long as it lasts, and perhaps hope that the levels of 7600 are not breached, if and when the markets come to retest the bottoms!!

Best time to BUY Stocks...All Out!!!

Its time for an rebound again...strange as it may sound, we are ready for a rebound...Now the word of caution, last time we went into an rebound on 10th of October, it lasted only 2 days...but during those 2 days we rallied by 10%. The reason is the oversold technicals which are warranting a rebound immediately...but the question that is more important is have we made a bottom? Well that is a question that is practically impossible to predict. However what needs to be seen is that when we make this recovery and come back to test the bottoms, will they hold, or would we slip further...Thats a question again I dont think is possible to predict.

From a fundamental perspective, as I had said in my earlier post that some of the individual stocks have bottomed out yet, index stocks might still have some more time to go. For arguments sake, if you take dividend yield as a parameter, then some of the mid caps seem to have bottomed out with a PE of around 4 and a dividend yield of 8-10%. So for e.g. a reliance currently is holding on at 7-8 PE and less than 2% Dividend yield!!! So just imagine if big boys correct to 8-10% dividend yield, then how much more they would have to fall!!! 

But good news is that spectacular valuations are emerging, with dividend yields actually going above 10%. A case in point being TISCO, with dividend yield of around 10% and a PE of around 2!!! So if you build your portfolio carefully, cherry picking good stocks now, over a period of 5-10 years these stocks would give you super super returns with great mouthwatering tax free dividend earnings...Lets take an e.g. if today you bought TISCO worth 30,000 then you would get roughly 3000 Rs worth of dividend this year. Now assuming that TISCO's earnings grow by 15% yoy and the same PE holds (which is abysmally low currently) then after 10 years, you would have a stock price of around 600 Rs and you would have got dividend worth Rs 60,000!!! Now adding all of it up, you would have made roughly 1,60,000 (1,00,000 by worth of stock price and 60,000 by dividend) hence you would have made more than 5 times in 10 years!!!

Hence it is critical not to lose sightof where we are and what valuations are staring us in the face...

Its time like never before to invest...but invest wisely and invest in what you know!!!