Sunday, January 17, 2010

Why is Market cyclical in nature?

Many would know that all the free markets, like Stock Market, Commodities Market, Bond Market and etc, behave cyclically. ‘Cyclical’ here means the upside and downside movement of the Market rhythmically between a particular period. We have seen Gold markets move up during the time Stock Markets come down. This is one type of cycle in the Market when one comes down, one goes up. When Stock Markets move up, the interest rates would go up.

Why are these cycles occurring in the Markets? Let me explain the internal dynamics of these cycles. We all know that any Market exists because of the demand and supply for that asset. Let us start from a bear Market bottom of an asset. Let us assume here that the asset being Stocks. During the bottoms the demand for that particular asset would be less and the supply for the asset would be high. Since supply is more than demand, the stock price would continue its downtrend.

At one particular stage, the supply will be completely observed by the Market. Here, the stocks transfer from the people of weak hands to strong hands. Once again here is a small explanation for weak and strong hands. Those who are well informed about the company with strong financial strength can be termed as strong hand, because he wouldn’t sell the stock even if it comes down further. On the other hand, a weak hand is an Investor, who is not financially strong and not well informed about a company would sell his holdings if the prices decline further.

At this stage, stocks transfer from weak hands to strong hands. The floating stocks of a company would be held by strong hands. So slowly supply stops and demand picks up at a lower price. Now the price difference also plays a crucial role. Since the prices are low now, automatically demand picks up in that stock. At one stage, supply will be overwhelmed by the demand and the prices of the stocks start picking up. This process always takes a time to complete. That is why a cycle is created in the market. This may be of Intraday, or weekly or yearly or decades cycles.

The same process takes place during the bull market peak vice versa to create a cycle. Proper understanding of cycles is very essential for successful investing.

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Saturday, January 9, 2010

Buy the Sell off, Sell the Rally


The Stock Mantra of prime importance is, you buy during big sell offs and you sell your securities during rallies. How many really do follow this simple logic in Stock Markets or Commodities Market is a question, even though it is the only way to make money in Stock Markets. Every body knows this logic, but nobody doesn’t follow it.

The Simple reason for that is, the logic is associated with emotions of investing person. During big sell offs, the Investor would go by his heart not by his mind. If you go by mind, then it will show you that this is the right time to invest. If you go by the heart, then the panic created by the big sell off would certainly eat you to make you sell the securities actually at a time when you should be buying it.

So investment decisions in any free Markets should be rational, not irrational. Rational Investors are very few in numbers and they are the winning Investors in the Market. Becoming a rational Investor is not as easy as it looks. You have to keep you emotions under the check during the big market moves and you have to think independently.

If you join the crowd, then you would be sucked into the crowd and you would be part of the crowd and your investing or trading decision would be taken irrationally or emotionally. Always await the crowd during time of taking Investment decisions.

One simple example is, those who have invested in the Stock Markets would have invested their money mostly in IT sectors in any part of the world from 1999 to 2003. Because, the popularity is such that any investor would have invested only in this sector. But this sector never saw a big bull market since then.

Had an investor acted in his own way and though investing in IT sector would not fetch good returns, simply based on the fact, that this Sector is already over Invested, certainly he would have avoided that sector.

So, be rational when it comes to investing.

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Thursday, January 7, 2010

Sentiments and Trend reversal in Markets.

We have seen that whenever a market is viewed by all participants as bullish, a trend reversal takes place and turns bearish. Likewise, whenever a market is expected to be bearish by all, it turns bullish against their view.

When Crude oil was trading around 145 USD in 2009, everybody is thinking it will go to 200 USD levels. The Media is bullishly covering Crude oil. Everybody is expecting the demand for the Crude to go up because of growing world Economy. Every Analyst has turned bullish on Crude, but it has turned otherwise. Crude fell from 145 USD to 30 USD within 6 months.

Why is this happening, when everybody is in one view but the Market turns otherwise? Let me explain the internal dynamics in it.

