Sunday, November 7, 2010

Update on The Ultimate Momentum Signal - 8th Nov. 2010

    Will the Market Attain New All Time Highs  ?

It seems a long time has elapsed since the last update with some market commentaries. In the meanwhile, the US Fed unveiled the QE 2 ( It's neither Queen Elizabeth 2 nor the Queen Mary 2 cruise ship but Quantitative Easing 2 ) involving 600 billion US Dollars worth asset purchases. This has already given further impetus to the equity and asset rallies all around the globe.  Handsome gains  on Coal India listing have also added to the bullish fervor.  Paul Tudor Jones, a renowned hedge fund manager from the US, has commented that  the Fed easing is leading to a situation in which a big bubble in the emerging markets is in the making, just similar to the tech laden bubble which occurred after the Fed easing ensued just after the LTCM debacle. ( For readers who are not familiar with the LTCM debacle, suffice to say that LTCM was a hedge fund run by some Nobel prize winning economists whose highly leveraged relative value trades might have forced a  complete breakdown of the western financial markets. The Fed actively manged to contain the debacle by arranging a take over of the fund's leveraged positions by a consortium of money center banks. The Fed also cut the interest rates to help the situation which actually led to tech bubble in the 1999 - 2000 era ). Now, the story is not about the LTCM debacle but about possibility of another bubble in the emerging markets. The renowned fund manger opines further that India's Nifty index might be one of the leading emerging market indices which may gain more in the ensuing bubble. ( For more information economic bubbles click here ). The whole purpose of this discussion was just to point out that markets may not be logical at all times and are capable of reaching stratospheric levels occasionally.

Indian Stock Markets - All Time Highs 

The table above shows the all time high values attained by the Indian stock markets. Even though the indices, Nifty and BSE Sensex are yet to record any intra-day new all time highs, Nifty futures and both the indices have recorded their highest closing rates as on the Diwali day.   

Nifty Futures - Daily Chart

The present recovery is involved with many run away gaps indicating presence or beginning of a possible new chapter of bull frenzy. However, a breakout above the previous all time highs will be confirmed only when both Nifty and BSE Sensex closes above the previous intraday all time highs. Since the indices and Nifty future are trading deep in to the bull territory a deep reversal is not expected with in a very short period.  Barring a breakout to the blue sky areas in the new week, at best the market may trade horizontally with some possible  excursions to fill the immediate gaps in the new week  

Nifty Index - Weekly Chart

The weekly chart of the Nifty index above shows that the index has tentatively closed above the resistance line / target line of the earlier breakout above the previous year old upward moving trading channel. The position of the said resistance line almost coincides with the all time high values of the Nifty index giving some more importance to the resistance line. However, the earlier one month old, mostly flat, correction the Indian markets endured with during the month of October, significantly reduces the importance of this resistance area. As such new highs in the blue sky area and bubble creating market frenzy can not be discounted at all at present.

 Nifty Fundas
The trailing PE multiple of the Nifty index has been quoting above the 25 mark for some time. The 25 PE mark  can almost  be termed as the starting point of the bubble territory.  Even though the multiple quoted just below the 25 mark on some days recently,  PE multiple has again started to quote above the 25 mark.
The above table shows the latest data related  to Nifty trailing valuation, sourced from the NSE, India website.  The historical  trailing price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 25.59,  3.97 and 0.99 as on  5th November 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 the 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 ).

Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as at the close of the trading on  5th  November, 2010 is given below :
 The steep rally has lead to the maximum momentum values for both the tracked indices and Nifty futures. 
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  8th November, 2010, are given in the following table. All readers are requested to take note that the table below is just a ready reckoner for the next day's Momentum Signal values and are in no way any targets for the Nifty futures or indices shown therein.

  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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