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.

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.

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?

Can we see revival of American Economy during Obama’s Presidency?

Ever Since, Mr.Obama took over the presidency of USA, the US Stock Markets saw a deep correction followed by sharp rally. But it is well below the highs of 2007. The US Stock Market Index Dow Jones Index made a high around 15000, in 2007. But it is trading around 10,500 now.

The Economy is gauged by the stock Market Indices in any country. So, if we want to know the future state of the Economy, study of Stock Indices would reveal the real picture. So, if Stock Indices behave well during his Presidency, than the Economy is going to perform well.

The Dow Jones made a high of 15000 in 2007. If the US economy performs well in his tenure, then Dow is going to move above 15000. Is it possible for Dow to move above this level? If so, then he will be recorded as one of the best performed President in USA history.

Let me examine the possibility in detail. Stock Markets behave in cycles. If you see a five rally then it will be followed by some period of correction. Normally, bearish periods are more in time than bullish periods, which means, Dow Jones has to remain in bearish mode for another 5 years.

Since Obama’s term will end in another 3 years, the chances are less for the Dow Jones to move above 15000 which in turn unlikely for the US economy to grow in the next three years.

If this happens and if Obama doesn’t get a second term, then he may go down in the history as an unpopular President of USA.

Fundamental performance of companies for the past five years

The fundamental performance of any company is the performance of their sales, net profit and etc. If it grows year by year then we can say it is growing. It can be stagnant or it can show negative growth. Some companies may show loss also.

So a company can grow positively, or it can grow negatively. Likewise, it can remain stagnant or it may show loss. The financial health of any company can be gauged by the financial performance of that company over these years.

Technical performance of the stock price may not really reflect the fundamentals. Let me discuss the fundamental performance of all the companies in the year 2008-2009. Though Stock Markets have rise all over the world in the year 2009, does it really reflect in the fundamental performance of the companies?

The performance of the companies started showing good growth since 2003 and it peaked in 2007-2008 year. In 2008-2009 period it showed negative growth in many sectors except few sectors. In 2009-2010, it has improved but not at the pace that we have seen in the last five years. To put it simple, the present growth is not as good as it seen in the past five years.
But Stock indices have rallied to 2008 levels which show that the present rally is not supported by the fundamentals. So, it is purely a technical rally in the Bear Market. One need to wait and watch for few more quarters of financial resulss before deciding about the future fundamental performance of the companies.

Cutting losses is the toughest decision to make!!!!!!!!!!

Ask any trader or an investor in the stock market or commodities market, he will say, the toughest decision he has to take is when he plans to cut his losses, if his positions goes against his way. The art of decision making is an important department in human’s life. Though decision making is the most important factor in trading, but it is been given the least importance.

For a trader to be successful, he has to be prompt and wise in taking decisions to cut his loss. If he makes a mistake in taking a decision in booking a profit, it will not affect him financially. But, if he makes a mistake in taking a decision in cutting a loss, then his capital would be wiped out partly or completely.

For a trader to take a wise decision during cutting his loss, he should plan his trade before he enters it. If he enters the trade with proper planning, then he will surely know, when to enter and when to exit.

Entry and exit are the important decisions, but, exit is the more important of these two. Even if you make a wrong entry, you will be saved by correct exit. Suppose you make a correct entry but you fails to make correct exit, then you will end up loss.

Traders who have mastered this art are the ones who are making consistent profits in speculative markets. This type of traders will be only a five percent of the total traders. The other nifty five percent traders are losers.

You decide in which type of traders you belong to.

How should be your investment portfolio?

The short term trader is meant to the people you who trades in the Derivatives Market (Futures and Options Market) in Stock Markets or Commodities Market. A trader takes a position in the market in futures or options and holds it for few days. Normally, we can see one month, two month or three months contract in the derivatives market, but we have contracts ranging from months to years.

The trader holds the positions until he makes a profit or until he cuts his losses. Not all trades end up in profits. If the trade goes against his position then he has to close it before he makes a substantial loss. Anyway, he has to close the position with profit or loss or at cost. If he feels, the underlying security move as per his expectation for the next month also, then he can carry forward the contract to next month also. Likewise, he can carry forward the position to unlimited number of months.

So a person trading in this time frame is called a short term trader. In a futures positions, he has to pay a margin to hold a futures position (whether it is short or long). In case, if the position he holding is loss, then he needs to pay the extra margin to make up the loss and also to continue to hold the position. So, there is always a risk of holding these type of positions. Unlike, holding a delivery share, holding a futures position would anytime invite margin call. If we are not prepared for that, then we have to close the position in loss, if it goes our way in the near futures.

Trading for the short term is always risky. But the profits we make in the short term is substantial. You no need to hold it for a long time. Your money will not be blocked for a long time. You can quickly use your funds.

But in the long term investments, your money will be blocked for a long time. There may a time when your money would remain idle without appreciating for years. But it is less riskier than short term positions.

I prefer any investor to invest more than seventy percent of their investments in long term and trade only twenty five percent of your investments in short term trading.