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Riding The Wave

The wave has just begun. The market is up nearly 6 days in a row and at this time, both the Nifty and the Sensex are reaching their highs. I think they’ll cross it comfortably.

But the factors that are negative: The subprime crisis hitting funds and banks in the US, it’s effect on Indian stocks – both tech that outsource from them and others that have LIBOR linked loans, the high interest rates in India, the price meltdowns in real estate, the dollan-yen-rupee equation; all of these are short term negative, and probably even long term negative, but they still continue to exist.

This is the beginning of the bubble. Doesn’t mean I’ll quit. I’m riding the wave – I’ve bought a large number of momentum stocks with a simple funda: a 10% trailing stop loss and a “ride the wave” concept.

I bought NIIT technologies on Friday, at 307. It has moved up considerably in the last few days and today it’s already up to 347.

Another stock I picked up was Kamat Hotels. I own it for a few days now, and I bought it simply because it made an FCCB earlier – bonds that it issued to expand. The P/E of 10 and the mid-level hospitality sector attracts me for the long term – I believe with new highways these guys are the ones that will make big money over the next 10 years. Yet, I saw a momentum play in the stock as well – and bought some more shares to ride this wave. I bought on Friday at 155, and it’s at 170. My stop loss is my buy price.

At this point, for a wave riding exercise, there are a huge number of stocks available. But it’s all risky – I’m taking a measured outlook. If you want to do so please embrace the risk first.

Note: Before every steep fall in the market, there has been a euphoric rise. I believe this is that rise for us. If we go up hard, we will fall hard. I’m not sitting on the sidelines – no, that is giving up too much of this opportunity. I’m just giving myself a 10% cushion.

  • Anonymous says:

    >If this was just another garden-variety consolidation before the real euphoric rise, why would bush and bernanke show signs of panic ?

    Rate cuts and optimism about bailouts are already baked into the market. So are stellar earnings from Indian companies. What in your opinion will be the catalyst for a blow-off top ?


    PS: markets go up the elevator and then jump down from the balcony. Gap-downs and broker delays due to heavy volume are rendering stop-losses meaningless these days.

  • Deepak Shenoy says:

    >I think we’re too used to greenspan-like propping up of the markets. In India’s case, the top echelons have been silent on all but the fact that interest rates will not be softened.

    There’s no fundamental reason for the rise. I repeat, this is a euphoric rise for the heck of it – because markets need serious momentum to fall hard. That they fall hard is known, but what also happens just before they fall is a meteoric, sudden rise. It’s like a runup to a massive drop; the runup is what drags us retail investors in.

    I’ve seen a max 5% gap down, which should still cover my stop loss. Remember I am not leveraged one paisa. If I ever see a 20% gap down, I think that would simply be such bad luck, but still, getting out on a 20% gap down will save me the 60% down it will eventually go to.

  • Anonymous says:

    >Hi Deepak,
    I strongly disagree. Stocks like Indian Bank, Bharat Bijlee, Omaxe are available at significant discounts to their fair value price. If you have not noticed, in the last couple of days domestic institutions are putting in a fair bit of money. A lot of ULIP money is coming in, something that is not commonly perceived as “hot money”. Moreover, to have an euphoria, you need to have an euphoric PE and in my humble opinion it’s going to be a while for us to reach that level. If Sensex EPS is at 875 for FY08, then bottom should be fairly valued at 14K thus limiting the downside.

  • Deepak Shenoy says:

    >anon: I’m not sure if this actually pans out. Mutual Fund data in August shows an actual DECLINE in assets under management in comparison with July (came out in an article in Moneycontrol)

    Sensex P/E is currently 21. Not exactly cheap – in fact at the higher end of the range, with earnings growth looking difficult to match.

    ULIP Money: i have no way to verify. but yes, many funds were in cash and have now attempted to deploy money over. Yet, they haven’t matched the FII exit of about 10,000 cr. in august.

    About fair values of stocks: I could argue that nearly every stock is either below or above its fair value because the valuation methods can vastly differ. Regardless of state of the market there are always undervalued stocks – that does not mean the market will always go up.

    To note: Past 12M EPS of Sensex is 735. If it grows to 875 like you say, the growth is 20%, which is just about fully valued for a P/E of 20. I would say that forward growth on sensex counters won’t quite reach the levels you imagine because of the slump in growth in Auto, tech and some metals. It will be interesting to see if a 16 P/e (which is what 14K comes to for a 875 EPS) is sustainable – I woudl imagine that the lower end of a bear run would give a P/E of 11 to 14.

  • Anonymous says:

    >Hi deepak, very interesting post. But a couple of questions for you: Typically how long do these euphoric rises last before the fall and does the subsequesnt fall signal the end of our bull market? Or is it more of a “correction”? Secondly, what’s the best way to ride this? your 10%trailing stop loss is one way for sure. Also, would be great if you could share your 5 best stocks to ride the momentum. Since me and many others here may not be into tech analysis, spotting momentum becomes very difficult, so a 5 best stock list would be great.
    In fact any and all thoughts on the current scenario would be most welcome. Thanks.Mark

  • Anonymous says:

    >Hello Deepak,
    Thanks for the reply to my earlier post where I had strongly disagreed with your take on the current market phase being the start of a bubble. Sure stocks have been flying around, but where’s that euphoria? IT, auto, FMCG are not participating. PSU banking, real estate, cement are not exactly in a secular bull trend. It’s just the media, power, infrastructure and heavy engg stocks which are moving thick and fast. Bubble yes, in that specific area, but if it could be hard enough to cause a secular bear run — NO. Fact is several of the non-participating sectors are available at attractive valuations, and that should keep the markets moving even if momentum dries up in counters like GMR or GBN.

  • Deepak Shenoy says:

    >anon: Euphoria seems to only be beginning. it’s the start of a big upmove, not the end and I can see how the build-up is starting. You’ll see euphoria only towards the later part of this run.

    IT still is overvalued for its growth, auto is moving fast, FMCG biggies are starting to see moves. PSU banks like SBI are now at historically high P/Es. Real estate and cement are also seeing some upmoves like in DLF in the last few days, and in ACC. Metals like Tata Steel and Hindalco have shown tremendous momentum in the face of serious credit issues in overseas acquisitions.

    The overall market is starting to move and people are still sounding bearish. This is the beginning of a very fast upmove. Given that the fundamentals are going to lag behind I think we’re in for a steep fall at the end.

    When will it fall? I don’t know. Perhaps it will fall only after two years. I don’t care because I have a 10% stop loss.

  • Deepak Shenoy says:

    >Mark: I’ll try to get some graphs for you. What you can do meanwhile is look at the crash in 2006, the great big crash in 2004, the 1987, 1973 and 1929 crashes in the US, the graphs show a similar euphoric move up before the fall.

    Stock list wise: I’ll prepare a list of the top 5 I’m watching.

  • Anonymous says:

    >Hi deepak, thanks for the reply. I’ll look forward to the stock list. Very confusing times these! Especially given that no one seems to quite agree if this is a euphoric rise, and if so for how long will it go on! Deepak, honestly, how long do you see this rise going on for? If it could be two years like you say, then it would be stupid to sit on the sidelines. The trick i guess is to put in place a system that keeps you protected from the downsides at least to some extent. And stick to it. The 10% TSL is one way. Your thoughts on any more such systems would be much appreciated!