Best time to buy stocks!!!

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!!!

Index Market - Bear Market Rallies How Sustainable are they?

I had raised a question in my previous post that do, Do bear markets end in a V Shaped recovery. The weight of evidence suggests otherwise, and hence the rally that we saw a couple of days back just fizzled out and we are again at new lows. Another interesting point I came to know, is that bear markets usually see the highest daily gain rallies in absolute and percentage terms. This is a peculiar characteristic of the bear market. And we indeed saw the other day dow gaining the maximum points in a single day. . .

However what is disconcerting is the fact that bear markets take a long time to go away and intermittent periods are marked by rallies that are 'fake'. I use the word 'fake' because these rallies are sharp upmoves and they show promise that the bull market is back, however the only thing that they end up achieving is lower bottoms. These rallies fizzle out after 'luring' the small investor only to end up in an even more severe downmove.

There is empirical evidence to show that in the great fall of 1929, markets went up 3-4 times till 1932, in rallies that were as high as 40%, yet every time in those 3-4 times, the markets made newer bottoms, and this continued till 1932, infact there were 6 false bottoms that were made before the final bottom came at 80% off the highs!!! And not only that it took the markets until 1954 to come back to the highs of 1929!!! But then that was the great depression, we are no where near a depression, infact we are not even in a recession....and as the common saying goes,

'when your neighbout loses his job, its recession...when you lose your job, its depression'

So where do we go from here, seeing the technical parameters, we are nearing a rally or a bounceback from these levels, the bounceback might come soon (if we have a sharp fall of lets say 600-1000 points in a couple of days) or it might come after 3-4 days of slow grinding down, or it might come even without any of these happening...but the point is that we will not see for sure a downturn without going up! My worry more is that how long will this rally sustain and more importantly will we fall further like the bear market rallies do!

If we go by the historical bear markets, they tend to last anywhere between 18-36 months, and we are still only 10 months into it ...and thats not comforting news...lets hope that our earnings growths will take us higher... 

Do bear markets end in V shaped recovery?

Sometimes I feel analysts sometimes overdo things. When the going is good Sensex is predicted to cross 25,000 and when the markets slump, suddenly the same analysts see the sensex going to 8000, 7000, 4500...take your pick! I think its not difficult but even impossible to predict the long term movements of the markets. There are just so many factors that can never be put into the equation (e.g. no one could predict a thing such as sub prime?), so how can the markets ever be predicted over long term. 

However there are certain things that remain constant. For e.g. empirical evidence. As pointed out by Shankar Sharma, there has been no market in the world that has given continuous 6 years of positive gains! And to top it after 5 years of unprecedented gains, those markets tend to give negative returns for some time. ( I hope this does not hold true for us!)...e.g. USA from 1924 to 1929, India from 1987-1992 both followed by periods of negative returns...

So where do we go from here. To get into an intermediary uptrend we would have to trade constantly above 3800 on the Nifty, that basically means a 10% upmove from here, which correspondingly on the Sensex would mean somewhere around 12500 odd...till such time this move can best be described as a technical pullback...Also another interesting fact is that yesterday the volumes on the markets were low and there was huge short covering, this was evident from the futures rates that went into a 50 point premium. Certainly low volumes would have to get built into stronger volumes if we have to sustain the thoughts of a recovery. Till such time i think its time to enjoy the upmove, as long as it lasts...

Expecting a Technical Bounceback Next Week

As mentioned in the previous post, a technical bounceback of the sensex is on the cards imminently. As all the technical parameters are also showing an oversold scenario. With the US markets ending their losing streak on Friday, Monday onwards we can expect some traction in our markets as well...Not to say that we cant fall further but it would be preceded by some gains on the indexes. It is also interesting to note that stocks (even some mid and large caps) have started to quote at dividend yields of 10% +, that basically means a 10% return with appreciation on capital (assuming cos keep on growing) For me personally, Friday was the day of shopping, wherein good opportunities were available at very very reasonable rates. Also another point to note is that not all stocks would bottom out at the same time. For e.g. SBI had formed a bottom at 1000, when the markets were at 12-13000. Now with the markets at 10,500 SBI is sitting pretty at 1350 odd. So if one sees value it might not be such a bad idea to nibble a little..... carefully though!!!

