30 April 2011

Nifty : Bull Trap Ahead ?

There has been practically no movement in Nifty for past 4 weeks. It has found stiff resistance around the trend line. At times it looked to clear it and give a breakout, at another it looks like it will break down. But interestingly it did neither. Fundamentals are also neither favoring the bulls or bears. The money printing in US is not stopping any time soon, but that bullish effect is negated by inflation fears of it. Though crude oil has not rallied heavily, it has crept higher, the headwinds of a explosive rally in it is keeping FIIs cautious. They have pulled out money in recent week gone past. So we are in kind of no man's land and people are waiting for triggers. In such times only price action can tell us what mood are people in.

Coming to the charts, the above weekly chart shows how the trend line resistance has kept Nifty in check though the cloud below looks to be the support. As per Ichimoku cloud the "Sell" signal generated in January is still intact, with last cloud support around 5500 for the month of May.

What I expect from a trader point of view is that, because the trend line resistance has been watched so closely, Nifty can break it apparently convincingly, sucking in a lot of buyers (a bull trap) and then head lower again. In medium term I also expect the lower parallel trend line to be tested before any signs of rally again.

James Altucher : 8 Reasons Not to Daytrade

Everyone wants to be a daytrader. Let me tell you the best days. You get in at 9:25am. You make the trade your system tells you to make at 9:30. And by 9:45, the trade is done, profitable, and you’re done for the day: $1800 richer and happy about it. Even better are those stories of people who took $3000 off of their credit card and “18 months later I had $25,351,011.45 in the bank!!!”  The first day I decided I was going to be a fulltime daytrader, on May 18, 2001, I was so excited I couldn’t sleep at night. It was unbelievable to me how much money I was going to make.
But its all a lie to yourself. I still occasionally daytrade. And I’ve daytraded for other people. I’ve daytraded for hedge funds and for prop trading firms. Right before I started daytrading, an old-timer who had spent 40 years in the business told me, “Don’t do it. Why do you want to be involved with those people.” But I wanted to be “those people”. I was one of them. I was a TRADER.
Don’t do it: Here’s why:
-          Suicide. At some point you will feel suicidal. That doesn’t mean you lost all of your money. You might  just be having your worst week in 2 or 3 weeks. But for whatever reason you bought when you should’ve sold and that sent your head spinning and now you need to be talked off the ledge. I’ve talked many people off the ledge in the past 10 years and had to be talked off a few times myself. Its not a pleasant feeling. Why do that to yourself?
-          You’ll overeat. Why not? You just put on the trade and the second you did it went against you. So you put on more and it went against you some more. So now you are staring at it and you are feeling bad. Your body needs to feel good. Your body is very short-term in its thinking. Its saying, “you did something that made me feel bad so now I need a doughnut. I know that will balance the bad feeling so go do it. Hurry.” So you eat a doughnut. The trade goes against you more. Screw it, you eat 5 more doughnuts. Six. Seven. I’m getting sick even writing this. Eight. Nine. And so on.
-          Your eyes go bad. Imagine you have two screens in front of you and thousands of numbers and they are all blinking and changing from green to red to green. You’re staring at these numbers for thousands of hours over the course of years. I can’t read books close to me anymore. The letters all melt together and look like a kaleidoscope. I have to take my glasses off to read them. Although, is that so bad? Maybe I won’t need glasses anymore eventually.
-          Social life. Do you really think that losing $500,000 of your client’s money in a day is going to make you a happy, chipper person when you go out with your friends that night. One person told me, “play with your kids. Kids always make you happy.” What the hell? Do I really want to listen to a four year old jabber about something when I’ve got money on the line? Forget it.
-         Blood pressure. When I have a trade go against me, I can sit there and feel the blood pumping through my entire body. I can feel my heartbeat. That might seem  like a superpower but it isn’t. If you hear every single pulse going all through your body then something very bad is happening.
-          Nothing productive. My biggest regret in life is the hours I spent watching trades when I could’ve been making a website business or starting some other kind of business that could’ve actually been helpful to people. Like a doughnut store. Who am I helping by trying to snatch a few thousand dollars out of the market every day? If anything, its like I’m trying to pick someone’s pocket – the unfortunate, overeating, suicidal, bastard on the other side of my trade.
-         No career. When you sit there and trade every day you’re not networking with friends or other professionals. You’re not learning anything new about the world or business. Every second you sit there watching a trade you are removing yourself further and further from any notion of a career since daytrading is not a career. You are closer to being an inmate in a mental institution and not a functioning member of society that your kids can be proud of.
-          Its impossible. I know some very good daytraders. In the long run it is possible to make money daytrading. But it’s hard and it takes years to build the psychology. Every good daytrader I know suffers from all of the above. You have to be extremely humble, have no delusions of grandeur when it comes to your market opinions, take losses as quickly as possible, and not get discouraged. Alas, in the long run,  I have none of these qualities.  And neither do you.

