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Blockbuster start to 2012

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Blockbuster Start to 2012

The start of 2012 has been a thrilling experience for anyone who is into stock markets. It’s been a stupendous rise for some of the major stocks and indices are clocking gains as I write this piece of article.

What needs to be seen now is whether the rally has gathered enough momentum to sustain the same, in short whether it is a steroid providing a short term boost or a proper medication. It’s not how effective a medicine works at the first instance, it is how far can the medicine last and what would be the repercussions of the same is something which needs to be watched with bated breath.

FII’s have made a strong comeback into our markets. Till date since the onset of 2012, they have pumped in 25000 cr(approx), and let alone in the month of Feb they have pumped in 14000 cr (according the the actual numbers from SEBI). We have already seen, some of the stocks making a brilliant comeback and rallying more than 50% of their price since the last 5-7 weeks. The European problems and its issues are being sidelined by the markets, and we can now say that they are forward looking, especially with the painful Q3FY12 period for most of the local companies getting a relief.

I believe that the undertone of this strong rally has purely been the turnaround of the interest rate cycle. RBI cutting the key interest rates and signalling that inflation cooling further will give them a leeway to relax the steep rise in interest rates and Infact go for a cut in the same. The banking sector which comprises a major proportion of our stock market capitalisation will heave a sigh of relief with this reversal of interest rate cycle. This will in turn have a trickling down effect to rate sensitive sectors such as Real Estate, Auto stocks, Capital Goods etc.

Technically one of the best part of this “relief rally” has been that we have comfortably crossed the 200 DMA, and have managed to sustain that since the start of Feb 2012. This is an extremely positive sign for the outlook going forward. Some stocks have touched their 52 weeks high and some of them have rallied to lifetime highs in this rally. It is a good sign, but what is now important is when the markets would go into the consolidation phase the kind of correction in the stocks which we will witness then, would determine the sustenance of this rally going forward.

It is true that stocks would always provide a higher percentage returns vis a vis the index, but it is the index which will show the actual “direction of the trend”.

Markets have proved it yet again that “ To break extreme pessimism, you need extreme optimism.”

Market View @ 1 pm.

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After the catastrophic fall in the markets last week, we can say that the markets have retraced the entire rally of last 3 weeks. The strong selling in the markets have brought the indices very close to its critical supports of 5750. I believe that in the absence of further negative news/events, markets would become rangebound and volatile between 5750 and 6050. Traders can find ample opportunity by buying on declines with a strict stop loss of 5750 and selling on rises with a strict stop loss of 6050, in this range bound market.

Investors with a medium term outlook(3/6 months) can look to invest in stocks such as HUL, Tatasteel and Sterlite.

Written by Rakesh Gandhi

January 10, 2011 at 10:36 am

Investor Sentiment in Bull/Bear markets

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As I write this article, Indian equity markets are trading at new 52-week highs and very close to their all time high levels. After seeing such strong momentum the one question which still lingers in the minds of many investors is whether we can trust the strength of the market or blindfold ourselves to the actual truth.

More precisely, ARE we in a BULL market or is it just a strong Rally from the deep lows?

post imageI believe that the key to understanding the markets and also to trade successfully is to understand the psychology of an investor at every stage of markets. Why do resistance and supports occur on charts and why does price correct from these levels. It’s because there is a significant amount of investor sentiment seen at such levels. The more the time taken for a chart formation and the more the number of shares traded in a range, the more powerful is the breakout/breakdown, because of the high number of sentiment’s involved.

The two most widely used terminologies for depicting the investor sentiment are ‘optimism’ and ‘pessimism’.

Let us discuss the case of a bull market. In bull markets there is an aura of euphoria and exuberance amongst people. The general outlook of an economy is that of prosperity, probable decoupling of the economy from other world markets, to put it crisply, there is ‘optimism’ everywhere. For example, according to the socioeconomic theory, a very interesting theory is that, in bull markets we see that animation movies perform very well. This is mainly due to a cheerful sentiment among the people.

There is an urge to outperform our counterparts in bull markets. We don’t want to miss out on any new ideas and want to implement every new strategy to make big returns. This gives rise to a sense of speculation in the minds of a so called ‘investor’.

Speculation is an activity seen more when there is subjectivity and good amount of difficulty in determining the true value of a stock. Speculation in stocks pushes the prices to unfathomable levels.

During a bubble however the propensity to speculate is high, many big sized players in the market argue for higher valuations for a young, currently unprofitable but good potential for growth. By contrast, the value of a firm with long earning history and tangible assets is much less subjective, and thus the stock is likely to be less sensitive to sentiment. That is probably the reason why we see a string of previously unknown companies making headlines, we see a good number of IPO’s in the markets getting launched and many of them even with a satisfactory business model making it big. I believe that is where the crux of the bubble scenario is, that the midcap and the small cap stocks will always give higher returns as compared to any other large cap stocks. Such mid to small sized company stocks give good returns, because of high amount of sentiment involved in them.

Now let us discuss the case of a bear market, there is fear and panic around. The general belief is that the worst is not yet over, and there is still more to come. Investors are made to believe that the fundamentals of a company cannot improve any further. In the socioeconomic theory, by a similar logic to that of bull markets, more horror movies would get successful, because of the fear existing in the minds of the people.

Corrections are generally sharp because there is FEAR which is the predominant sentiment involved. As I quote from one of the famous dialogue writers “Madness is like gravity. All it needs is a little push. Nobody panics when things go according to a plan, even if the plan is horrifying.”

I am sure very few people are aware of the HEM-line indicator. The theory states that the stock market rises and falls with women’s hemlines. This is another example of the prevalent psychology of the investing public.

I think the bull and bear phases of any markets are formed based on the sentiment of the investor.

The key to making money in stocks is not to get scared out of them.

–          Peter Lynch


Written by Kunal Bothra

October 18, 2010 at 5:10 am