Buying opportunity when stocks hit new lows

When stocks reach for a new low, investors dump it, fearing that the price will reach even lower. And that is what happens in reality. When a stock reaches for a new high, it continues to reach for newer highs till there are no more buyers to push the stock upwards. This condition is a bull market. Same when the stocks reach for new lows and more stocks follow, it is called bear market.  When more stocks follow in the same direction, fear escalates into a bigger sell off.

As the market reaches its extremes, there comes a very good buying opportunity. That is, when a large percentage of stocks reach for a new low,  the whole market slides downwards. Taking along with it even some of the good stocks. These good stocks become attractive and give opportunity to buy for big gains that will come up almost immediately.

How to identify such opportunities?

Plotting the New High – New Low index for the market will help us get the picture of when there is opportunity to buy or sell. This index is the total number of stocks that hit a new high for the day and number of stocks that hit a new low for the day. The total of highs is subtracted with the total of lows, we get the New High – New Low index. Which is also called the NH-NL index. More detailed study on the NH-NL index can be had from Dr. Alex Elder’s book on New High – New Low.

Having the data plotted takes a little effort, we have been plotting the same for about 850 stocks that we track. From the daily values, we sum the values for the last 5 sessions to make it a weekly value and have it plotted.

These values are taken for 3 time periods to get a better understanding. Along with 52 week High low, we also collect data for 90 days and 30 days. This chart here shows all three values as a plot. We can observe that when 30 day NH-NL reaches past 1000 (Orange line in the chart), market gives a reversal. The sections highlights with yellow are the reversals.

An even more powerful buy signal comes when there is a divergence on the NH-NL index. Points marked with Green arrows indicate where there were strong reversals.

When we have the 30 Day NH-NL move past 1000, you can begin checking charts for stocks that show strength on their prices, like having a bullish divergence on the histogram or the MACD lines. Get ready to buy when the down side move is completed. When they reverse their direction in few days they give very good profits.

As we are writing here, there is one such reversal that is in progress. And in the last 1 years we have had 9 such opportunities. Can we expect the same to repeat every year, ideally not. NH-NL nails bear market bottoms, where after a weakness, market recovers for a short period before going down again. Using NH-NL, we can identify such short term reversals and profit from it.

IN a bull market, we can use the divergences to exit our long positions before the markets slide and take away most of our gains. Regions marked in Blue on the chart were conditions where NF-NL had a divergence to the price movement. As price reached for a higher high, NH-NL reached for a lower high, giving us first signs of weakness and alert to tighten stops on long positions.

Therefore, when market reaches for the low and many stocks are giving new lows. It gives a good buying opportunity. We are not doing bottom fishing here, we are identifying strong stocks in a weak market which will help us make some quick gains.

Where can you get NH-NL charts?

We will have it published on our website by mid-march, which will be live on daily data.

Golden tree Zee complains of negative forces

Zee group was the biggest loser this week. Their chairman blaming about negative forces destroying their wealth is a little too childish. Zee stock was bearish since Aug 18, all the present developments like promoters shares almost fully pledged, all the companies carrying huge debt, losing money on wrong decisions have only aggravated the condition. I remember having a meeting with one of the ex-senior of this group, where I was a little taken aback when he said, ‘everything said & done it is a “seth” owned management, they have lot of cash dealings. One should always be good with the bada “seth”, if he has to stay with the company’. After hearing this comment, when I used to find Essel Pack stock going up in the recent days, my mind was somehow confirming that it is not a good sign for the stock and it sees a single day collapse of 17%, washing away almost 2 months of price rally. The group including all zee channels, Dish TV and Essel Packaging together are running more 5000 Crores of debt and about 75% of promoter holdings is pledged with banks. Now when the stock price goes down, the promoters not only lose the valuation, they also get margin calls from banks due the value erosion. Satyam was a similar case which is now history. Looks like we are going to see more of our big names getting out of the markets in the coming days.

Inside Our Portfolio – 1

This video talks about stocks that are at advantage in our portfolio from the current result season. Intellect Design Arena, L&T Technologies, Sterline Technologies stocks in big rally mode. Trading positions in Himadri Speciality Chemicals. Top technology growth stocks in our portfolio helps us outperform the SENSEX by more than 3% this week even with 50% exposure.

Observations @ Morning Star

I had been to the Morningstar Investor Conference in Mumbai, had the opportunity to hear thoughts of some prominent names in the industry, fund managers, Economists alike. Thoughts that were shared by economists were too negative, at a time when the markets are down with lots of pain in the minds of investors, these negative thoughts did not feel like it is right.