James Altucher : Lessons Learnt while Trading

I traded for Victor Niederhoffer for about a year starting in 2003. I was up slightly more than 100% for him, primarily trading futures using a quantitative approach. During that period I had one down month: June 2003.
Victor was a top trader for George Soros before starting his own fund in the ’90s and then writing the classic investment text “Education of a Speculator.” He then suffered one of several blowups in his career when his fund crashed to zero while on the wrong side of a couple of bets during the Asian currency crisis in 1997 (most notably, he was short S&P puts when the market crashed that year).
Despite that, Victor has consistently traded his own portfolio quite successfully and is one of the best traders I’ve seen in action.  He still posts his daily comments on trading and the markets at his site dailyspeculations.com.
Here are 10 things I learned during my time trading for Victor:
1.) Test, test, test. Test everything you can. If someone says to me, “There’s inflation coming so you better short stocks,” I know right away the person doesn’t test and will lose money. Data is available for almost anything you can imagine. (In my talks, I always discuss the “blizzard system” based on data of what the stock market does depending on how many inches of snow have fallen in Central Park that day).  Victor and his crew would spend all day testing ideas: What historically happens to the market on a Fed day? What happens on options expiration day if the two prior days were negative? Do stocks that start with the letter “x” outperform? Nothing was beyond testing.
2.) Optimism. There’s plenty of reasons every day to assume the world is going to end. The media is constantly speculating about imminent financial collapse, hyperinflation, peak oil, pandemics, terrorism, etc. One of Victor’s favorite books, which I highly recommend, is “Triumph of the Optimists,” which shows the success of the U.S. markets over the past century over other markets and asset classes. Yes, the markets take a hit. But invariably buying dips (and being careful not to get wiped out) will be a long-term strategy for success.
3.) Fearlessness. I had a big March 2003 trading for Victor. The market was threatening to go to new lows at the advent of the Iraqi war. I went long and strong and had a great month. Then, for the rest of the year, for fear of destroying a great track record, I would go up a few percentage points at the beginning of each month and then coast for the rest of the month, probably leaving another 100% or so on the table as I passed on trading many high probability situations. I always suspected Victor was very disappointed in me for that. When you have a high probability situation, trade it and trade it big.
4.) Everything Is Connected. Whether you are studying baseball, checkers, trees, wars – all contain patterns similar to the patterns we see every day in trading. Sometimes the best way to get perspective on your trading is to study something seemingly unrelated and to then consider the analogies.
5.) Ayn Rand. There’s a lot of retrospectives right now about Rand, one of Victor’s favorite authors. I don’t care much for the so-called Objectivism or Rand’s views on capitalism, but what struck me about her books was the emphasis on competence. Her novels are about competence and the personal gratification one gets by being good at what you do, whether it’s building railroads, designing a building, trading or cleaning a house.
6.) Warren Buffett. Victor is not a fan of Warren Buffett. This forced me to look at Buffett in a whole new way. Is Buffett a value investor? What other tricks of the trade has Buffett used over the years? I ended up reading every biography of Buffett, going through four decades of SEC filings, and pouring over not only his Berkshire letters but his prior letters from his hedge fund days (1957-1969). The result was my book, “Trade Like Warren Buffett.”
7.) The First Day of the Month. It’s probably the most important trading day of the month, as inflows come in from 401(k) plans, 1RAs, etc. and mutual fund have to go out there and put this new money into stocks. Over the past 16 years, buying the close on SPY (the S&P 500 ETF) on the last day of the month and selling one day later would result in a successful trade 63% of the time with an average return of 0.37% (as opposed to 0.03% and a 50%-50% success rate if you buy any random day during this period). Various conditions take place that improve this result significantly. For instance, one time I was visiting Victor’s office on the first day of a month and one of his traders showed me a system and said, “If you show this to anyone we will have to kill you.” Basically, the system was: If the last half of the last day of the month was negative and the first half of the first day of the month was negative, buy at 11 a.m. and hold for the rest of the day. “This is an ATM machine” the trader told me. I leave it to the reader to test this system.
8.) Always Protect the Downside. This is learned by negative example. As Nassim Taleb has pointed out ad nauseum, Black Swans occur. (See the Malcolm Gladwell article on Taleb to see Taleb’s thoughts on Victor.) No matter how much you test, there will be a “this time is different” moment that will force your bank account into oblivion. I trade a strategy based on selling puts and calls at levels where my software thinks its statistically unlikely the market hits those levels before the next options expirations day. But I also use some of the premium I earned from selling those puts and calls to buy slightly further out puts and calls as insurance the market doesn’t run away from me. No matter how confident the software is, always protect.
9.) Keep Life Interesting. Victor surrounds himself by games and the people who enjoy them. When I knew him, he took regular checkers lessons, played tennis every day, and has some of the oddest collections I’ve ever seen. He stands out on a crowded city street and seems to spend part of each day seeking out new and interesting experiences. He often asked me what I’d been reading and if it was trading related he was disappointed. Trading is ultimately a window into the psyche of the world at that moment. Uncovering the nuances of that psyche is ultimately more important than doing the latest test on what happens after a Fed announcement (but, on that point, tests have shown that whatever the market is doing before a 2:15p.m. Fed announcement on Fed days, chances are it will reverse after 2:15).
10.) Be Open to New Ideas. In 2002, I was still reeling from the dot-com collapse. I had sold a company near the height of the insanity in 1998 and also started a VC fund that opened up doors in March, 2000, the absolute peak of the market. I was trying to figure out new things to do. I came up with a list of about 30 people I looked up to and came up with 10 ideas for each person about how they could improve their business. To Victor, I sent a series of trading ideas that I had both backtested and had traded successfully. To Jim Cramer, I sent a list of 10 ideas for articles he should write. Of the 30 people, they were the only two who responded and ultimately I ended up managing a little bit of money for Victor and writing for Jim Cramer’s site, thestreet.com. I’m grateful for the opportunities that both people created for me.
(originally published Feb 10, 2010 at WSJ.com)

