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How to do SIP (Systematic Investment) in Stocks?

“History is written by the winners” -Napoleon Bonaparte I won’t be writing about the SIP which is already covered in the public doma...

Wednesday, July 23, 2008

Another Ride in RNRL

Whether the victory of the UPA government in the trust vote has any good for the country or not, for speculators it was a field day today. Market breadth was too positive. In NSE, 1000 stocks gained vs. 90 stocks which declined. A 11:1 ration in bulls favor.

Now forget about all bad news. There is no more bad news at least for 3-4 weeks. Let America go down drain in the name of recession. We can ignore all overnight gap downs for the time being.

Now we need to see whether the govt. will remove FM PC and RBI Reddy not to violate the rust of SP. What I had not seen in this political gambit is the effect on Reliance stocks.

In the recent market turmoil, the stocks of Anil Ambani were battered down more than that of Mukesh’s. It was reported that Anil had lost 137,000crores of rupees in six months from his peak net worth of 280,000crore. And it was the highest amount any Indian had lost in this gamble.

Now with the positive relationship between Amar Singh of SP (a close ally of and which bailed out UPA govt.), all Anil group’s stocks are set to skyrocket like hell. At the same time Mukesh’s stocks which missed bigger downward move might end up in a range trading pattern for some time.

Whether some good will be really done to ADAG or not is not important for a speculator. Stock market is there for speculators. Investor is already dead if not will be butchered over the course of time. For a speculator what is important is the future prospect that it might happen. It means that RNRL-RIL dispute which was on the verge of ending as a negative to Anil is now under expectations of bringing some positives. That means already volatile RNRL will find its way northwards.

That is the precise reason why of all the stocks, ADAG’s stocks rallied strongly today. Adlabsfilm was up 17%, Relcapital was up 15%, RNRL was up a big 23%! I think it will decisively move till 150 in the coming days. But when to take position is really a matter of concern because of its extreme volatility.

One dip must be surely expected if it were to reach 150. That dip must be for only one day because of profit taking. To imply that the stock was not just short covered but indeed bought by long players. On the other hand if it continues dipping consecutively for five days, we can give up hopes. The today’s rally can be attributed to purely short covering. That time will come soon and we need to get set for the next bull ride.

If you think RNRL is too costly, buy MRPL and JPHYDRO as hedge.

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Saturday, July 19, 2008

Zandu Pharma Did It Again

After taking a loss in the recent times for not putting stop losses early on, I had decided that short term swing trading is not really good in this bear market. So I started looking at old ways. There are two or three stocks making new highs.

One was SELMCL. But it gave up. It is stabilizing near its 50 day moving average. I am waiting for a normal white candlestick to take a position. The other one was Zandu Pharma. But I had ruled it out because it has a circuit limit of 5%. We cannot enter when it goes up and we cannot exit when it goes down. We can only gamble in this stock. That is enter/exit when it is calm hoping in the uncertainty that entry will be below exit.

I was watching this stock from 17000. It went almost every day by 5%. I stopped tracking it when it reached 18000. Now it reached above 20000. Quick 10% move. New highs stocks will always make these kind of moves. Also the risk in these stocks is limited unless they suddenly fall by big amount in single day. That marks the end of their strong uptrend.

I had a dream in which there was a special trading session in the evening on the NSE, similar to that on the day of Diwali. I remembered this stock – Zandu Pharma. I felt like shorting as it doubled in these two months from 10000 to 20000. So a strong correction can be expected anytime as it is going up pretty fast now indicating boom in the near term. As I am not sure when it will change direction, I thought of resorting to futures to short sell. I was about to check this stock in the futures list to find out what is the lot size, what is the margin required etc. But suddenly the dream changed the topic.

After waking up I had realized that this stock will not be in futures list because it has circuit limit. Very bad.. I cannot take advantage of it in either direction.