Maybe these people do not want to take responsibility for their views if what they say goes to be wrong and are always taking sides of what is the prevailing situation. Thoughts that our

  • Crude oil buying problem is increasing
  • Trade deficit is equivalent to those in the 90’s
  • The picture now is more bad that what it is experienced.
  • India is spending more on Coal, which is a surprise.
  • We are importing more electronics.

Why should they voice concern now and have not done earlier when markets were going up? If all these were true, it cannot happen all of a sudden in a day or two. People who are tracking these should have known them early and should have actually informed people to take right decisions. Instead all that these so called big names including media are doing is, to come after the event and support the situation.

I have been holding position in Jubilant Foodworks, the owners of Domino’s Pizza. Till last quarter for 5 quarters this company had good growth on its sales and profits. In the September 18 quarter growth has slowed down & because of bonus announcement its earnings got dropped. After the results were announced, analysts are giving information about the challenges the company will face like.

  • Due to food aggregators, they will have labour problems.
  • Competition is eating into their business.
  • Increase in Fuel cost as well as other inputs is not getting passed on and will be a burden.

How come all these showed up the day results were announced? Now that the company is showing signs of slowdown, all these people are giving supporting thoughts to strengthen the actual condition.

And this brings more clarity that all the media as well as big names should not be believed or should just brush aside and we continue with our beliefs. The other day there was a thought shared in a video that big money is made in the markets only when there is more fear and blood bath in there. And when fear gets bread through media it becomes more pain and that is where right opportunities come.

In 2008 everything around us was talking negative, joblessness, crude oil at peak, businesses defaulting and media was only giving negative news. From there market went up 157%. Even now news papers are full of negative news.

  • Agriculture growth is underwhelming
  • Mid & Small cap in Bear hug.
  • 1 year sip’s in Red
  • Valuation still above average

All these means that, there is the next big opportunity just about to come. Only that, one needs to invest into quality stocks. Just because stocks are available at a discount, one should not pick up junk stocks

Stick to quality and the next rally will help you make handsome gains.

Add Insurance To Your SIP For Double Benefit!

Insurance is a high priority investment option in the minds of the Indian investor for decades now. In reality, it is not to be considered as an investment product at all. This option was made to look appealing by insurance companies as they provided a guarantee in repaying the principal along with some appreciation and also an insurance cover. Hence, in the unforeseen eventuality that the insurer is not alive, his dependents get a significant sum of money.

Pitfalls of Insurance as an Investment

Investors failed to realise that in return for their long-term commitment to pay premiums, what they got back was a pittance. When taking out a policy they only see the high numbers quoted and it looks like a rich reward. At the time of maturity when they receive the maturity amount, only then do they realize that the amount is not a significant growth of their monies. For creating this corpus, they would have shelled out all their lifetime earnings by paying premiums.

The tax saving advantage of the premium paid made insurance look like a much better option compared to other investment avenues available. I even heard the mother of a 2-year-old child asking her husband to take insurance for her child to meet future educational needs. It is not her fault because that is how her parents have saved.

Many are so very sincere and committed to paying the hefty premiums without realizing that, all their commitment is doing is making the insurance company rich and not them.

Increasing Awareness and Options

Off late there is increased awareness about the poor returns that insurance gives. Even with the tax savings that the product delivers, it is not worth an investment and people have been moving to term policies.

People shied away from term policies because they will not get any amount in return if they are alive after the policy term ends. They felt bad that they the premium paid goes waste as most of them are pretty confident that they will live beyond the policy term. Little do they realize that, however healthy you are, there are still some chances that things can go wrong. Life is not fully in our control.

A New Entrant – SIP Insurance

Now, there is a new option available for those who thought that term policy premium payment is going waste. Mutual Funds have begun to give insurance cover for SIP’s. It is called SIP Insurance, where, while you are investing through your SIP’s in mutual funds, you get an insurance cover without any extra cost. Moreover, all the money you pay for the SIP earns the highest returns. Insurance comes free.

Reliance Mutual Fund gives the highest returns in this segment with 120 times the SIP amount as the insurance cover in the 3rd year of the SIP investment. Coverage begins from the second month of the SIP with 20 times the SIP amount for the first year, 50 times for the second year and 120 times for the 3rd year.

