OptionPundit

Category: Worldwide Markets

  • Where is NIFTY (NSEI) Headed?

    Where is NIFTY (S&P CNX NIFTY NSEI) headed? Well, no one has that answers else they wouldn’t be trading. It’s all about “What ifs” and probability of those likelihoods. This post tries to paint what are the possible outcomes in the short run and how could you trade those?

    Let’s cover some macro economic perspective first before diving into technicals.

    • Reserve Bank of India (RBI) has been trying for several months now to combat inflation and surging prices. It has raised repo rates seven times so far during the past year. In fact, recently it surprised markets by raising interest rates by 50bps vs. 25bps expectations by most economists/banks.
    • Markets are fairly valued and I don’t think a disproportionate growth premium can be awarded without Indian companies exhibiting strong top/bottom line growth especially when compared with other alternatives available.
    • Savings rates will soon reach almost double digits. So if you could obtain double digits gains from Banks in the form of fixed deposits/CDs/ SCs with almost no risks (as defined traditionally), what’s the incentive to invest in the stock market? Aha, that’s where the logic goes out of the window as we tend to think that we can outperform the markets/FD rates.

    Last Year in November, I covered India’s NIFTY (Click here to read)

    Where is it headed now? If we use these retracements as guiding light, we might expect NIFTY to bounce upto 5,940 (or lower) or so before any meaning downleg starts. 5,700 needs to be defended. If not, NIFTY might soon visit 5,500 that needs to be absolutely defended or else we might see another sharp down leg.

    Since then it hasn’t gone anywhere meaningfully and still trading range bound. Sure there were some sharp corrections but all the action of past 6months was confined pretty much into 700-800 points i.e. 5,200 to 5,900. So where are we now?

    So let’s revisit NIFTY for developing some short term scenarios. Based on the chart attached, focus on Red/Green lines that define a congestion and indecision area.

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  • Is it The Time to be Bullish?

    I mentioned that I won’t go long until S&P can close above $1,344. Yesterday, S&P close comfortable above 1,344. Additionally, there was another bullish signal based upon Dow Theory i.e. both Dow Industrial and Dow Transport closed at new high since Mar’09 bottom. So the market might be entering into another bull leg, probably the last leg before it gets back to where it was in 2007.

    So am I turning bullish now? Lets understand the context first concluding anything.

    So, it seems all is clear for Bulls now. Fed told nothing, answered everything and provided absolutely clarity i.e. “Status Quo”. Interesting. A status quo means, same as it was; we are conceptually in the same position as in 2008/09. Why? Simple, nothing is being reversed, pretty much all the meaningful actions Fed took during the crisis are still in place. It’s a different story that ZIRP was required when a) economy was in extreme crisis and b) outlook was grim. It was a set of  tools that were used for an exceptional circumstance. But if Fed continues to use the same tools without any indications whatsoever to stop using it, than it implies to me, in plain simple words, situation is as bad as it was, if not worsening.

    Maybe the green shoots are just a “feel good” factor. Beneath the surface though the shoots might be rotten. Consumers are running away, unemployment is still high, US$ is making newer lows, food and energy prices are sky rocketing which might be “transitory” but as an individual I need to feed family and drive “today” not in future. None of this tells me there is “wealth effect”!

    OK that’s all subjective. Maybe I am including emotions here. Let’s then get down to some key numbers?

    S&P 500 Dividend Yield (Source- multpl.com/s-p-500-dividend-yield/)

    Dividend Yield: Dow 2.56%; S&500 1.72%, and Nasdaq-100 @ 0.71% and falling as markets are rising. Look at 100 year chart above, the yield is getting dangerously closer to 100 year lows (as observed during the 2000 bubble) .

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  • Time Is Now, Not Later

    It was start of winters in Kobe, Japan. While sipping coffee in a “Gaijin” restaurant in Sanomiya , I was thinking “this is irrational”. How could money making be so easy for everyone that I talk to me but for myself? Even the coffee-shop owner was giving me tip which is the next .com I should invest. “What if” meant nothing to them as returns were accumulating day by day. Albeit, the stocks I was investing in weren’t doing great and I was playing cat-n-mouse without any luck; then came huge decline of 2000 and my capital was wiped out never to be recouped again. Enron and WorldComs’s failure were thought to be exceptional during those time.