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Tuesday, July 15, 2008

Bad Days Are Falling Out

After a long time the markets have started accepting the reality. Dow Jones (DJIA) breached 10.9k. Let us hope that it will close below 11k so that the bear market can run down at a little faster rate and rallies go slowly allowing us to participate and profit from rallies.

When this scenario was very clear in the middle of March, markets didn’t like the reality and wanted only to go up. When I say market, it includes market participants. March 14 would have been the end of all these games. With US Fed’s intervention to bail out Bear Stearns, the reality was given some more time. Markets traded higher till end of April on borrowed time from Fed.

As nobody can hide the reality, (there will be no honor among thieves in this context), markets came down steadily all the way back to two-year lows. Whatever US govt. is going to do for troubled mortgage companies, Fannie Mae and Freddie Mac, can have positive effect on US markets.

But our markets don’t have an option. They have reached a dead-end without any turn but only to jump into well. If govt. helps by lending more dollars, that fuels inflation in dollar currency. That leads to higher and higher inflation in US, higher oil prices (is $200 good?) in turn leading to chaos in the Indian stock markets and politics. That is not enough daily life will be affected severely. RBI and PM ji are dumb/deaf people. They don’t listen to the ‘common man’s’ suffering. If they listen, rate hikes will lead to even more bloodsheds. So there will be bloody-baths now and then.

In other case when govt. does not help, US markets will tank harder and harder. That leads to overnight overseas madness leading to gap downs now and then. Such is the danger in taking overnight positions in the present market.

Oh.. I don’t know what market it is. As I am writing this Nasdaq went into green from red and again slipped to red. Generally when the recovery happens sharply, that may not be sustainable because it implies short covering. Similar to people booking profits when stocks go up, short sellers also book profits when market steadily goes down. That booking action will be quick by human nature. But the initiation of new positions in a direction is slow in nature. If the short covering is followed by stability and steady upmove, that implies trend reversal.

Right now all roads seem to be headed for south. Better to watch out open positions. Intraday is the only safe thing to do in these highly volatile markets. If there is an exception for intraday it was on Jan 22.

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Sunday, July 6, 2008

Stabilization Started!

Wednesday’s mad rally at the close and Thursday being a bulls-hit day, I being absent from desk felt relief by staying away from the markets. What happened on Friday was interesting. The market rallied again even when the Asian and European markets took a hit. That is typical of what is technically called consolidation.

One day down 6%, then up 6%, then down 5%, and finally now up 3%. If you plot it, it takes the shape of a triangle pattern showing that the market’s intraday range is narrowing around a central point. That could be 3980 for Nifty. Also it is indicative of possible intermediate bull market in the near term. For all the trend traders, this is the time to watch closely and start the next ride.

If somebody remembers, this kind of thing happened almost exactly in January after great falls. On Tuesday big fall, then on Wednesday up by 10%. Then on Thursday down by a big amount. Then consolidation started by being up on Friday. There were three consecutive down days with narrow intraday range in the next week till Thursday. Then came the bright and white candlestick on Friday that decisively signaled the next intermediate uptrend. I cannot forget this due the profits I made from this opportunity which negated large part of my losses from the January crashes.

Same thing can happen now. To ignore it or miss it is foolishness. As common sense tells that we cannot take excuses for known things.

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No Overnight Positions Unless the Trend is Strong

After taking huge losses in the last trade even when I followed my principles properly except for not putting stoplosses strictly at 8% point, I got my senses back. Now I take only conservative approach and no more aggressive buying from here on.

The problem was I felt the urge to do short term as I couldn’t track stocks in intraday to make big gains in intraday itself. The problem is risk increases as I look for higher returns with lesser tracking in a short term trading scenario. That is the pitfall of short term trading in bear markets. No need to ask about long term trading in a bear market. That is already dead and there doesn’t seem to be any indication of its rebirth in the near future.

