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Watching the Tape!

August 4, 2009

When Indian markets made a humoungous 15% move three months back on the event of a thumping election mandate, it was a weekend. The Friday before the close I was long.I was holding a naked futures position a few 3800 calls and a lot of cash positions.

Fast Forward three months later, the tape again is telling a story. Back in May 2009, when such a move rocked the markets, many of the retail investors who held on the pain were rewarded. Not necessarily the level till which they deserved, but they were rewarded, nevertheless. The weeks which followed saw a huge overhaul in midcaps, with some midcaps trading close to 200% up above the May highs. Small Cap registered a growth of , even in sceptical figures will be 250%+. Clearly, participants have been assuaged, their fears were given a balm and their portfolio a respite. Yet…

Yet,my belief, the hunch that, the indices in general will not rally beyond the May highs for much of the year, held water. Of course, traders and swing-ers had a time of their lives. But retails will always be butchered.Period.And the market after around 3 months, tested the May highs of 4703 on NIFTY once again.

Is it a double top forming?

Is it a double top forming?

What next,Dexter?

Lets break this question into three parts. Today, Tomorrow and the Days Ahead!

Today: The story of short term

The question of 4703 is the prime importance for people over here. Yesterday NIFTY broke 4703 and rallied to 4730 in a euphoric rise reminiscient of breaking 3511(the then 200Day Moving Average). Of course we all know what happened after it broke 3511, but we must remember we are not talking about 3500ish levels, we are talking about 4700 levels. I would trade on the short side, till 4700 is broken. On 4th of August 2009, the price gave away nothing and held all the cards to itself. Clearly, 4700 is rejected. It did tank, intraday around 70 points (~200 points in Sensex), but had a fierce rally in the last 20 minutes to recover the most from the days of the low to close at 4680 levels.

You will seldom hear me talking about the-coming-week-coming-day-is extremely-crucial. But once I will eschew all those, and I would truly say, tomorrow will set tone for a lot of things in the next 1-2 Months. If we break 4700 early tomorrow, then we can truly be set for a massive rally upwards.

We break 4650, we are gonna to drop to July lows, possibly May lows. I am not counting it, but yes we should be prepared. And if indeed we still manage to stay above 3950ish levels, previous support, then I wont expect this trading range to go before Nov-December. This is the short term view as I see, today.

Disclosure: I am long.

Tomorrow

In the intermediate term, I am increasingly cutting down on my bullishness. Of course, I am long. I am heavily long. But the point is all about being nimblefooted.

To me, markets might rally, and I will be long, but that doesnt change the fact that the growth engines of the world, US is not looking any better. For me, I would attach as much value to US economy as I would attach to a parambulator gifted on my birthday. The situation have clearly worsened. 62 banks have failed in US till now. There is still a lot more pain to be wringed away from the Main Street. So does that mean, I short? Hell,no! Economics and Tape are two different things, and dont even make the mistake of confusing them together. But yes, there is no guarantee today, that in this bear rally turned headfake turned bull run doesnt metamorphise into another bear run. Trust me! It doesnt take much time.

$SPX-Rally?

$SPX-Rally?

For US economy, I would say, we might see a lot of headfakes, in the coming years and I dont think we are going to see another higher top in $SPX for quite some time to come.

Observers should remember, we haven’t seen another lifetime high on NASDAQ since Dot Com crash, and my guess it will take another 15-20 years to see the same thing.[Fig NASDAQ]

The $SPX has made another top equaling the top made in previous bullrun that is 1999-2001. It has not made another higher high and for all practical purposes [even theoretical] has failed to breach the previous top. [Fig SPX]

So the tape tells me, “HeyBuddy! Watch Out!”, The Economy is telling me, “Dude, dont mistake my ferocity” and the entire Western demographics is telling me, “You are riding too much on my back, hold on! I can’t take it anymore”.

Fundamentally, cheap money is just fuelling a cheap rally. I would say,ย  lets create a quality check on the rallies. There are headfakes, the ultra cheap rally of the lot[QA=0.5/10], then there are strong sturdy rallies, they are ace grade rallies[QA=9.0/10]. I would rate this as a credit driven rally, which will come to bite it in its arse, once the lenders come calling in.

NASDAQ since 1978

NASDAQ since 1978

But all in all, I would say, the situation is no better and just because money is being put to use it doesnt mean, the rally is going to sustain.

Bottomline: West has entered a structural bear run which will last atleast for the next 25 years.

The DaysAhead

In the coming months, the entire global economy will undergo a huge phase of euphoria. The “green shoots” of this euphoria has already starting being

SPX since 1960

SPX since 1960

visible. But in reality they are the nettles. Euphoria is never good for a bull market. Just as panic is not for a bear market.ย  The SPX crossing over 1000 and NIFTY crossing over to 4700 will be the catalysts. But we are closer to a bubble than we might think ourselves to be.

And the trigger that might come for the next stage in this structural bear run, might be a collapse of Chinese Economy.

A lot of wrong signals is coming from Chinese Economy off late. And somehow things don’t really look that good. Socioeconomics also to a certain extent telling me, China doesnt look that good. So is, simple common sense. But of course I am not on the Chinese ground and hence I can’t assess the situation for sure. {If you are eager enough to know about it , sponsor me a trip to China}. Yet everything worth noticing is telling me, China might be the next pain point.

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5 Comments leave one →
  1. August 4, 2009 8:50 pm

    Hi Soham,

    Interesting analysis . I appreciate the insights you have provided. I also believe we need to see euphoric moves before calling for a correction .

  2. August 4, 2009 9:03 pm

    Euphoria never leads to correction. It leads to pain, the pain which comes from being butchered around live. ๐Ÿ™‚

    Dragon’s underbelly is slithering over a mountain of faux-debt.
    “Never waste a good crisis” ๐Ÿ˜‰

  3. Girish permalink
    September 15, 2009 12:12 pm

    Nice blog and nice write-ups on the market too. I liked this article and the way you’ve explained your time perspectives. (altho’ I’m reading this a month after you’ve written it).

    Now at 4885, what do you think it is – Euphoria OR bull-run OR a correction in waiting ?? Thanks.

  4. September 15, 2009 12:21 pm

    “It will fluctuate”- J.P.Morgan in1904, when asked what is market going to do.

    I wont attempt to try something, for which I am not made out. I am a fund manager and my job is to make money, not to prove myself right. So I will stay clear out of predictions.

    I have updated a lot of my views on the recent run up, in the latest posts. But it is worth noticing that, it attempted breaking 4730, twice after this, only to succeed breaking the level a third time. Right now, its trading at 4881 approx. But, my fears are not getting assuaged. My fears are being just teased and aggravated.

    My belief, we might be closer to more pain than we are ready to bear.

    Soham

  5. Girish permalink
    September 15, 2009 1:25 pm

    Soham,

    I concur with your last line and I’m of the same view as well. (4879 spot). I just can’t put on a finger on “when” ๐Ÿ™‚

    Does your study of algorithms, systems trading point out Time factors ? Just curious to know – I’m not looking for trade secrets :). Some of the famed indicators do give an indication (evidently) of the time but I’ve not able to measure their accuracy. Have you ?

    Brief intro – I’m a self-styled trader and have picked up nuances of FA, TA with help from two worldly-wise and knowledgeable gentlemen. Have been trading/investing for many years now. Recently, I’ve started wearing the traders’ hat more often before. ๐Ÿ™‚ I do have a Comps background but that has changed a lot thanks to the nature of the my profession (despite working in IT industry) ๐Ÿ™‚

    Cheers,
    Girish

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