some excerpts from my book the art of speculation


HOW IT WORKS 




How does everything come together what works and what doesn’t  in this section I am not trying to tell you about technical analysis or support or resistance lets see what events affect the market and what is the effect of each one of them

some of the major factors affecting the market are
·     the government and its policies
·     the central bank and its policies

·     international markets and their movement
·     movement of commodities especially those who have bearing on inflation like crude 
·     global liquidity
·     various economic numbers like the IIP
·     inflation and where its going
·     corporate earning
these are just some major factors which affect the movement of the market on a day to day basis sometimes one factor will become important and will drive the market and sometimes some other factor will become important it is seesaw a struggle between positive and negative news

the various participants of the market weigh these news and development and take positions accordingly  if they feel that the stocks will gain they will take bullish position and if they think that stocks will go down they sell there is money to be made either ways

so all this factors affect the market but the market is not lifeless person it is made up of millions of persons and entities who take position in the market so its not just the event or the news but the perception of these people about that news that is important so let me add one more very important factor
·     perception of the market participant

this in fact is the most important factor and perhaps this is the reason that stock market behavior comes in the domain of group phycology

just because news seems to be positive that does not mean that the stock is going to go up for example just because some company has given excellent results that does not mean that its time to buy that company what is important is what the market expected of the company if the expectation was still higher the stock may as well go down

in the same way if some company has announced bad results that dos not mean that the stock is going to see a sell off if the market perception was still lower no there could be upswing in the share price

so the perception and reaction of the market participants about the stock is most important and any news regarding it should be seen with that perceptive .

so both micro and macro news affects the market if crude climbs above a certain level the fear of its affect on inflation comes in and we see a sell off and when it goes below certain level we see renewed buying

but then its not that simple it not just as easy as buy when crude is down and sell when crude is high

crude can be at a high and inflation can be at a high and everything on the macro level  can be wrong but still the market could gain 7 to 8% in just say one week well what works there liquidity if fii and other foreign entities have money at their disposal and they think that valuations are attractive you can see sudden upswing without any macro environment supporting it .

So here comes another important factor and that factor is trend as it is said that trend is your best friend. if there is trend you need to go with it even if it does not seem right this may not be true  of a investor but is especially true of a trader

a trader need to trade in the direction of the trend or he risks losing too much and that's where technical analysis comes in

so a trader needs to be everything a technical analyst , a fundamental analyst good at judging the macro and micro environment and you should have grip a on mass psychology all this is required if you want to be successful trader

Is value investing the right strategy in volatile markets?

Markets are in wild swing going down 2-3% in a single day and this volatility has been persisting for the last  one month  without going into the reasons for this decline let us see whether it makes sense to look at EPS and PE to invest into this market

The first point  to note is that the market changes its PE ratio and of all the sectors along with it as it goes down when news is driving the stock market and that too macro  news that concerns the economy you never know to what level the market is going to adjust the PE ratio what may look like a good PE ratio to invest may just get adjusted in a week’s time as the market adjusts  to the new macroeconomic scenario so don’t look out for value deals instead look at the macro and then decide to what level the market is adjusting itself

Secondly as earnings drive the EPS and PE  ratios of the world earning growth can get adjusted very wildly if the market is dealing with a new reality of slowing economy or even recession all the earlier earnings estimates go out of the window very fast as the market adjusts itself  on the downside and the downside is based on panic  so it all right to say that buy on fear but when you don’t know of now when the fear psychosis is coming to end it could be very risky to be  a value investor because the definition of value is changing on weekly basis

So the point is if the market is volatile in a grip of a panic it makes sense to be just a trader and go with the flow than trying to a value investor because the wealth erosion could be severe if you are wrong 

the global markets are in a turmoil .

the problems that the globe has are not going away every new day is there some or the other development and which pulls the  entire equity market down .