    Then 7 years later, I couldn’t understand it again. When almost half the world was crying for rice, food basket was more expensive then the day before and real earnings were dropping, Oil was above $120/barrel, companies were raising prices, property prices were escalating BUT wages were not keeping pace. I wondered how long it could go before we would see a sharp pullback (subprime issues had started to make inroads) and we had > 50% quick wipeout in the stock market. We saw the biggest bankruptcy in the history i.e. Lehman Brothers and biggest financial crisis since Great Depression.

    Here we are again, 3 years later in 2011; I haven’t looked into the statistics as I don’t think that published data is really useful. I’ll keep it simple. Look at the Macro pictures, Unemployment is still record high, US is deeply sunk into debt which I don’t think it will be able to pay (but that’s me); Food inflation is running high (India had 17% food inflation in year to Jan 22’11), Brent crude is over $100 again, food basket is again prohibitively expensive, real wages are falling, Africa is boiling, revolutions to change decades old regimes are in full swing, food riots are resurfacing, commodities are surging (and we are about to see surge aka speculation again), and Banks announcing great results/great bonuses thanks to creative accounting rules…

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  • How to Trade Possible Rebound in Egypt stock Market?

    Egypt is going though probably the most challenging period of its recent history. The developments in the country are being watched closely by almost everyone. EGX-30 (Egyptian stock market barometer) is down over 20% during the last few weeks (close on Jan 27). The CDSwaps are rising. Moody’s has just downgraded Egypt’s bond rating from Ba1 to Ba2, with the outlook changed from stable to negative. According to Reuters, In the two working days after the protests erupted last Tuesday, which was a bank holiday, Egyptians and foreign investors transferred hundreds of millions of dollars out of Egypt, currency traders estimated. The more you read, more you can find.

    So why am I am focusing on probably the most volatile country etf right now? I am optimist. My Basic premise is that no doubt there are issues that need to be addressed but from a pure market perspective, at this juncture Egypt market is oversold in short term and may see a quick rebound even on a slight indication of any positive development.

    In my search for playing a quick swing trade on Egypt, I came across this etf called EGPT. Those who don’t know about EGPT, here is a quick explanation from Google Finance-

    Market Vectors Egypt Index ETF (the Fund) seeks to replicate the price and yield performance of the Market Vectors Egypt Index (the Index). The Fund would normally invest at least 80% of its total assets in securities, which comprise the Fund’s index. The Index provides exposure to publicly traded companies that are domiciled and primarily listed on an exchange in Egypt or that generate at least 50% of their revenues in Egypt. In certain cases, companies with less than 50% of their revenues derived from Egypt may be eligible for inclusion in the Egypt Index. The Index is the property of 4asset-management GmbH, which has contracted with the Structured Solutions AG to maintain and calculate the Index. The distributor of the Fund is Van Eck Securities Corporation. The investment adviser of the Fund is Van Eck Associates Corporation.

    This is a scenario where I would like to use the term “Heads I win, Tails I don’t lose much” as made popular by Mohnish Pabrai . As of this writing, EGPT (Market Vectors Egypt Index ETF) that represents Egypt stocks market is down almost 17% within last few weeks. (Just coincidence, that since I started writing this post, it has risen almost 7% today). I shall have my stop around $15.5, target exit will be a quick 15% (If it pullsback then a good entry is around $16-$16.5). There are no options on this etf and hence one has to trade using this etf as an underlying.

    The WLL free trade that I shared a few days ago is already up +20%, collecting almost 65% of credit in less than a weeks’ time. Congratulations to those who played.  You may want to close it and book profits.

    Disclaimer– I am by no means an expert on geopolitical issues. As of this writing I hold positions in EGPT but I may close anytime without any notice. Trading in EGPT can be very volatile, pls do your due diligence before investing any single $$ in this trade.

  • Let’s Get Ready for 2011

    We have seen a great bull and a mild bear  market (which actually didn’t go as wild as it could have been) thanks to Greed and Fear of the Wall Street and those who packaged junk and guess what Wall Street is about to witness record revenue in 2009-10-recovery, thanks to trillions in the form of Government bailout(s). With record revenues also come record bonuses which we’ll get to know only early next year. But guess what, the little guy who provided money to bailout banks is still licking his wounds. He/she doesn’t even realize what the heck has happened and despite spending humongous amounts of money he is still jobless. And the sad part is, that he/she will probably continue to fall victim to the same game, over and again. Click here to read an article from ZeroHedge that points to extreme optimism prevailing in the markets.