The only condition is that the SIP should not be disturbed or redeemed till the age of 55 for the investor. One can start a SIP of 10K, in the 3rd year get 12 lakh insurance cover and then stop the SIP in that scheme and take it in another scheme. At present each fund has a maximum limit of 50 lakhs, so if a person takes a SIP in 3 or more fund houses, over a period, they can have a Rs. 2 crore insurance cover.

Regular term policies have their own challenges as one’s age catches up. Many investors have been denied insurance coverage because they have some existing disease or the premium gets increased because of the pre-existing disease. In SIP Insurance, these conditions don’t exist. Any individual who is investing in a SIP and has opted for insurance gets covered, immaterial of his age or disease status.

A big sigh of relief to those who are in the above condition. This SIP Insure product option takes away the challenges of investing in insurance and getting lower returns. Get in touch to know more about this new avenue for your life savings.

What is SIP?

SIP is the short form for Systematic Investment Plan. It is a way to invest small amount of savings on a regular basis.

SIP is similar to a bank RD, here it is invested into a Mutual Fund. Where you can pre-fix the amount you want to invest on a regular basis. It can be monthly, Bi-monthly or quarterly.

The difference between Bank RD & Mutual Fund SIP is, in RD, every rupee invested will be growing every day. It has a fixed growth in a fixed period. In an SIP, the investment will not be growing every day. Some days it can be up and some it can be negative. It has no fixed return though it can have a fixed period.

This up & down movement is what makes SIP’s more attractive, because it will give lesser number of units when markets are up and more units when it is down. It will help in averaging the investment so that, when the market goes up to its next higher level, your investment brings higher return.

Let’s look at this with an example:

Investing ₹1000 into an RD account which gives 7% interest will accumulate to ₹12465 after 12 months. The same amount invested in a MF SIP where the assumed return is 7% and the funds NAV goes down to -7.60% in the same year before closing with a 7% profit. The value of the investment will be ₹12765. 300 additional earnings which is 30% more than bank RD.

This is the advantage of an SIP in mutual Fund. And Mutual Funds generally give 15% returns which would mean the same 1000 investment for 12 months would have grown to 13670. A profit of 1670 against only 465 from the banks.

 

Why you should start an SIP?

The first reason is that it brings a discipline to save. And the second, the most important reason is that, it keeps you off mood swings. For example – If you decide to invest an amount every month taking time to check the market and then do it. Most of the time, you obviously get held up in some task and miss the investment. If you have the time, you would want to wait for a better price. Or think about your previous investment which is now in the negative and postpone the current one.

SIP removes all these worries about timing. It helps you have the investment happen automatic & accumulate wealth.

Axis mutual Fund has coined a tag line for SIP, Sleep In Peace. It is really so peaceful was of accumulating wealth.

Why Mutual Funds May Trump Real Estate as An Investment Option?

We Indians are believers in creating assets and leaving it behind for the next generations. Saving up and funding assets is a must, for most Indian families. So, what kind of assets do we look at investing in? In a typical Indian family, it will mostly be gold, real estate (either a plot or a house), and in a rapidly growing crop of people, mutual funds and SIPs as well. So, what prompts our choices and how do we make our asset allocation decisions?

We recently shared our views on the pros and cons of gold as an investment option. So, left with the possibilities of real estate and mutual funds, let’s look at which one to choose and what are the pros and cons.

Initial investment

Many people usually save up for years to purchase a real estate asset as it is never cheap. The initial investment in real estate is always high, and at most times, apart from their entire savings, most buyers also end up taking huge loans. These loans can become a liability in the long run, if not planned for properly. Also, life is full of uncertainties – ill health, loss of job for an earning member, new family commitments, etc. can change the equation overnight.

In contrast, investment in mutual funds can start with as little as even INR 500 or 1000. You could choose to begin a Systematic Investment Plan(SIP) with a small amount per month and slowly build it up into a growing investment. In fact, many people have invested in mutual funds quite early on, from the time they have started earning and made enough profits, to invest in real estate. So, while you may not be able to purchase real estate unless you have lots of money to spare, mutual fund investments can start at an early age, and you need not wait to accumulate your savings.

The Process

Investing in real estate is not an easy process; one has to find the right property, at the right price, at the right time, at the right place. At times, you may have to involve brokers or other such third parties and pay out commissions as well. The property papers must be legally verified, and the due process of registration needs to be completed, which is again a bit cumbersome. In short, it is tedious, fraught with painful procedures.