28 April 2011

Dollar : Repeat Telecast?

26 April 2011

Gold : Silver : Mean Reversion ?


"The status quo remains if silver continues to outperform gold… but the mean reversion scenario suggests other outcomes such as a dramatic ‘catch-up’ rally in gold, or a ‘blow-off top’ correction down in silver."

- Courtesy afraidtotrade.com

23 April 2011

Technically Speaking : Gathering Steam ?

Above is the chart of page views of this site since May 2010. As you can see it was negligible in May and June 2010. July 2010 was the watershed month as page views jumped from next to nothing to just under 500. Since then the following of this site has increased consistently and March 2011 saw just under 2000 page views.

For a blog which started only in late August 2009, dealing with a very narrow field, catering to a narrow audience, I think this is a commendable achievement. But this would not have been possible without your great support. I hope to carry on and improve the effort I have been putting, so that you can get best of its kind analysis of Indian Markets. CHEERS !!

Market Breadth : Turn In Tide?

The above chart shows Nifty (futures) against 10 day moving average of Advance - Decline of the F&O segment of NSE. I have talked about what the basis of using only F&O stocks earlier as well. So would be focusing on how it had been predicting weakness and strength in Nifty.

Check the first shaded area from late November to end of December. After the strong sell off in early November, Nifty rallied from 5800 to almost 6200 on closing basis, though the Adv-Dec line shows continuous weakness in breadth. That is, more stocks were declining than advancing even though Nifty was rallying. We can easily say that focus of buying was only on blue chip, while the others were getting sold.

Then came the period of fierce sell-off. But here as well in later half of selling, you see that Adv-Dec line made a higher low, when Nifty made a new low. Signs that blue chip were sold while there was value buying happening in the broader market. Interestingly Nifty followed a rebound.

What we also notice is that since the high made in early April, though Nifty is range bound, we see our indicator rolling over and has fallen below 0. (check what happened when it did that last time!) A very strong signal that people are losing faith in the broader market again. And all we need is a trigger to pull Nifty along with it.

22 April 2011

George Soros : Maybe I don’t understand the market.