    Do you really want to understand what’s going on. Here is a simple write-up “Fed’s QE Ponzi Scheme begins to backfire” by Gary Dorsch of Global Money Trends magazine

    In a taped interview with CBS’ “60 Minutes” that aired on December 5th, Federal Reserve chief Ben “Bubbles” Bernanke tried to brainwash the American public, into believing that “Quantitative Easing” (QE), is absolutely necessary in order to prevent further losses of jobs, and tried to assure his listeners that he has the skills to keep inflation under control. The US-jobless rate would have risen far higher, “something like it was in the Depression, at 25%,” — had the Fed not provided tens of trillions in loans to Wall Street banks and other financial companies, he said.

    Two-years ago, the Wall Street Oligarchs played the central role in the greatest financial scandal in the history of the world, – one which wiped out tens of trillions of dollars in wealth, nearly bankrupted giant corporations and entire countries, and plunged the world into the deepest slide in global trade since the Great Depression. Huge profits were made in sub-prime mortgages, based on a Ponzi scheme of exotic financial derivatives and sliced packages. When it came crashing down, the public treasury was looted to cover the financial aristocracy’s losses.

    Since then, the Fed has carried out QE-1 between March 2009 and March 2010, in which it bought $1.45-trillion in mortgage-backed securities and $300-billion in Treasuries. Together with pegging interest rates at zero-percent, weakening the US-dollar, and flooding the stock markets with cheap credit, – the Fed enabled US banks and S&P-500 companies to record bumper profits, even as they slashed jobs and capital spending, and suffered revenue declines.

    With QE-1, the Fed channeled interest free money into the coffers of the Wall Street Oligarchs, which in turn, was used to buy higher yielding Treasury bonds. In a single stroke, the Fed monetized the US-government’s debt, and at the same time, bankers earned double or triple the interest rate at which it was borrowed. They pocketed billions under the scheme. Wall Street banks also bought high-grade corporate and junk bonds, and emerging market bonds, to fatten their profit margins. At the end of the day, QE-1 was utilized to recoup the gambling losses of the financial aristocracy, and created fertile conditions for driving-up equity markets.

    Here is what Mr Richard Russell, a famous Dow Theorist think of this market-

    Let’s be honest, this is a damnably difficult market. My PTI has been wobbling up and down ever since February. Nothing the markets are doing seem to make sense. C’mon, all I ask for is some clear and obvious trends, and none of the markets seem willing to give me definitive trends.

    So if you’re losing money in the markets (and almost everyone is) don’t get depressed or discouraged. Even the pros are getting beat up by these markets. The winners are those individuals who are losing the least.

    For my own interest, I often follow the selections of well-known advisories. I have six lists that I follow, and all six are now under water. Pity their poor subscribers.

    But if you think you can still win this market just because you think you are smarter than those banks, read this wonderful article from NY Times “A Secretive Banking Elite Rules Trading in Derivatives” ; These are indeed interesting times. Let me add little more to the bearish  tones, Read “warning”, yes warning from John Hussman of “Hussman Funds.

    Just like an advertiser/marketer, presenting data is something that is biased by the author’s perspective. One may choose all the data that points to bearish tone, or data that points to Bullish tone. Whichever case I want my readers to read, I can present data to support that hypothesis.  So keep in mind that just as I can collect data for bearishness, I can collect for Bullishness too.

    But I am NOT Bullish and hence I presented above data.

    Sometime back, I argued Uncle Ben’s logics for QE2; and mentioned that “Permanent Wealth effect via Stock market” logic was flawed. Since then Yields (long term rates) had been going up and up (instead of going down that Mr Bernanke was expecting). So much for the $100 billions that has been spent in the first round of QE2.

    So, bottom-line, where does this all leave a retail small investor? What to make out of all this?

    Here are my three cents. Money is made two ways-

    1. Capital Appreciation
    2. Cash Flow

    To win in the game #1 i.e. Capital appreciation, one needs to have an edge. That edges comes from knowing “How to Value”, then “Finding the Value” and finally “Harvesting the Value”. It takes time and guts. I know of many “long term value investors” who lost their shirts by “buying and holding” thinking that they are buying value. And let’s face the truth, value is not found easily. People of my age haven’t really seen the value in stock markets i.e. when S&P is trading at >6-7% dividend yield and smoothened P/E in single digits. For retail investor, knowledge horizon is limited to the “published” information, and finally he hardly has any influence to change board’s decision to unearth value.