Market movement is influenced by demand and supply. There is always a demand or supply potential for a market. Demand is inversely proportional to Supply. If the participants in a market feel bullish about a particular market, they will start to accumulate the asset. Like this slowly, every participant acquires the asset. In initial stages, the demand potential will be high, but as the time progress and as more number of participants acquires the asset, the demand potential slowly recedes.

But the sentiment in the market will slowly turn bullish, as more number of peoples have already bought the asset. As this process continues, almost all of the Investors would have bought the asset and the sentiment would be highly bullish by this time.

Now the buying potential is already receded because the potential Investors have already bought the asset. Now a selling potential is created, as those who have bought it will sell it for a profit. As the buying potential recedes, a selling potential increases.

At some point of time, the demand potential and supply potential will be same. And after some time, demand potential will be overwhelmed by supply potential. But at this time, the bullish sentiment would grip the Investors.

At one point of time, everybody would have bought the asset and nobody is left, so everybody is highly bullish, but the selling potential would be at its highest and buying potential would be at its lowest in this point time.

This is the time, trend changes from bullish to bearish because of the change of balance of buying and selling potential in the market. That is why, even though the sentiment is bullish, the trend changes from bullish to bearish and vice versa.

Understanding the internal dynamics of the Market is essential for successful Investing.

Monday, January 4, 2010

Will BRIC Nations perform well in 2010?

Russia topped the table of Countries whose stock Indices performed well in 2009. It is followed by Brazil and it is followed by India and China respectively. Russian Stock Index, Russian Trading System(RTS) appreciated by 112 percent in 2009. Brazil’s Stock Index Bovespa, appreciated by 83 percent. The Indian Stock Index Bse Sensex appreciated by 81 percent followed by China’s Shanghai Index (SSEC) by 80 percent.

What we have to take note is, China’ Index has been trading well below its all time high of 6124 and it is currently trading around 3300 level. India’s Sensex is trading around 17500, well below it all time high of 21000. Brazil Bovespa is trading around 68000, well below its all time high of 74000. Likewise, Russia’s RTS is trading around 1400, well below its high below 2400.
It is clearly visible that all these Indices are trading well below their 2008 highs indicating, that they haven’t actually grown. What they have done is, they have pared some losses. Our expectation is, will these countries stock Indices perform well in 2010 also. If so, will they cross their all time highs.

Fundamentally speaking, the companies in these countries have performed better in 2009 than 2008. But they have not performed as much as they performed for the last three years which indicates, the growth in these Stock Indices are unlikely in 2010. And also, the PE ratios of these indices are in higher side when compared to 2008.

Technically speaking, no bear market would bottom out in one year. It will take more than two years to bottom out. So, 2010 would be year of downtrends in all markets. So, 2010 would be as good as 2009 for the BRIC nations. If markets come in this year, then these nations could perform negatively this year.

Don’t be complacent in holding Investments in these countries.

Friday, January 1, 2010

Mutual Funds or Stocks?

Many Investors have doubts about whether to invest in stocks directly or in Mutual funds. If we can analyze the performance of the Mutual during the Bull Markets and Bear Markets, it would give a clear answer about it.

The present bull market started around 2003 and ended in 2008. The Mutual funds performed well during that period but still their performance lagged behind the performance of Stock Indices. In India, Bombay Stock Exchange Index Sensex appreciated by seven times. But no fund appreciated by seven times in this time. If we take into consideration some well performed sectors like, Reality, Power and Infra, the performance of the funds is far more less, which clearly indicates, Mutual funds have not performed extraordinarily. They have performed as an ordinary investors do.

Had an Investor invested directly in stocks, he would have multiplied his money manifold. So, Mutual fund Managers are not smarter than us. I prefer investing in Stocks directly instead of Mutual funds.

But investing directly in stocks do have some risks. Had anyone invested in Hindustan Unilever in Bse or General Motors in USA, he would have not seen his investment appreciate far the last five years. So, picking the right sector and right stock is more important in investing. Any secular bull market will sustain for five years to ten years. Always hold your investments till the bull market is over. Don’t shuffle your stocks in your portfolio frequently.

If one can follow the rules propounded here, then one can prefer stocks over Mutual funds.

Which one do you prefer?