Finally I made a resolution to seriously accept the overnight risk coming from overseas madness. The big loss (15% on venture capital, still at the back of good sentiments) was mainly due to overnight risk coming from US markets. Dow Jones fell by mad 3% on that night and there was no stopping to it till the close of that day. To add to my misfortune the madcap stocks and even the front liners closed the day by 6-10% decline. The only way to resolve this overnight risk is to not have any open position that too when the stocks have already declined on the day of purchase by a significant amount. This is a good principle. We can see its effectiveness in application. A stoploss trigger at 2-3% from purchase price and a limit gap of 0.5-1% depending no. of shares is the best way to go in these kind of markets. I cannot continue otherwise. I can sustain one injury at one place. But even after that happened, if I do not protect it from unforeseen injuries whether they happen or not, is a fatal mistake. That is the simplest principle a common man survive upon.

We should also note that overnight risk is not a rare thing in the coming months. The money in US is simply disappearing. Fed has done all it could to save the rich by giving more cash to them and thus inflating the dollar. Latest news tells that some stores in US have already started cropping up windows saying “We accept Euros”. Dollar just isn’t going to stop falling and along with it the economies of all emerging markets. The credit crisis has started unfolding and in the coming weeks we are going to see the massive writedowns from many US banks and FIs, that we have never seen before. That means Dow Jones will have more down days of 2-3% and that creates overnight risk here.

Unless we find a strongly trending stock we should not take an overnight position. The people who have lost from the January heights and without taking any defensive approach must have already lost by nearly 75% of portfolio. For them any new venture is less riskier. But for me who protected all of the gains made at the January by defensive management, I am more vulnerable to any decline from here on. Any small dip from here is a big loss for me as the already losers do not have any worry to keep selling and booking losses. Any slide from here has less effect for them. Those who protected their capital should take even more stringent measures from here because when the journey is half done, the other half journey will be convincingly done at a faster rate.

That means I need to look at the next peak the market is going to make and then a dip not lesser than recent low. After this if the market rebounds without going down further, I take a call as intermediate bull market and enter into any stock trending up strongly.

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Wednesday, July 2, 2008

What Happened to the Markets Today?

Today’s rally in the last hour of trade is very significant because of the magnitude, though the rallies in the last hour of trade have become a fashion since this bear market has started from February. BSE data shows that FIIs are net sellers to the tune of 688cr, and DIIs are net buyers of 421cr in the cash segment. What surprised me is then why the market rallied so heavily in the last hour, and why the rupee has appreciated today sharply from 43.42 to close at 43.17 against the dollar.

I observed these kinds of strange things happening only recently. A classic short covering must have happened very rapidly as the market has fallen very much without respite continuously for many days. Now the Nifty is at 4100, 200 points far from 3900. This gives some relief for bulls as the distance is far to breach and signal the next down trend.

Whatever happened today to push the markets up heavily either due to retail investors aggressive buying or some brave people giving support or anything, the action is not likable. Our market seems to have got junk participants. The worst thing is that, this makes many investors feel helpless and being cheated or being unable to understand the dynamics of the market. Also it makes some people alter their decision making process and makes them vulnerable to bottom fishing.

What we should be concerned about is that we should ignore these kinds of situations. They rarely happen and so statistically will be positioned at the extreme corner of probability distribution. Take this as a good signal to find next good predictable moves and participate in it. We need trade all the time. But we need to defend in bad times and take advantage of that opportunity which could be possible for us to see.

Specifically, I had seen Ansalinfra go up by 28% today. It was going up decisively from the morning but I noticed it only in the evening. As I watched at 3.25pm to 3.30pm, the stock quickly moved from 79 to 81. Many stocks went up today. All these are the ones that were battered in the recent days. Stocks like Suzlon, PVR did not make much gains. Akruti hit upper circuit at 20%. Indiabulls didn’t go up much. This tells that lot of short covering happened from one corner or the other.

One interesting thing I noticed is that the analysis done by Market Technicals section in the Business Standard, has noted that it is good to do fresh purchase when nifty hits 3900. The analysis done here is very good one and helpful for education. It may or may not happen as he says but the analysis is useful for a trader like me who bases his decisions on statistics than other reasons.