    Sometimes, you may win in #1 by technical/ momentum investing. I’ll leave this to discuss some other day. You may also win when you are investing in a cycle or happen to be in the right place due to factors that you may not replicate i.e. rising tide lifting all the boats.

    Game#2 i.e. Cash Flow Investing involves a different mind set. It is about collecting monthly checks, somewhat similar to monthly salary. You buy a house, rent it and collect the income. It is not a get rich quick scheme. It requires operating discipline and planning. When reviewed over a long horizon (10-20 years) there are many more examples of retail investors succeeding this way vs. those winning via “Capital appreciation”. And that’s where Option Trading comes in.

    Options provide tools and mechanism to retail investor to win the investment game as long as “Greed” and “Fear” is checked and operating discipline is followed. You can design n number of monthly income trading strategies depending upon your knowledge and capital level. Albeit, it has to be a business and be treated like a business. Just like in any business you’ll have Standard Operating Procedure (SOP) or CBAs, you need to have your SOPs/CBAs for your little “Option Trading Business”. Will you win all the months, no! No one can! But do you have more chances of succeeding via Option Trading as opposed to direct equity trading, probably yes.

    So change you game for 2011. Don’t fall victim to the “get-rich-quick schemes”. Set your trading vision. Design your objectives and set realistic goals. Measure those regularly. Learn continuously, refine and then re-set your objectives. If you need help, do drop me an e-mail and I shall help you.

    The New normal is settling-in and you need to prepare accordingly. THERE ARE NO SHORT CUTS.

    Have a wonderful “preparation” for the 2011, don’t spend just because you are “consumer”; every single cent you spend should add value to your life and that’s what is “new normal”,

    OPNewsletter Dec 2010 portfolio is up >10%, if you would like to sign-up, pls click here to sign-up for the wait list as subscription is via invitation only.

    Profitable Trading, OP

  • A Look at India’s Stock Market via NIFTY

    India’s NIFTY (S&P CNX NIFTY- .NSEI), different from India’s famous Sensex is an index of India 50 blue chip corporation. It covers 23 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio. The S&P CNX Nifty stocks represent about 60% of the total market capitalization of the National Stock Exchange (NSE).

    Nifty (.NSEI) hit a 52wk high on Nov 5th and what followed was a quick and steep correction of almost 10% in a matter of almost 2 weeks. The correction was fast and furious without any pause, as corruption news were surfacing one after another. On one hand, one might conclude that it is the news that’s driving markets lower but on the other hand, markets were overbought too fueled by QE2 money/anticipation that easy money will find its way into India. Whatever the reason maybe, NIFTY stopped in a classic text book way right at 38.2 fib retracement of a 35% rally that started from Feb low at 4,675 to ~6340.

    Where is it headed now? If we use these retracements as guiding light, we might expect NIFTY to bounce upto 5,940 (or lower) or so before any meaning downleg starts. 5,700 needs to be defended. If not, NIFTY might soon visit 5,500 that needs to be absolutely defended or else we might see another sharp down leg.

    That’s technicals, an easy part! The difficulty in trading any emerging market carries three major risks for retail traders- 1) Political stability and 2) The Foreign Funds Flow and 3) Unavailability of reliable data. While funds flow can still be anticipated, political stability/ corruption is hard to anticipate especially while choose single companies. In the past 3-4 weeks numerous scandals (Money Matters, LIC Housing, 2G spectrum to name a few) have emerged causing markets and related equities to tumble sharply. So before you take a position, make sure there is always this “unknown” that might be detrimental to your portfolio growth. Keep that margin of safety.

    That’s where Options (F&O/ derivatives, as known in India) come to rescue retail investors. Trade markets with Iron Condors, Calendars, Diagonals, Butterflies, Credit/debit vertical spreads and many more via creating several what if scenarios. You’ll have an edge even over big fund managers who can’t get-in and out of markets quickly.

    From a long term perspective, India growth story will continue for sometime and easy money will still find its way exposing markets to sharp rallies and/or pull backs. Here are some ETFs that you may want to look at INP, EPI, PIN, IFN in case you want to trade India.

    By the way, if you know of good financial blogs that covers Indian markets, pls share those via comments section.

    Trade the “unknowns” carefully,
    Profitable Trading, OP