Friday, October 15, 2010

Update on The Ultimate Momentum Signal - 15th Oct. 2010

    Once Bitten, Twice Shy !!!

Yeah, 'Once Bitten, Twice Shy !!! '. This proverb explains the story which was enacted in the Indian stock markets on Thursday, better than any kind of analysis.  Yeah, contrary to all expectations, inclusive of yours truly, a wave of profit booking not only took away the gains made in the morning but also more than half of  the gains of the previous day. Even though the previous resistance turned supports at 6250 and 6230 were expected to hold the market, it sold off to record a low of 6181 in the Nifty futures. This happened in fact just after the Nifty futures almost reached the actual high it recorded in actual trading which according to this blogger's memory is 6325. Thursday's high was 6318.  

Now, what is the moral of the story ? Indian investors and institutions who were trapped in the earlier boom period are selling in to the rally whenever the rally reaches important milestones.This rally has been running  only on the back of the cheap money from the international markets. The trailing valuations levels are also reaching in to the bubble areas. Corporates are queuing up to sell shares of all kinds of businesses to cash in on the high valuations. In such situations of extreme speculation,  volatility and risk levels increases many fold. The fact that wild markets are capable of doing anything, which may extend even beyond our wild imaginations,  makes the mixture of new money, new story and relatively inexperienced investors and traders  a dangerous place. All previous bull markets had periodical corrections to the magnitude of 10 to 20 percents. This bull market is propelling itself like there is no tomorrow.  If you ask me whether there will be a correction from here, my honest answer would be simply, I don't know. If the question is whether Indian market may have corrections in future, the answer would be a firm 'Yes', because this is what history tells us. The only thing we can be sure of at these times is that the market is relatively overvalued. May be the market is going up for the simple reason of the so called 'TINA Factor', ie. 'there is no other alternative' especially  applicable to the foreign fund managers, who need to put other people's money to work.

Nifty Futures - Daily Chart  

Nifty future has come down to the top end of the  previous week's trading range negating the breakout of  Wednesday. As such, traders may checkout whether the future is capable of  trading above the last week's high of 6250 and the minor resistance at 6230 to analyse further market direction. In case the future remains steadfastly below these levels, it may try to test the previous week's lows at 6093 and 6083. As has been pointed out earlier on many occasions on this blog, one or two day's profit booking may not kill a strong bull market. It will end only when a series of selling days occur and the markets records lower lows and lower highs successively and remains incapable of making newer highs. Therefore, the answer to the question whether the selling seen on Thursday is a precursor to a correction is anybody's guess. As traders, our job is to prepare for any eventuality and plan accordingly. Checking for lower lows and lower highs is just one tool for finding out whether the markets are still in an uptrend.

 All Time Highs

Many readers who might not have access to the historical charts might be interested in knowing the all time highs of the Indian stock market indices. The above table shows the all time highs of Nifty futures (then current month ), S&P Nifty and BSE Sensex and the dates on which the highs were recorded. The all time intraday high of Nifty future is 6336 and that of the Nifty index is 6357. The highest closing prices of futures and the index were at 6288 and 6289 respectively.

Nifty Fundas

Together with the strong rally and non stop gains in the broader markets, the trailing valuations levels of the Nifty index are also climbing in to the bubbles territory. 

The above table shows the latest data related  to Nifty trailing valuation, sourced from the NSE, India website.  The trailing PE multiple of Nifty index is quoting above an expensive 25 mark. The historical  trailing price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 25.68, 3.89 and 1.02 as on 14th October 2010. Readers may please note that the periods in which the Nifty index traded above a historical PE Ratio of 25 were limited to just  two occasions in the years 2000 and 2007-08. And both such periods coincided with highs just before the burst of the then bull markets. ( More information and analysis on Nifty historical valuation is available from the "Nifty Fundas" page of this blog ).

This information is being provided for the benefit of long term investors only. For traders, they can enjoy the rally till it lasts. It may be noted that markets can remain overvalued and overbought for significant periods  which can be much beyond our expectations. 
Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as at the close of the trading on   14th October, 2010 is given below :

The Ultimate Momentum Signal is trying to cope with the fast markets of the present times. The Momentum Signal could only indicate a neutral value of +30 as on Thursday.

Projected Momentum Signal Close Values

The projected levels Momentum Signal values applicable to various ranges of closing values of the current month Nifty Futures, Nifty Index and the BSE Sensex,  as at the close of next trading day, ie. as on  15th October, 2010, are given in the following table.

   Please click on the table to enlarge. For more info on the above table,  please click here.

All readers are requested to read the Risk Factors, Risk Analysis, Position Limits and FAQs pages of this blog to have a reasonable understanding of the system. Please do post your suggestions and comments on how this blog can be made more useful.
Cheers and Prosperous Investing and Trading !!!

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To checkout the five year history of The Momentum Signal Spreadsheet click here
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Nifty direct said...

You have shared very good update and i read it and got some good point, strategies tips from this blog. I am sure that you had to spend a lot of effort and time to write the blog. And it is really very useful blog. I appreciate this blog.
Thanks for sharing the blog.
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Romeo Das said...

That was a really informative post and a great update!

Romeo - When love calls