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What's with the volume?

Why is the volume in the NSE so terribly low today? As the Nifty stayed flat, the NSE Cash market showed volumes of about 16,500 cr. and F&O of 47,000 cr. – both showing dramatic decreases from the averages of the previous few weeks.

What is worrying also is a decrease in volume in the futures markets accompanied by an increase in price. Always a short term risk there.
What's with the volume?

What's with the volume?

This seems to be a universal theme with large cap stocks though there is a lot of interest in smaller cap stocks (and worse, in stocks whose absolute prices are less than Rs. 500).

This points to a higher density of retail investors, at least to me. Logically, we should be getting lesser FII participation because of the subprime issues in the US and the PN concepts, The domestic institutions like mutual funds haven’t really bought a lot – though they’re flush with cash – in fact, they’ve bought less than the FIIs, and haven’t really done much – less than a 2000 cr. net buys in December. So who’s buying?

There’s action in select midcaps and small caps. Stocks like MRPL, Essar Oil, Escorts etc. are booming, and so is the whole smallcap index.

I’m net short the market right now. That’s not because I’m bearish – I just think that if the market goes down, it’ll go down big and if it goes up it won’t go up much. But the data is contradictory in a way – the only way to confirm this is to have a few big down days on *increasing* volume.

The fact is: The market is the ultimate authority. If the prices don’t go down, despite volume reduction, then there can only be one conclusion – everyone is waiting for the big dip. And if that is so, the best thing to be doing is buying the index. Right now it’s not time to act – it’s best to see where the next few weeks take us and then take action. Remember, don’t predict, react.

Trading updates: this short trade will be my last trade. After this I will either put my money on the index or in money market funds. I have to concentrate more on Moneyoga and will not have the time to track the market closely; eventually when we build the systems I might think of a small bit here and there, but for now the trading portfolio is shut and sealed. I didn’t make a hell of a lot – about 18% in two months, but there were a lot of learnings. The big takeaway – don’t let your emotions screw you out of the trade.

Note that the fed is probably going to cut rates by 0.25% tomorrow. It will only exacerbate the subprime problem, in light of recent events (which is essentially giving a few borrowers the ability to stretch their “interest only” rates to five years more) – the idea being, if rates come down, the higher fixed rates of interest given to borrowers in 2005 and 2006 will prompt them to default anyhow. The fed reducing rates will not bring capital to India this time – I don’t understand how the fed rate should affect Indian equity – if anythign, it should give US equities a boost, perhaps even at the cost of India. The next few days will be very interesting!

  • Ravi S says:

    >Hi Deepak,

    I completely agree with your concerns of an eminent crash kind of think. I had read your earlier posts on the same issue and I feel they are valid classic signs of a pre-crash scenario. History shows that, mankind have predicted 9 out of last 3 recessions. THe problem with a crash is that it presents a catch 22 situation to you. No one knows when its gonna crash and if its not a crash, then no one wants to miss the ride too. Sitting with cash and seeing the markets sky roketing is painful as is investing and seeing them reduced to half or even less. A correction may be a buying opportunity as well as start of a recession thats gonna last 3 years or so. This is really critical to those individuals (read naive) investors who have missed out the previous rally and want to get in now.

    As you said it is better to react to the situation then predict, I would like to know what are your strategies in case market turns bearish. I was unable to figure out what to do in such a situation and thought of seeking your opinion.

    Regards

    Ravi S Ghosh

  • Tarun Goel says:

    >Hi Deepak,

    I have been a regular reader of your blog and find it quiet informative.

    A lot of topics you discuss get people chruning their minds.

    I have been an investor myself for about 8 years now and am a very keen follower of the markets/trends in the financial sector (to the extent that I can with a full time IT job).

    Lately I have created a blog of my own where I thoroughly try and present insights/investing opporutnites to the investors who facny equity markets.

    Since I like your articles I would like to check if you would want to evaluate my blog on IndiaLongTermPicks.Blogspot.com to add a link on your blog to my blog and possibly a post telling people about anything that you like on my blog.

    Please let me know if you like the idea. I will be more than happy to add a link to your blog and tell people in a post (with a link).

    Cheers
    Tarun
    (FindTarun@Yahoo.com)