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Not very good signs

April 5, 2010

Today, I woke up to find a mail in my inbox by somebody who calls herself Monica(if only the mail was as sultry as her name)

The mail is verbatim copied here.The emphasis are not mine.

Hello Friend
After the recent budget, this is the right time to invest and trade in stocks, because the Indian Stock Market is ready to explode!

I found a free tool which gives you Free Tips on what to trade in the Nifty Stock Market Index so that You Make Money.

Further on, as I open Rediff Money, something catches my eye. For disclaimers, I do read and watch the general opinion of analysts, because it tells you two things straight away. One, where does the crowd’s loyalty lie and Secondly, what is the general sentiment out there. I like when the analysts are in doubt, I like when they lack conviction, and humans have a very strong affinity to pick subtle cues. One guy is in doubt, and if he is in a relatively well heard position, then the entire crowd will be in doubt. So on and so forth.

Now read the targets given out by Rediff Money:

…says Ashwani Gujral, technical analyst, on CNBC TV18. Nifty has strong support at 5310 and resistance at 5450, he adds.

…Expect Nifty to touch 5450 in the next 2-3 trading sessions, says Shardul Kulkarni of Angel Broking…

…Stay bullish on Nifty, buy it at 5360 with a target of 5400 and stop loss of 5340, says Hemen Kapadia, technical analyst, on CNBC TV18…

…Jagdish Thacker, technical analyst, on Zee Business. Nifty is likely to go to 5300-5400, he adds….

All of this in one day! The change came in one freaking day of around 1.1% change. This is atrocious.After such a long time of “will-it-stay-will-it-fall” doubts, people have suddenly in one day turned bullish. It just shows how frail crowd vision is. I expected some last remnants and vestiges of doubt in the bears. I expected the bears to be stronger to fight this momentum.

Well, certainly not good, for cautious traders.

Anyway, now that the gambit is set, now take a look at this: “Sensex may touch 50,000 by 2015-end” [link here]

So, a simple calculation says, the opinion holder assumes 22.5% growth rate (vis a vis 16% of the previous 10 years) from here, assuming currently Sensex is at 18k and 5 years compounding. To be frank, I dont like such ebullience.

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5 Comments leave one →
  1. April 6, 2010 10:47 pm

    Good one.

    There used to be a joke floating around one of the trading forums in 2006 after a Gujral advised his clients to go long and compound long positions during May – “Gujral is terrific. He’s the most gifted guy you could find out there. Just subscribe to his services and do exact opposite of what he says and you’ll end up making millions!”. The guy is the vice-president of the Association of Technical Anal-ysts of India and has put his own book in the recommended reading list for their exam :D.

    The Agarwal article seems to focus on every thing unimportant, unsurprisingly.
    “If a country’s market capitalisation as a proportion of global market capitalisation mirrors its share of world GDP, India’s stock market seems to be within 15-20 per cent of where it should be, says Aggarwal.”

    Typical representative bias, comparing ice creams with screw drivers and naively extrapolating from the past 🙂

    • April 9, 2010 12:31 am

      The observation with Ashwini Gujral, I think holds true for each and every analyst out there. They have this innate ability to be extraordinarily bullish to capture the crowd’s attention even when immediate numbers(no not the econ datapoints) contradict them.

      Soham
      (Pelling, Sikkim, 6800 ft above sea level)

  2. April 15, 2010 7:33 pm

    Soham,

    couple of questions (unrelated to the post) for you: do you know of any “cheap” way to trade the nifty mid cap index on a swing basis (I want to trade only on close – maximum once a day and more likely once every couple of days on average)? The nifty mid cap future is not traded at all unfortunately (any ideas why?) so I can’t use that. If I use the juniorbees etf then I have to pay delivery brokerage charges which are too high for a swing strategy (so far I’ve found interactivebrokers with 0.05% brokerage + tax, etc as the best for this – 250 trades per year max leads to max 12.5% commissions + tax annually). Any suggestions, info, tips to reduce cost would be much appreciated.

    Thanks!
    – Vivek

    • Soham permalink*
      April 15, 2010 7:49 pm

      Hi Vivek,

      Very pertinent question.
      This is one side of the game, where we Indian traders are at constant loggerheads with the circumstances. We are effectively victims of liquidity(or absence of it).
      Technically, futures should be the best way to go forward but, their liquidity is lamentable. I understand your situation since I wanted to once trade in CNXIT but liquidty was awful. So over and above, as far as I know, we cannot really go ahead for taking an exposure without paying the exorbitant costs. Still, I will have a look.

      I can think of a way, but buyers beware, its frought with risk and can break down anytime. It is to model the returns of niftyjr on the basis of nifty and a few select stocks. To bring down the costs, it might be helpful in trading in options. Complex, and can break down at anytime. Might be intellectually challenging to find out, but not worth it, IMO.

      Soham

      • April 15, 2010 8:16 pm

        I was looking at something similar… using 5-10 stocks out of the 50 mid caps to replicate the index. Perhaps I can include nifty as well in that set. I understand the risks of that and can work on it if that’s the best option I’m left with.

        Thanks for your comments. I wanted to make sure I wasn’t ignoring an easily available option. Maybe there’s a turnover based brokerage firm (like the reliance money flat fee brokerage structure of the past) out there. Or, a cheaper brokerage firm for delivery based trades.

        In Fidelity US now there are zero commissions on 25 common etfs. There are lots of low cost brokerages also. Why does competition in India not reduce brokerage costs as much (high cost of opening a brokerage firm leading to barriers to entry?)?

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