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Charts & Analysis

We Did Not Tell You So. We Had No Idea This Would Happen.

This is what happened to the market today:

NIfty Move

While it’s apparent now that on twitter everyone knew this was coming and were well prepared for this years in advance by sending their brokers scheduled messages to sell everything on Monday, I must admit that:

I had no idea the market would fall like this.

Four continuous days of heavy selling, after a strong Jan 1, and two days when the Chinese markets have been shut. India, today, is still performing better than the DAX (-3.2%) and the FTSE (-2.8%), the Nikkei (-2.3%), and the Hang Seng (-3%). Only Korea at -1% was better.

We did not predict this. We just predicted the return of volatility and even bet on it, and that has whoa, come true.

What To Do Now?

So the first thing to do is wear ear plugs and stop listening to thousands of people giving you figures like 6,000 Nifty and 15,000 Sensex and how the world will come to an end. Primarily because these are predictions, they don’t tell you what to do!

(And they don’t tell you when the Nifty will go there, so technically they can never be wrong. “The market went up. What happened to your Nifty 1800 prediction?” “Wait, it will come true in 2016”. You can never win)

There’s one option: Sell everything. If you want to do that and it makes you feel better, fine, go ahead, sell everything.

There’s yet another option: Think of this as a buying opportunity. My feeling: Interesting point. I would still be long certain stocks. Like we are long Indigo. We went even more long today. It closed up, but that’s not the point. Given the situation we aren’t seeing Indigo break down and die, so I don’t mind a little more risk. It’s an airline that will benefit from the fall in crude. But that’s Indigo, and the point is to stay stock specific. There is no way I’m buying Axis bank or Bank of Baroda which are making 15 month lows.

What about the positions you hold? There is a stop loss I would have for every stock. If you don’t believe in stop losses, then this post is not what you should be reading at all. For you, did you know there is a beauty pageant in an all-women security prison? (Also skip to end)

Since you’re here, you know you want a stop loss. It’s just something that says I can take pain, but I can’t take more pain than this. Bravado is good for Bruce Willis Movies, but in markets it’s more important to survive. You describe how much pain you’re willing to take and then take it if the stock goes there.

Sure, you can buy the stock back. I love Bharat Forge for the future. But I’m going to wait till I get convinced about that story again.

Why Should You Care About What I’m Saying?

Now that’s the question I’ve been waiting to hear. You shouldn’t. Like anyone else, I’m not a person you should follow. You should just look at my approach and if it suits you, build your own that comes close. I really don’t want to tell anyone what to do, because everyone’s situation is different. My family portfolio has been around since 1985. I am not selling anything in it now – it is sold only for cash flow, and at that time we couldn’t care if the stock market is up or down, you just sell and realize the cash. Essentially I’m not even listening to myself in that portfolio, because it has a different purpose.

To the long term investor – who’s probably surfing brazilian beauty pageants by now – this stuff shouldn’t matter, especially not a 2% fall. The post earlier (where Sensex returns are just 5% in 5 years) has a more dramatic impact and calls for a change in strategy. The one day falls and rises are boring, and just noise.

So Are We Bearish?

There is, in our opinion, a higher probability of a down move than an upmove from here. So we’re short. This can change anytime. You don’t get married to a position.

In the medium term, we think India is overvalued. It’s doing better than other countries, but you wouldn’t pay a 23 P/E on the CNX 500 especially when earnings have fallen by 7%.That’s a very high P/E number and it’s simply not sustainable. (We have been writing about this for months now. It’s not an indication that markets will fall. It’s just saying that if markets are going up, which they were till four days ago, that upmove is not supported by earnings growth) 

CNX 500 PE

Lastly, we are seeing foreign investors exit. That’s been a constant thing since November. If that continues, you will obviously see some pressure on the markets. Foreign Investors own large caps. Retail Indian investors own small caps. The large caps are back to the lows of September. The small caps are still 10% above it.

Nifty versus Smallcap 

Keep the faith, folks. Ask us – either here or on twitter messaging @capitalmind_in if you are troubled and want more information. We are likely to confuse you, because honestly, we have no idea what will happen tomorrow, or next week. (Hopefully it will rain) We can pretend like we do, but you know what, that’s not our style. And that way we won’t have to say we told you so.

  • IsItPossible says:

    Good meaningful post after a long time……

  • sreedharrv says:

    Liked this very much ” first thing to do is wear ear plugs and stop listening to thousands of people”

  • adithya says:

    Great article sir. Very humble of you to admit that. I have two questions. will be great if you could help.
    1. I thought technical analysis, algorithms etc are meant for such things. So if they couldn’t predict this fall or cant cant predict how low it can go from here, then what is the value of technical analysis/alogirthms?. i am asking you since you are an expert in this and macro.
    2.I guess you were active in market during 2008/2009 too. Based on your past experience and the understanding of macro, could you tell if you see a similarity to 2008 crash?
    thanks in advance.

    • Thanks. Let me try and answer.
      1) Algorithms or technical analysis in my opinion do not predict. They only can tell you probabilities of what might happen. you use those probabilities and potential outcomes to take positions if the probability and odds are in favour you walk into the trade properly.
      2) This market is different but there are still indications of a crash 🙂 BUt having said that we have a short bias right now so please account for that

  • S S Gayen says:

    Not a bad analysis. However, keeping in mind result season & forthcoming Budget one can short any index on a particular day but for ‘Medium’ term some stocks are worth going long till respective result date &/or Budget.

  • Murty says:

    One should have his or her OWN Algorithm.
    Music is good to ears as well as to your portfolio. Keep a nice pair of ear phones handy.
    Also, categorise your stock portfolio.
    A. Stocks that you hold forever.(FEW)—20%
    B. Stocks for the medium term(Good Number)—30%
    C. Stocks for the short term.(Large)____40%…
    My own algorithm