An excerpt from a May 22nd, 2000 Wall Street Journal article, How the Soros Funds Lost Game of Chicken Against Tech Stocks

NEW YORK — For months, through late 1999 and early 2000, the Monday afternoon research meetings at George Soros’s hedge-fund firm centered on a single theme: how to prepare for the inevitable sell-off of technology stocks.
Stanley Druckenmiller, in charge of the celebrated funds, sat at the head of a long table in a room overlooking Central Park. Almost as if reading from a script, he would begin the weekly meetings with a warning that the sell-off could be near and could be brutal. For the next hour, the group would debate what signs to look for, what stocks to sell, how fast to sell them.
“I don’t like this market. I think we should probably lighten up. I don’t want to go out like Steinhardt,” Mr. Druckenmiller said in early March as the market soared, according to people present at the time. He was referring to Michael Steinhardt, who ended an illustrious hedge-fund career in 1995, a year after suffering big losses.
Mr. Soros himself, often traveling abroad, would regularly phone his top lieutenants, warning that tech stocks were a bubble set to burst.
For all this, when the sell-off finally did begin in mid-March, Soros Fund Management wasn’t ready for it. Still loaded with high-tech and biotechnology stocks and still betting against the so-called Old Economy, Soros traders watched in horror when the tech-heavy Nasdaq Composite Index plunged 124 points on March 15 while the once-quiescent Dow Jones Industrial Average leapt 320 points. In just five subsequent days, the Soros firm’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss.
“Can you believe this? This is what we talked about!” cried a senior trader amid the carnage. Others on the firm’s gloomy trading floor busied themselves calculating how much they had lost by aping Soros investments in their own accounts.
Aside from an April 28 news conference about the firm’s agonies and brief interviews afterward, the secretive Mr. Soros and Mr. Druckenmiller, long his No. 2, have said little about the period leading up to the humbling disclosure of the problems. An account pieced together from interviews with a dozen Soros insiders and managers of other hedge funds — private pools of investment capital — shows two longtime friends and colleagues increasingly at odds until it all became too much.
As the losses piled up, tension inside the firm grew, with Mr. Soros second guessing the traders who had made him billions of dollars in the past decade. Soros executives say they overheard heated arguments, as Mr. Soros pressed Mr. Druckenmiller to bail out of some swooning Internet stocks before they sank even further, while Mr. Druckenmiller insisted that the funds hold on.
During the worst of this period, it happened that the Soros offices were consumed by a powerful burning smell as electrical work on the floor above kept starting small fires and setting off deafening alarms. The smoke and racket and the dizzy headaches they caused seemed “like a divine message,” recalls one Soros executive of the bizarre office scene. “We almost wished it would burn down.”
By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%. Mr. Soros had stated in a 1995 autobiography that he was “up there” with the world’s greatest money managers, but added, “How long I will stay there is another question.” Now came an answer. Both Mr. Druckenmiller and Quota Fund chief Nicholas Roditi resigned. Mr. Soros unveiled a new, lower-risk investing style — completely out of character for him — and conceded that even he found it hard to navigate today’s murky markets.
“Maybe I don’t understand the market,” a reflective Mr. Soros said at the April 28 news conference. “Maybe the music has stopped, but people are still dancing.”

16 April 2011

Inflation and Interest Rates.

After a lot of posts on technical aspects of markets, I thought of taking a break from it. Just browsed through some macro economic data. I always get an urge to look back at data when our news channels give reasons for a market fall as high inflation, poor IIP number or interest rate hike. In my opinion markets are far too forward looking, most of the fundamental analysts look 3 years ahead and estimate earnings of a particular business. Also what we will see is that interest rates as well as inflation is not much of a local phenomenon these days.

Lets take a look at the above chart, which shows Interest rates and Inflation from Jan 2000. I will ignore pre 2000 macro conditions as I don't have much data to comment on it. Coming to the chart, we see that till 2005 end, inflation was very much a "domestic animal", tamed and mild. The monetary policy as well reflected the same calmness and relaxed attitude. At the beginning of 2005, we see the rate increasing (marked A in chart) and only period when RBI was ahead of curve, mostly because there was too much foreign money flowing in (stock market as well was roaring) and Indian economy was slush with liquidity. It was easy to get credit, but with too much of "hot money", RBI found it difficult to handle and started raising rates. Notice that initially there was not much impact on inflation (which was expected due to the money flow), but after 2006, it started rising and rarely fell below 6% till 2008, even though rates were increased to tackle it.

