From past market performance it is evident that Market tends to rise around Diwali time. Investors have a unshakable faith in this tradition as it also marks a new year according to Samvat calendar.
No doubt this diwali also we can see the market moving up as it usually happens, but, what after diwali. Offlate it seems Indian markets are not taking into consideration the global happenings. The US markets have been in standstill for almost a quarter now. The financial sector in US is worst hit by the ongoing subprime crisis and large financial houses like Merrill Lynch, Citibank etc have written off billions of dollar eroding shareholders wealth.
Even though the direct effects of subprime, on the Indian markets, are pretty limited. Any slowdown in US can dampen the earnings visibility of Indian companies. Around 80% of India's total exports are targeted to US continents.
Not only the subprime crisis, adding to it the US housing data is also slipping into negative territory. August reported New housing Construction dropping 20% on a yearly basis. The US housing prices is continuing to fall with a drop of 4.4% in august alone. The housing market in US have not found bottom yet and is expected to fall further as the housing inventory is currently massively over supplied.
How US housing effects India?. The major concern is that falling house prices will hurt consumer spending, which accounts for two-thirds of the US economy. This in turn will trigger the US consumers to lodge money in the bank, rather than going for a shopping spree. As we know India is a large supplier of home products ranging from textiles, wood to cookware to US, the exports of this will come to a stall and in turn put a question on the earnings visibility of these companies. Already these sectors are paring losses into their profits due to rupee appreciation. Textile being India's largest employment house can make many lose jobs.
Coming back to subprime, the trouble starts when large-sized funds (with exposure to highly leveraged sub prime markets) start liquidating their holdings in emerging markets to make good their losses in a sinking sub prime market. In the case of Chinese market, FIIs are not allowed to pull out money at their whims and fancies; there is a lock-in period for staying invested in that market. So evidently since India is receiving a huge inflow of FII's money into the stock market the risk of fear led fall in Indian markets is high.
What should Indian investors do after diwali?
1) Investors must use the diwali pre-market rally to book partial profits and sit on cash.
2) Invest only in fundamentally strong stocks which targets domestic consumption and are less dependent on US Economy. Stock in Power, Infrastructure would be a good bet to invest.
3) Monitor global cues at a regular basis before taking a long position in stock market.
Always remember "Cash is King". Cash in hand is worth a fortune rather it getting struck in a bear market.
Happy Deepavali.. Happy Investing
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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