the European problem the US  problem the Greece problem every day there is some or the other bad news

so what does it suggest

well to me it seems that this is market that is willing to go down heavily on bad news and is due for some major correction baecause the bad news is not going away

earlier the markets in Europe and the us used to recover very sharply but this time this has not happened and this tells you that the market is keeping on factoring bad news and the desire to go up is going down every minute

so this is not the time to go long if you want to trade at all trade short and it would be better if wait it out and see what happens over couple of days and than take a call 

theories of stock market

this is a chapter from my book the art of speculation

Theories of stock market

The firm foundation theory

The castle in the air theory

And the random walk model

All these theories have been discussed and debated and have been lade threadbare in various books and papers each have their own proponents and critics each theory substantiates a certain view point of the market

Let’s look at them

The firm foundation theory says that the value of stocks is rooted in some in some fair value that is that a stock has certain basic value which can be concluded from its sales earnings and other multiplies  this theory supports the fundamental analysis and  is rooted deep in the financial markets .

Various books and writers have propounded this theory and this is the bedrock of today’s financial market or equity analysts job this theory rests on the basic principle that earnings and sales can be extrapolated into future   and by discounting the present rate of growth future prices of share can be found and also the present price can be compared can be decided that whether a stock is cheap or dear.

Various financial parameters are included in this one commonly used parameter is the price to earning ratio which determines the correlation between the earning and the price that the market is willing to pay for that earning.

A company can be cheap or dear depending on the PE ratio that is prevalent for the sector as a whole high growth industries have high pe ratios and low growth have low PE ratios so a simple strategy would be to buy stocks that have low PE ratio compared to their peers and than they are bound to show you good returns

So an equity analyst takes into account all these factors and decided whether to make a investment or not this theory believes that even if stock prices go ashtray in the long run they will revert to their fair price and that the basic believe that this theory works on

But this theory has several holes firstly is you asked 10 analysts to give you an earning estimate 10 will give you different versions of the same and then too those would be very far off from the original

Also its very difficult to predict the future earnings of company and come to conclusion of the fair price of share bade on that companies can have drastic changes in their earnings depending on the market conditions and the initial guess can be way off the mark

Also the market adjusts PE ratios and other financial parameters very fast in a downward market the PE ratios of an entire sector can be adjusted very fast and entire investment can go drastically hay wire

the firm foetation theory is the bedrock of investing in the financial world it is very difficult to discount it because it seems like logical answer to an otherwise illogical behaviour of the stock market but to believe that stock market that is made up of millions of people behaving in an irrational manner would somehow keep in mind what is the fair price of share seems like an outstretched idea.

this theory though having substantial following has never been proven and it has never been proven that all the equity analysts with all their tools can provide a better return various studies conducted have shown that someone throwing a dart the stocks would have been better off in the stock market than taking the advice of the equity analyst

but since this is what the financial world believes in this theory has enormous power if big institutions and manages arrive at the fair values than this group of people with their enormous power can drive down or up the price of share because all of them sail in the same boat they have the same idea and they have enormous power in terms of the finances that they control

it’s like a  closed club where entry is restricted to only those who speak the language that is considered to be the language of the  elite and fundamental analysis is the jargon this elite club which separates them from others whether it has any relevance or not is not important what is important that how many people believe in that and since the financial experts need an esoteric and understandable language to separate them from others all the financial ratios and the gibberish which cannot be understood by a common man is their tool of differentiation and the reason for commanding high salaries which has no basis

The castle in the air theory

the castle in the air theory states that it all right to pay price for a particular stock till there is another fool who is willing to pay you an even higher price .this theory believes that stock prices are decided by people and it has got no relevance to the fundamentals of the company all that there is know about the company is reflected in its stock price and that the golden rule on which this theory is based.

this theory is held by the technical analyst people who look at charts volume action and then decide that whether stock should go up or down they believe in trends that if a stock is going yup it would resume it uptrend and if a stock is going down it would resume it downtrend and this and proponents of this theory believe that then chart is supreme and it tells everything that is there to know.