After Jan 2008, inflation was getting wild. It spiked to 10%, thanks to crude oil and other commodities. But look how RBI was sitting on its hand. Why? The housing bubble and had gone bust in the US, and all the easy money was gone. Foreigners were, (forget about putting money) taking out money from India. Had RBI raised interest rate at that time, growth would have been seriously challenged, at least RBI thought it will damage the economy if it raised rates.

But in late 2008, something more unconceivable happened. There was almost a total freeze of credit. RBI had to reduce rates dramatically in form of stimulus to spur the economy. Rates came down to below 4%, first time since 2000, inflation on the other hand totally ignoring the credit crisis, kept on galloping and lower rates pushed it even further (food was the key driver of inflation during this phase).

When it reached almost 16%, then only RBI had the guts to begin rate hike. Since then we are almost back to the easy money period rates, but inflation is still stubborn at over 8%. RBI and government still pledge to bring the inflation down, as it has been seen as a major political headache, but can they do anything more than tweaking the interest rates? Where on one hand inflation threatens business doers with increasing cost of operations, on the other hand high interest rates makes it difficult to get/afford credit.

Its very difficult and almost impossible to maintain a balance of interest rate and inflation, without hurting the economy much. Look at how US, China and Japan have been struggling to get a right balance of both. RBI have been favorably placed during last credit crisis, as oil a major import as well as inflation contributor after peaking almost collapsed, saving it from hiking rates. But will it be so, where crude oil is resilient over $100 and analysts predicting 200.

So, what we see is that, Indian inflation is much more a function of global macros than local supply-demand balance. Interest rates have been managed well by RBI, but still is dependent on what kind of money flow, India is getting. Going forward this will remain the case. If the world, is flooded with easy money (dollar), then inflation will be rampant and India will be a huge sufferer mainly because it will have to import commodities at a much higher price, which definitely is going to cause a slowdown in growth, as it will kill demand. On the other hand a credit crises again, though equally terrible, will be only punishing those, who do not have cash at hand.

10 April 2011

Nifty : Long Term Trading Interest

Volume of trading has always eluded analysts who try to make sense of it. Classical technical analysis says that a directional move should always be validated with relatively higher volume. If such is the case then we can expect the trend to continue or even strengthen. So in a bull market the rallies should have higher volume than corrections, and in bear market the corrections should be having higher volume than the rallies. Volume spike at the fag end of rally can be considered as the euphoria phase of the market, but we will come to know that only in hindsight.

Off late, we have been seeing a lot of anomalies happening in the volume vs price action, especially in the western markets. The current rally in the S&P 500 since March 2009 is a living proof of this. After the initial burst, the US market has practically crawled up in relatively thinnest volume. This has made technical analysts question its sustainability since long, but the rally has proven them wrong consistently.

The chart above shows Nifty, its 200 dma, 200dma of turnover volume and 200 dma of traded shares. I have used both shares traded and amount in Rupees, so that we get a better idea of the volume. As the bull market progresses, prices increase and hence does the turnover. So shares traded should give us more exact figure to deal with interest in markets.

So, just considering the shares traded curve as of now, we see that it has been in a continuous uptrend since 2006 till mid 2009, during which Nifty rallied from roughly 2500 to 6300, corrected back to 2500 and then again rallied to 5000. Its the rally that has been post 5000 that has seen lower interest.

So can we go back and check when this kind of loss of interest in trading happens in Nifty? In the chart, we can see 2 more such peaks in trading volume. 1st being mid 2004, when Nifty rallied and then corrected, before continuing the rally again in mid 2005. 2nd can be seen in 2001, which mostly coincides with the correction.

What can be seen is that when the volumes are higher it is generally accompanied by higher volatility in prices. You can also say higher volatility in prices drives volume higher, but the fact remains that the two go together. Volumes have come down substantially lower from peak since mid 2009 is in conjunction with the fact that prices have been in a range.

Also, to be noted should be the duration of this period where volume keeps coming down. Going chronologically, 2001 peak to trough lasted around 1.5 years (from early 2001 to late 2002), from mid 2004 to 2005 (1.5 years), from mid 2009 to date which is also just under 2 years. So looks like we are kind of done with the falling volume period in the longer time frame and there should be a decent uptick in volume going forward. Which means there should be an increase in longer term volatility.

As a matter of concern, the falling interest in stocks even as Nifty has managed to crawl higher, is a sign of fatigue, with overall fundamentals gasping for breath, and period of easy money (at least for FIIs) looking to end sooner than later, crude oil and inflation worries looming, and overall valuation fluctuating between over valuation and fairly priced, I think we can see another bout of flight to safety trade, pulling the market lower. That should raise interest in stock market!