Though many stocks went up today very much that was not enough to even reach point where I sold of my stocks on Monday. This was surprising. Next thing to expect is that if the market doesn’t fall for two or three consecutive days, we need to find stocks which start moving. This is because of the ripple effect. The ripple slowly spreads to other stocks. That is where our money is.

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Nuclear Deal is a Good News for the Market

The apparent reason for the spike in today’s market in the last hour of trade, on the upside can be partially attributed to the relief government got by the possible support of Samajvad Party. The nuclear deal, if happens, is a good news for the market both short term and long term, which could immediately trigger another intermediate bull market.

On the other hand if it does not happen, there will be no end to the gloom and doom ahead for the future of our country. That is a terrific thing, in the present world. I already started imagining the ruins of the country similar to Iraq, if the deal doesn’t go through. Otherwise why would our Prime Minister bother so much about this at a time inflation is skyrocketing with the fuel of oil prices and other issues.

I understand various concerns different people have about the deal. But honestly I wish the deal to go through. In a world divided by two superpowers, recent threats of terrorism and human nature to defend/attack for survival, I think that is the best that can be done in our present situation. On the other hand, I feel very weak in thinking of a better future without passing this deal.

One thing is true. We are not a super power in this present world nor do we like slightest destruction in the homeland for whatever reason. Though I don’t understand much of the politics, I can clearly tell that we cannot act as we wish in this world, mainly because of our excess population with limited resources in a world where the superpowers are not rich in human resource but in natural resources.

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Tuesday, July 1, 2008

Another Bloodbath Happened Today

Our markets started this new quarter which could be notable in the future, with continued bloodbath. Today’s bloodbath is worse than yesterday and that too even when US market closed the quarter with a quiet session in the end. Dow Jones was up all through the day hovering around 0.55% and ended without gains at the close. But sadly enough our markets had witnessed a great bloodbath today. I have seen many stocks butchered today worse than the gap down day of last Friday. There was simply no respite for the markets.

If I settled as a day trader, I would have made good killings in these days. These kind of quiet but cold blooded days are what are required for a professional day trader.

As I had sold off most of my stock except 7% still stuck, I didn’t feel the pain today. In fact IFCI which fell yesterday by 9.5% had fell down by 13.5% today. Rajeshexpo down by 14.5%. Arvindmills also down by around 15%. RNRL went down further and Ansalinfra is a regular new low maker. It is only for a single day that it takes a break from making a new low. It is a potential loser for a buyer. So it is in a strong down trend as is the case with IFCI. It is dangerous to buy them now. Even Cairn is also down by 5% today. Suzlon, eleconengg, sasken, jphydro, jpassociat, adlabsfilm, relinfra, jswsteel(14%), adlabsfilm(14%), the list goes on. There doesn’t seem to be any expectable defensive stock today.

The safer bets I think for the medium term can be found in cairn, orchidchem, spicetele, reiagro, hindoilexpo. The only danger with them is that they can also change their trend for some reason unknown to us. A strategic entry into these stocks on a good day with reasonable stoploss for defense will make a good bet.


Perhaps the most interesting thing that happened today is that while the market broke down today with Sensex tanking 500 points and Nifty by 144 points, both FIIs and DIIs remain net buyers though by about 200cr-160cr. This is in the cash segment. But I don’t know what caused this restless fall. That smells to me like a crash is in the offing with widespread panic. Nevertheless another interesting thing that happened today is that Rupee depreciated sharply from 42.96 yesterday to 43.42. I don’t know what RBI was doing today. Either oil companies must be buying too many dollars as Crude oil is sitting happily above $140, or FIIs must have done big play in FnO or elsewhere.