Various studies conducted have shown that the price of stock had got no correlation to what was the price the previous day and all the patterns that chartists talk about can be seen everywhere for example if you draw chart of coin being flipped you would find the same patterns in the chart as you would find in stock chart

Charting theory has so many holes that it is difficult to count them and also it is difficult to find any substantial basis that proves the chartists right

chartists have been there since a very long time but they were never given any respect but with advent of information technology and data it is now possible for everybody to have access to charts somehow this easiness of charting has bought new life to the charting community everybody is chartists and they are given prominent coverage but the fact remains that technical analysis is all hogwash

the only reason that brokerages and channels employ these people because for channels they talk in language that makes what channels do live coverage and their own show of understanding possible and for brokerages it is way to churn your portfolio more often and this what makes them commissions which is t life blood of a brokerage business .

so the castle in air theory has many loopholes and charting is something on which voluminous data has been written but charting just does not take into account that every day is new day it h stock market, market is reacting to many factors and the factors can change overnight and even in intraday so it futile to think that market has got a trend a market has a trend so long as the factors supporting that trend remain in place and as soon as those factors change so if you buying at higher and higher price and selling at lower and lower price the losses can be substantial 

So I would advise that that let go of the technical analysis

The random walk model

Of all the theories the random walk model makes the most sense it says that it is difficult to predict the market and that every move is different from the previous moves the only way to succeeds is to be able predict these moves and this model is the most apt to what a stock market is

Market is random and the market irrational market reacts to news and when markets react to news they do so in an extreme fashion both on an uptrend as well on an downtrend

So trading in the stock market is like taking random walk it can go anywhere and can lead you also anywhere and this is best explanation that someone can get of a stock market all the other theories which try to confine markets in some parameters be it fundamental and technical go against the basic nature of the stock market 

what will happen to nifty

well the markets have been turbulent witth a big downward bias but the recent retracement of that uptrend suggests atht markets are just inching to go up but they are not finding any positive news

the news from the global markets has not been good the jobs data in the US has not come well and there could be further downside

we need to be very careful with trading in this month as this is news heavy and event laden month

there is speech by BARAK OBAMA then there is RBI policy announcement and all these have the potential to swing the markets in either direction

the bias looks negative as the markets as just waiting for some bad news and the downfall gets very steep so just waiat and watch for some days which way the market swings as we can in for nasty surprise

 but is all goes well the nifty can easily trade above the 5200 mark and that is when trades should be initiated

so lets wait and watch for some days and then lets see where it goes 

what lies ahead

the market ahs seen alot of turbulence in the recent past

a mix of local and interantional bad news has brought the market down to the 5000 level and the market is trying to find its feet at these levels

the downtrend is clearly underway and it looks that the market may go downawrds from here

but as they say when everybody is saying that the market will go down that's when the market decides to go up

one or two good news and the market may decide to go upwards from here

i think that this is the time for conatarian call

the downside is almaost done may be 1-2% more from here but the upside looks to more if the market decides to go up

so i advise long on the market with stop loss at around 4940 levels

buy the sep 5200 or 5300 calls and a 100 150 swing in the nifty can fetch you handsonme returns

so going long would be my advise

but dont buy august calls they are about to expire on the 25th of aug and that can mean huge erosion in thier premium

so happy trading

outlook for 2nd aug

the moves in the market are now being dicatated by what is happening in the global markets .

last week it was rbi policy which pushed the market down and now its the US debt crisis .

the european markets were down and out  almost 2to 3% the dow and the nasdaq were down almost 1to 1.5% from where they opened .

so expect a soft opening for the market the market should open down .

but would it stay there .

well that depends on many things .

first the results that have come for maruti and tata motors are below expectation so expect a a downtick there.

then it would depend on gloabal cues if european markets extend thier lossses then expect the NIFTY to slide down further .

anyways the impact of the rate hike is still to be fully refelected on the nifty so you can expect further slides in the market .

so be short and remain short till the  nifty does not decicively break 5550 mark .

so happy trading .

oulook for monday 1 aug

 well its a first trading day  of a new month the US debt crisis seems to have resolved itself over the weekend and the mrket as expected opened with a gap up.

the nifty is up 60 ppoints and sensex 200 points

but as they say amatures open the market and veterans close it so lets see wlhether the euphorai still sustains itself over the day .

my view is that it will not ,the rbi poicy has changed things for the worse and it will be very difficult for the market to susutain itself even on short rallies.