Friday : A prelude to Next Week? - Part II

Continuing our study of Friday closings, lets check out what happens when Friday closes on a positive note.

As you can see out of 387 total instances there are 132 negative closings for next week and 216 positives (34% to 56% in favor of positive closing). In a bear market (price below 200 dma), positive Friday closing leads to 75 positive closings for next week and 38 negative closings in a total of 128 observations (30% to 59% in favor of positive closings). In case of a bull market we have a total of 236 such cases, where 127 (54%) has led to positive closing and 87 (37%) has been negative closing.

What can be said, with some confidence is that there are higher chances of markets giving a positive return next week, if the Friday had been a positive day. Whether we are in bull market or not doesn't really matter much.

Friday : A prelude to Next Week?

All traders are subject to anxiety, sleeping in peace is not what most of them can afford except maybe the day traders! That's the reason why closing price of a stock on a particular day matters. Its a reflection of commitment. Overnight development and just the fact that things may not be the same next day forces traders to cut their position before the close. Similarly, in a longer time frame weekly closing is also having the same substance. If the commitment for a position is not too high traders may get out of a position or at least lighten it up on a Friday.

I have done a study to see how Nifty has reacted in next 5 days (next week) after it closed in negative on a Friday. If a stock loses ground on a Friday in a bull market, we can say that it is a normal profit booking session and new traders will jump in and push the prices higher next week. Friday losses in a bear market do not point to anything significant except that the trend is on (Friday gains may point to short covering). All we can say is that traders (long) are in no mood to wait more, though traders (short) are adding to positions.

Checking the charts above, ( X axis return for next 5 days, Y axis frequency) we see that the 318 instances of a negative Friday closing has led to 155 negative closing and 128 positive closing for next week (49% to 40% in favor of negative). Things get interesting when this happens during a bear market (price below 200 dma). Out of 141, we have 77 negative closing and only 47 positive closing for next week (55% to 33% in favor of negative) . Even during a bull market, out of 165, we have 73 negative and 74 positive closing for the week ahead.

So we see that a Friday weak closing is not particularly great for the coming week. Rarely so in a bear market. But is it so, or are we trying to find pattern in randomness. Let me try with Friday positive closing in next post to clear this.

03 April 2011

Nifty : Can Crude help Identify the Top?

Its always nice to see ratio charts, I prefer them because they give better insights when most of the markets are either going up together or coming down. Ratio charts can warn us beforehand about a forthcoming turn of events. Lets see the chart below, I could get only 3 year chart from usual chart stores, so I prepared one by downloading some data.

The chart above is a weekly closing ratio of Nifty and Crude Oil since 1997. As one can see the ratio generally has been bound between 40 and 80. Another thing which I have pointed out is that the ratio once crossing 60 tends to touch the other end.  In 2000 it crossed 60 and remained below it till 2006. I don't need to describe the chart, you get an idea.

So what does this oscillation from lower end to upper end means. Once the ratio moves to the higher end, Nifty becomes costlier when compared to the most important commodity, the fuel of economy. Similarly when the ratio is closer to lower end, we can consider it to be relatively cheaper.

Another interesting thing to note (refer exhibit 2) is that when the ratio moves below 60 (2000 & 2008) it almost marks the top of the bull market. Even the minor peaks (during 2003 to 2008) are marked by the ratio turning lower after making a local high.

So why does this happen, is there any reason for it?
What I can make out from it is that, Nifty as long as its in the "relatively costlier" zone looks to be in a momentum period. Investors tend to ignore the rising crude prices (Nifty rallies more than crude), till we reach the inflection point. After crude reaches the Inflection Point and rises further, fear of Inflation and slowdown in economy due to higher crude prices start making investors nervous and pulls Nifty lower. This sudden shift in sentiment, turns this ratio over its head. There is good amount of time when this inverse co-relation continues, money from commodity importer countries will keep flowing out and will get into commodity funds.

So is the latest fall in this ratio a sign of a bull market top in Nifty, or can we have this rally in Nifty along with the rally in crude. Fundamentally, all these markets have been driven by liquidity. Its just a matter of which side of  the balance the weight is more. I feel the 2008 scenario is going to be played again, when Nifty will top earlier than crude and once crude has topped, we will see "deflationary" collapse in both.

01 April 2011

Nifty : An Observation