It is notable that the part of the rally in the Crude oil prices is really driven by the buying by domestic oil corporations and may be similar case with other Asian oil importing economies. This is a fact as I remember rupee being depreciated sharply one-two months back before petro prices were about to be hiked and the companies are buying dollar heavily to meet the rising local demand for fuel.

That means there is more danger in the future as the depreciating rupee and appreciating oil because of rising demand from oil importing countries and China’s desperation for Olympics, are going to send the inflation by a modern rocket. Now I am expecting inflation to cross 13% despite whatever government has done/not done to contain it.

This means more interest rate hikes are inevitable as RBI will be sent into a check mate situation without other options. Whatever it does, a massive deterioration in IT and outsourcing companies is one surefire thing that is going to unfold in the future. When this unfolds hell will break lose but the good part of it is the housing prices will decline steadily like in the US. This makes them affordable for few people who sustain their profession.

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Progressive Reduction of Portfolio: A Successful Exit Strategy

One of the reasons why I consider stock trading to give returns always is because of the pyramiding approach. It is similar to averaging. Instead of buying as the stock goes down to average down the buying price, we buy the stock as it goes up to increase the profits. Strange it may seem, but it needs clever brains to understand why it is good in the long run.

We can do same thing while selling stocks. As it is tough to decide when to sell all holdings, we sell some if markets fall by some amount. Sell some more if again the market falls by some more. Keep doing it with three or four divisions of stock. By then all stock should have been sold out. That ensures that we reduce losses and get out only if it were to go down and also eliminates fear/indecision due to uncertainty at the cost of certain real loss.

I did the same this time around. I was about to do pyramiding while buying on Thursday but the orders didn’t get through as the market was not going up any more after I bought first. This was unfortunate and mistake on my part to consider the FnO settlement day. This a surely bad day to initiate positions.

I closed my positions progressively as I started feeling pain. It is ok to see stocks going up when we are in. But not seeing them down. I felt the pain because I consider the losses as real immediately as they appear on the paper. When I looked at US markets on Saturday, falling down again by 1% I felt bad. But after realizing that I sold half of my holdings, I got relieved. I thought, even if hell breaks lose on Monday, I will not lose much as around 25-30% of my portfolio is in the market. That became true as I lost only 5% of this amount while the mid cap index fell by 4% and many hot stocks fell by nearly 10%. I got out of all stock except a 6% of total capital is still at risk.

This is a great way to reduce your stock if you are uncertain about market direction. This works pretty well in both directions and employed by all institutions/funds because they have no other choice. For a day trader, this is a great armor in his continuous struggle for both regular profits and survival. It can happen that the stock immediately changes the direction after we finish this process. We should not worry with that because those are the scenarios that put poison into our decision making process. It takes many such scenarios to turn any person into profitable stock trader. That is the reason why it is better to trade actively with different techniques even with lesser capital to sharpen our trading edge.

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FIIs Action Crucial for the Days Ahead

As I had expected FIIs came from nowhere pulling money massively everyday from Jun 1st week the last day of this quarter. Many foreign investment firms have massive losses to write down in the quarters to come. They improve their balance sheets by booking profits wherever possible in the same period as they are booking losses. Both US and European institutions are suffering from this crisis.

It is very crucial to watch the action of FIIs in the days ahead. They can continue their frenzy to sell for variegated reasons. But if they subdue their selling, a rebound can be expected. Nobody likes to buy top support the repeatedly falling market. One time it is possible but not second time. Though the real bulls are Indian bulls, we have to wait till their action can have effect. That is good news for us.

The worst sector to concentrate now is the IT or outsourcing sector. Even export oriented sectors. The present inflation cannot be mitigated by any means other than appreciating rupee against falling dollar. Both this and the rise of interest rates will affect the IT companies. IT sector is nearing a checkmate after which the housing can start becoming affordable. Unless a massive deterioration happens in these sectors, one cannot expect good times ahead.