Technical Show an Oversold Market

The technical parameters are showing an extremely oversold market. Only the fall of January 22 was a lower point wherein the NIFTY crashed to an intraday low of almost 10%. However we are not very far from the technicals of that day too!!! What this basically means is that once we are done with the correction of today(that in all probability will come because of the US markets crash last night) we should be ready for a technical bounceback. Where that bounceback leads us is an entirely different question. My sense is that we will see a relief rally coming in now with this technical bounceback rally. 

Dividend yields Sensex & Nifty

With the stock markets crashing and falling like 9 pins, some of the stocks have reached levels that are simply mouthwatering. Its a phase in the market that is both exciting and involving. Exciting as there is a good potential to earn super returns and involving as you have to make the right choices. Its no longer a blind game, wherein everyone from your driver to watchman was recommending stocks, and making money!!!

Now with PE's losing their meaning there are 2 fundamentals one should look at:

1) The company should be stable and not look like it will close down.

2) Look at the dividend yields the company is offering, this is essence means an indirect comparision with the PE's of the company.

A small e.g. will make it little clearer. . .Company X is quoting at a price of 100, with EPS of 20, this implies a PE of 5. It gives a dividend of Rs 4 per share. This in essence means that every year you would be getting a return of atleast 4% even if the price falls. In my opinion the further the price of shares fall, more attractive their dividend yields become. And there comes a point wherein the dividend yields actually surpass or become very close to the market rate of interest and that is the time to buy equities heavily.

Currently there are some stocks that are quoting at dividend yields of around 6%-7% also. The trick is to identify such stable companies. My personal favourite is brokerages. Some of the stocks such as India infoline and Indiabulls etc are quoting at good dividend yields however some of the PE's like that of India infoline are still higher, hence it makes sense to analyse both the parameters before entering into a trade.

NIFTY SHORT TERM MOVEMENTS

Markets have a way of tricking us into believing that the obvious is going to happen. With the US bailout package secured, no one thought that the markets would crash the way they did. Also the technicals were not showing anything so depressing, infact the stochastics were showing that we might have had an upswing in the near 2-3 days. So how much more before we start to go up? In the short term seeing the Relative strength index, we are at 34 (30 is usually considered the bounce back) it seems that we dont have a very long way to go before we end this downtrend (at least in the short term). For this bear hug to end, we will have to stay above 4050 cosistently. So what can be the strategy to trade in these markets:

 Small Contra Position of going long with naked NIFTY calls: I would be very tempted to try this out as the risk reward scenario looks good for this kind of trade. But on the other hand the technicals donot support such kind of adventurism. Also on e would be tempted to buy in cash in this falling market. However every day wherein we postpone the purchase we thank our stars as the next day the markets tank! Its a falling knife, but a little bit of nibbling maybe not such a bad idea if you know what you are getting into.

Best and Worst Performing Sectors of BSE and NSE

This post shows how various indices have performed over the last 6 and 9 months.

It is interesting to see that Realty sector is the worst performing whereas FMCG has been the best performing with returns of 6%. This clearly shows that why defensives are considered safe when the bear market is there, whereas the biggest falls are in the sectors which had the largest froth. e.g. Realty and small caps.

$ 700 Billion Bail out package and impact on Sensex

The stochastics of the NIFTY turned positive on Wednesday, so in the near term (1-3 days) expect a movement that is up. 

(see the red line cutting from the bottom of the black line indicating that there could be an uptrend for 1-3 days).

The US parliament also passed the $700 billion bail out package thereby providing the relief to markets. Although the asian markets did not respond to it much, I expect the Indian markets would react to it once the markets open up on Friday. Now until and unless we have a meltdown in one of our financial institutions such as ICICI (that has been wrongly rumoured) or other such big companies, I don't think that India would be affected much by this contagion. 

The point to note here is that FII's have been taking money out of India  at a rapid pace, and the current figure for this year stands at an atonishing level of around $7 billion, and we have been feeling the pressures, but the good thing is that the Indian retail investors are putting in the monies in the market. This can lead to two scenarios 

1) FII's keep on pulling monies out of the market and the retail investors don't have any money left to put in the markets and hence the markets crash (I personally don't think that this would be the case)

2) Once the FII's stop pulling out and start putting in the monies, the markets rebound back with a vengeance (More likely)

As previously stated once we cross the 4100 level we would be in a short term uptrend, and if we cross 4250 we would be in a uptrend convincingly for the series. I dont think that blind long positions should be built but little bit of nibbling in stocks that one always wanted to buy wouldnt be such a bad idea afterall.