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Monday, December 24, 2007

Expenditure may ease crunch; Re set to dip

Liquidity: Set to ease
Liquidity is expected to improve this week following the budgeted government expenditure taking off in full swing at the end of the third quarter.

There is no pressure on liquidity, except for a stray demand from banks to meet the requirement towards the third quarter-end of the financial year.

Since foreign funds and banks are buying dollars to repartriate in the calendar year-end, it will add to the rupee liquidity, says a dealer.

The sentiment on liquidity will remain bullish since the market is of the view that most of the FIIs have lined up funds to participate in the ensuing initial public offers (IPOs) of companies in the new calendar year.

The Reserve Bank of India has also been selling dollars in the market to infuse liquidity besides the usual repo route, where banks borrow funds against the collateral of government securities.

Call rates: Likely to head south
Call rates are expected to ease from the highs of 7-8 per cent to a low of 5-5.5 per cent. This will be on the back of improvement in liquidity. Moreover, there will be no pressure on liquidity since outflows from the system are moderate.

Dealers also see most of the banks not preferring to fund the cost of arranging excess liquidity towards the end of the quarter.

Mutual funds, on the other hand, may not be aggressive in lending in the collateralised lending and borrowing (CLBO) market as they expect redemption. The pressure on redemption will be from foreign banks, which operate as custodians for foreign institutional investors (FIIs).

Treasury bills: MSS deferred
RBI will auction the 91- and 364-day treasury bills for a notified amount of Rs 500 crore each.

The central bank has postponed the auction of T-bills towards the Market Stabilisation Scheme (MSS) as the liquidity situation is yet to ease. The postponement of the MSS auction will add to the positive sentiment on liquidity.

Corporate bonds: Issues galore
A host of banks, including subsidiaries of State Bank of India, has lines up certificates of deposit (CDs) to raise funds in the short term for third quarter results.

If the liquidity improves, it may push the yields down in the shorter end of the curve, which, in turn, will prompt a string of CD issues and commercial papers. In the long term, banks, financial institutions and public sector undertakings are expected to come up with bond issues to raise funds.

G-sec: RBI mop-up on
RBI is expected to continue buying government securities to build up the stock of papers for conducting open market operations.

Open market operations require RBI to absorb or infuse liquidity into the market in exchange for the sale or purchase of securities respectively. This had started last week and, for the week ended December 14, RBI purchased government securities worth Rs 2,230 crore.

Rupee: May drop
The spot rupee is expected to rule with a bias towards depreciation. The primary trigger for the rupee to depreciate will be the global strength of the dollar against all other currencies.

The dollar has been gaining following robust economic data as regards retail sales and inflation. Inflows from FIIs will take a while as they will wait for the market to correct and some new IPOs to come to the market.

Posted by Srivatsan at 9:59 AM

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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.