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Ending the Half-Year with Bloodshed

Our markets have swung in and out from Jan1 to Jun 30 with Sensex falling violently from 20.3k to 13.4k shedding a whopping 34% (~6.9k) in just half-a-year. What a BLOODY HELL!! What those people who bought at the January Heights and didn’t sell till now must be thinking?

It is only part of the story. The real bloodshed must be seen from the midcaps as many Indian bulls and retail investors love these fast paced stocks. For example, RNRL closed at 182 on Jan 1. It reached the peak closing of 244.3 on Jan 8, the day I sold all of my RNRL holdings with the largest ever killings I made to date in a single stock. Presently the stock is at 64.65 losing 73.5% from the peak closing point and 64.5% from the Jan 1 close. And this was one stock that was recommended by a magazine to be the stock every investor must own for the long term. Sure enough it was a hot stock that made fireworks during Diwali. I participated to see 100% profit to my amazement in just 10 days. I had known people who held it and saw the stock depreciate like a candle melts as it burns. This is the real hell of a loss to take from a single stock if any unfortunate person has taken a position and didn’t yet get rid of it. In my knowledge, I had known one person on moneycontrol board who bought around 210 as it was falling from 244. In February when the stock was at about 150, I advised this guy to get rid of his stock as it can fall further violently much in the same way it went up. He told it was too much loss to take at that time and he didn’t like the idea. Then I told him if he doesn’t take this loss, will he take a 50% or 75% loss (which was statistically possible at that time, I don’t predict)? Now his loss (I surely think he holds the stock) is at 69.2%. Enough to ruin a 225% profit made in long term. I never traded it afterwards to avoid erosion of my liking ness with the stock.

Another actively traded stock is IFCI. It swung from 96 to 37.2 shedding 61%. It was one of my most preferred stock to trade for short term. This time around it bled me by 20%. Diversification reduced my losses though. Today as I was planning to sell, I was looking at it at 39.2. Then before I put the order I checked the price to put proper limit. It immediately drifted down to 38.95 and then in a few seconds down to 38 and 37.7. I lost all hope and gave it up at 37.65. Luckily I got out as it closed near to this price. These are the two stocks either to make a fortune in 2007 or to ruin one in 2008 if focused intensely.

Gmrinfra plunged from 250 to 80.3. RPL from 220 to 170. JPhydro from 137 to 43.5. JPassociates from 426 to 144. Eleconengg from 324 to 92.5. Ansal properties from 425 to 69.5. I bought it at 430 and sold it at 390 after losing hope and giving up. This is another hell of a loss. It would have meant a destruction of 512% of profits made or a depreciation by 84%. Many stocks were battered badly.

Now the tough part is for those investors who took to mutual funds at the height of this boom in January or even in February. Many tax saving funds which are locked for 3 years period, have shed more than the indices. We can easily say that they must have lost by 30-40%. My advice is to consider the loss as a real loss when the money comes out after three years and treat it as a new capital. Then decide if you can trade better or put it to fund managers or use for your needs. I will pull out whatever is left as I know that I can trade better than fund managers. There is no ego here, but a fact. I will not bother to save taxes. That time could possibly be the start of next bull market. But still in my case, that means continuous profits better than mutual funds.

Seeing these, one might think the worst might be over and it is better to start buying. But the worst has just begun and we are still far from the end. A long term bear market can correct the indices by as much as 80%. We just had only 36% for Sensex. A 4.2k for Sensex might decisively end the bear market. But that is very far now though nearer than earlier. I still consider this target for Sensex as a long term not short term target due to the facts that are presently pulling down the markets. The possibilities of reversal of trend in the long term seem unreasonable though wish-able.

In the interim there might be an intermediate bull market with gains of 20-30% for the indices alone. Using caution and discipline can ensure one can make good use of this period. But we shouldn’t get fooled by this temporary period.

All this happened when the Dow Jones of US which is the center of present financial crisis had fallen from 13k to 11.4k. It has more to shed. When the epicenter loses more anybody should guess how the hell breaks lose repeatedly in our markets!

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