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General

Happy Diwali!

I know it’s late and I’ve been preoccupied with Diwali and all : Happy Diwali to you all! Wishes for a prosperous year ahead.

Quite ironically, I’m out of nearly all of my trading portfolio. Only things left in there are: Reliance,L&T and Mudra Lifestyle. I have a credit put spread that makes some money if the market goes down.

I expect a huge downside from here. There may be a temporary move up, especially in the midcaps, but I think from here the immediate future is down, and the future a little bit ahead of that is: down.

Reasons:

  • US financial market is going to collapse. Lots of reasons for that, but I don’t like it one little bit.
  • Hedge fund redemptions are on and the impact will be visible post Nov 15.
  • The new mark to market accounting rules for financial institutions gets visible on Nov 15, and already some banks have revealed assets they own, that they have NO idea what their worth is, and that are greater than the capitalised base of the banks. Duh.
  • The Indian market data does not look good. Futures have moved to discounts from premiums, and there is a lot of call writing. The option data shows a lack of big investor participation on the buy side at least.
  • Distribution in large stocks, accumulation in midcaps. Yes, the retail investor is getting in. Time to move out and wait for the inevitable.
  • Trading distortions all over the world and accounting indicates that investors will churn out their profitable assets (read: India). And this is exactly what is happening.

I’m out of trading. Some long termers on investment remain – like some RPL, Reliance, Opto, Moser (only the bonus shares, for tax reasons), Ranbaxy, DRL, Nifty BeES etc. I continue to run them on a trailing stop loss basis.

Portfolio wise, some extreme reversals have caused me to retreat to index returns, but I am nearly all cash and by the end of the month expect to actually beat index considerably if I am right. Going forward, this is not going to be a good year for the bulls, but it may be a worthwhile year for traders who have no problem going short. Let’s see. Have fun, folks.

  • Siva says:

    >Yes. I too has a similar view(Hope, all in India =))) )

  • kumar says:

    >Hi Deepak,

    Went through the article “Happy Diwali” –

    I have SIP investments in MFs like (Reliance Growth, HDFC Equity, SBI Magnum Global, HDFC top 200, DSP ML Tiger).

    As indicated in the article, the market might move down, please advice if I can continue with the investment or redeem the same.

  • Deepak Shenoy says:

    >kumar: depends on you – do you really believe the market will go down? if so will it stay down? then go with your belief – don’t listen to people like me because I could be wrong!

  • Anonymous says:

    >Kumar:
    i recently read a book about investor behaviour. It relates to 1973/74 recession in US, when Many investors cashed out of panic because they could not withstand the heavy losses in their portfolio. Those who stayed put and withstood the pain gained significantly over the long term (meaning 10 years or more).

    In case you think you have over exposed yourselves to equity funds as a percentage of your total portfolio and you cannot withstand looses in equity funds, then you should reduce it to the level you consider it acceptable to you, where you will not change your behaviour.

    Most important: you should never sell all the equity even in worst condition. The best strategy is to rebalance your portfolio once in a year irrespective of market conditions.

  • Deepak Shenoy says:

    >anon: Note however that if you had sold in 1974, and kept your money in a fixed deposit rolled over till 1984 – the deposit rates were over 10% in that period due to high interest rates – you would have made substantially higher than the stockmarket which, in that period, was either negative or only partially positive.

    The 1974 example is where you SHOULD book losses, not the other way around. The 1987 example, on the other hand, shows how buying can help withstand a crash (since the 1987 lows have not been breached since)

    My opinion is that this current market stinks of a serious downturn. Not just a correction, but a sustained down move.

  • Anonymous says:

    >Deepak, are you implying that this could be the end of the bull run – at least for the next year or so? I ask because i have a technical analyst friend who’s of the opinion that the markets will do nowhere all of next year.

    On a personal note, i’m not the kind of investor who has the inclination to sell at short term intervals (within a year for instance) when markets tank. So am wondering, is it time i started getting worried? Do you suggest I offload some portion of my equity? Would really like your inputs. Thanks
    Mark

  • Deepak Shenoy says:

    >Mark: I’m taking that route for my trading – that the next year will definitely be down.

    My long term portfolio is still intact (some Reliance, Moser, Opto, Ranbaxy, DRL and the like) but i’m trackign those with stop loss points.

    Now everyone on TV is asking people to buy at dips, and according to me public sentiment is still on for a recovery. The events of the last two weeks have jarred me considerably, and with current data I’ve come to the conclusion that staying long in this market is very very dangerous.

  • Anonymous says:

    >Deepak, from what data have you concluded “Distribution in large stocks, accumulation in midcaps.” ?

  • hari says:

    >Hi Deepak,

    I was watching the interview of some experts in CNBC TV 18.Rakesh Jhunjhunwala and co were also extremely cautious.I do accept the theory that there is some probelm in the US economy but in case of a correction there could be enough cash waiting in the sidelines to recover.Why I feel so is during the months of Jan-Mar the insurance and ELSS money acculmulated money could be deployed by our mutual funds.Even if the Hedge funds redemption happens I feel that the local mutual funds and insurance money could help us.

    At the same time I read the BWorld magazine a month ago and its cover story outlined that the Index of Industrial Production has reduced considerably.I am a bit confused.

    I do beleive that there could be a 20% correction and then a recovery.I could be wrong I dont know,but I do not feel that there is anything fundamentally wrong with our economy.

    I have moved out of all my holdings and I am in cash and in case there is any correction I am not bothered but I feel that the recovery could be equally quick.

    Regards
    Hari

  • Anonymous says:

    >We retail investors have different mind set (more emotional) compared to FIIs (who play with other’s money).

    Some times our perception could be more negative (less objective) and we may tend to make mistake in judgement.

    Given the fact that Indian markets are shallow (if few of the FIIs decide to sell then there would be a heavy fall) it would be more prudent for retail investors to be cautious. In Indian context (where we have no social security) only that money which we can forget for 10 years or more should be invested in stock market.

  • Deepak Shenoy says:

    >anon: the midcap indices and prices has been moving up on larger volumes (in the individual stocks) and the main Nifty index has been falling or staying flat on reducing volumes. Signs of accumulation in one and distribution in the other.

    hari: Rakesh J is accurate this time around, according to me. Prices need to correct otherwise we will have a bloodbath at a later point. cash waiting on the sidelines, I think it’s getting deployed in the markets now , and we’re still not able to sustain.

    And actually, there are a LOT of fundamentally things wrong with our economy, just that we have overlooked them (I have been repeatedly saying that we are rising despite the fundamentally negative cues). Eg. High interest rates, oil prices, dollar falling, slowing industrial growth, reduction in liquidity, tightening of credit, a lacklustre Diwali in terms of sales etc.

    Let’s see how it goes. As I said, I could be horribly wrong. But I don’t get a good feelign about longs right now.