but then the mrket has been down for some days so some buying emerging at this level cannot be ruled out

but i will still maintain my view that its sell on rise market .

so lets see

if market sustains todays gap up  you can expect it to build some momentum and try to cross 5600

but if this rally falters or any negative cues from the globe or locally emerge you can expect downsides

but i always maintain that you should take the path of least resistance and that path seems to be remain short on the market

oulook for friday 29 july

the markets are looking for consolidation

usually after a heavy fall such as what has happened this week the market tends to consolidate and then move on

what direction it will take is not clear as of now a lot will depend on the gloabal cues

the US market continues to slide downwards as the solution to the us debt crisis is nowwhere in sight

all this has made the entire world market subdued and all indices are either trending downward or in a state of a limbo.

the earning season is turning out to be mixed bag

market haeavywiegt itc came up with good set of numbers and the stock will react positively in the short and ,medium term on the same

so traders can create long positions in the same

icici is coming out today with it numbers looking at history thet will be good nos

expect the banknifty and the stock to react positively

so what is my outlook for toaday

well i expect the market to be in stste of consolidation and if there is no negative news the market should trend upwards

i am long on the market and advise the same to all

the nifty opened with gap down

the reason are mix of local and international events

the us markets sold off yesterday and all the asian indices are down arnad out today 

also today is expiry day so  traders may either roll over thir positions or cut them 

also there is overhang of the rbi credit policy 

so all this is keeping the market down but will this gl oom continue

well i dont think so

in my opinion the us debt crisis is just an unnevessary showoff that is bound to end any time soon

also the market has fallen 4% in 3 days so you cn expect some short covering any time now

so in my opinion going long in this mrket is better strategy than going short it can pay handsome dividends and the downside is low

so hope you mak some money out of it and so do i

so happy trading

outlook for 27 july

the rbi served a shocker to the indian markets yesterday

the market was down and out .

have a look at the cahart for nifty for yesterday

so what about today what is to be expected

the global cues are not positive and any which way we are showing a great delinkage from the world markets

the indian markets are expected to slide down to what extent cannot be said but yes the sentiment is going to subdued may be we will not get an immediate gap down but during the course

of the day expect the market to slowly slide downwards .

i presume that the pressure is going to mount through the day and we can end 40to 50 points down on the nifty close to 5530 mark

so my advise would be to keep your shorts active but not to create new ones and creating a long position is not advised
happy trading  

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after the bell

the market closed 105 points down and the sensex was down 353 points
once the rbi policy was announced the market never recovered there were bouts which showed promise but the market revereted back
nothing was spared with the adavanse decline 1is to 4
so what happens tommorrow well the market seems posied for for downward trend unlesss gloabal cues come for our aid
but if the cues coming from the US and europe are not positive the market would go down further
so keep your shorts active and look for longs on posirtive cues
.

big day

rtodleased yesterady was a big day as the rbi monetary policy was announced the market had rallied yestaerday on the expectation that rbi is not going to take a hawkish stand and at most is going to incraese the rates by 25 basis points

but rbi outlook released yesterday was quite hawkish but market still was up in the morning in anticipation

but the rbi monetary policy cahanged all that rabi increased the rates by 50 basis point and signalled a hawkish stand and immediately themarket broke down and was soon down 300 points with nifty losing close to  100 points

so what now

some recovery can be expected and traders can long calls to take advantage of that for intraday

but with this expect the rally that has been going on for the last 3 weeks to come to an end the market from now onwards looks bearish and would be a sell on rise market

outlook for the day

well tough global conditions forced the nifty to open lower but positive sentiment pushed it higher soon

but expect the nifty to drift downwards due to various factors

               

 the traders are epexted to take short positions on the nifty prior to rbi policy 

the ongoing condition in the US markets unless resolved is going to keep the global markets down

then there are reliance results today  if positive they can provide a boost to market  but if  below expectectations can make the market drift lower

so my recomendattion would be to go short on the market

whats the outlook on monday

well it seems we are in for bullish start for many reasons

the reliance bp deal going throgh

approval in part of the 51% fdi in retail 

all this hould push the nifty up but whether its able to sustain would depend on global factors and the results that are  due tomorrow