For investing in mutual funds, however, there are no such hassles. Once you decide the amount you wish to invest, you can quickly start an investment account with your bank and transact online. Your relationship manager at the bank or a trusted financial advisor will help you maximise your returns by growing your money while reducing the risks as much as possible.

The Liquidity Factor

Any investment is made with the intention of growing one’s money and also providing a safety net in tough times. Real estate prices do rise slowly and even accounting for market slumps typically your property value would have gone up. The pain point is liquidity.  If you need money immediately to fund an emergency or new goal, selling your property for the right price promptly is difficult. Here again, the process is long- you need to find genuine buyers, and it takes time for the money to come in hand. In contrast, selling mutual funds is more comfortable, and at most times, the money is back in your account within three working days’ time.

While we all seek the safety and security of owning the roof over our head, do consider first building a growing mutual fund portfolio and then using the earnings to build a dream home.

Mutual Funds load on ICICI Bank shares

Mutual funds have loaded up on ICICI Bank shares when the bank went through a slew of bad news with its CEO Chanda Kochar in the limelight on the Videocon loan default and kickbacks received by her husband Deepak Kochar in the form of loans which further got converted into Equity to his company Nu Power. Money got routed through Mauritius.

Funds have taken a technical bet, where there is an expectation of a bounce back from the bottom which will provide an opportunity for short term gains. In such a situation, there is not much that can come from ICICI Bank as there was an article in the ET stating that, ICICI Bank is one of the lowest performing banks among its private counterparts. Its NPA’s are seriously high, though not to the extent of their PSU counterparts.

Banking sector on the whole has gone into underperformance haunted by increasing NPA’s and managements which was so far the PSU’s, now even the private sector has shown poor governance. These developments have made the Banking Sector not a favourable investor’s choice. In such a scenario, taking exposure to a stock that is fundamentally weak is not a good sign. It feels to think that, even fund managers have begun to behave like immature investors.

There is a potential for short term gains as ICICI Bank’s asset quality is not so deteriorated like that of the PSU’s, which will help the stock to make a rebound. For those who take investments based on this development, need to be pretty clear on their exits. Once the stock begins to show weakness on its price, it is time to exit those funds.

Investing in a beaten down sector when it is about to turn around is a very good investment strategy, while that should be done in the right sector. For example in 2016 when metals turned around, those funds that had high exposure to metals sector were the biggest gainers in the 2016-17 rally. The next such opportunity is likely to come in the Pharma sector sometime in the near future. It is not going to be frontline Pharma companies that will lead the rally. At this time it is too early to spot the leaders, while when there is one, leaders will show up bright.

At that time take exposure to mutual fund schemes that have higher exposure to those strong leaders in Pharma and your investment will beat all the benchmarks and give your saving a bumper profit.

10 Lakh Crores of Investor wealth lost after the Budget 2018. Really??

After the 2018 budget, the rising stock market went into correction mode. This long-awaited correction was triggered by the budget proposal to re-introduce Long-Term Capital Gains tax.

Media frenzy created fear and confusion in the minds of retail investors, resulting in panic selling. In parallel, global events like the Russian elections and Saudi Aramco IPO, the world’s largest IPO, supported the fall. Now crude oil prices need to stay at high levels for both these events to sail through. This worry took the markets further down, so more sell-off is likely.

Now the media says 10 lakh crores of investor wealth is lost in 5 days. This fuels the fears of the already confused investors. Is it true that so much wealth was actually lost? If so, who made the gains?

In the stock markets, when there is a higher value on a company’s stocks or the index, it is true that the whole asset is valued at that price. If all the owners offer to sell at the highest price, there is zero possibility that everyone will get that price. As sell offers pour in, supply increases and price declines. Price decline continues till the supply slows down and demand increases. Then the price starts to move up again. If the sentiment becomes stronger and builds more confidence, then the market moves past the previous high leading to an even higher value for the total asset.

Wealth gets created because of the confidence people have in the company or the economy. Wealth gets eroded when many of them conclude that their expectations are met and begin to move out.

So, only if we sell and move out of the investment can we lock the high price. If a person is waiting without participating in selling and realizing the gains, it means his confidence level is high, and he wants to achieve an even higher price.

Just calling out the highest level reached, not taking the action to exit and saying wealth is lost when prices move down does not have a meaning. The reason why you did not sell was that your confidence in the company or economy continues to be strong. If it remains strong, be invested to exit at a higher price.

The other approach is flawed wherein you stay invested when the market is moving up and when prices decline due to selling by others, you get worried and take a decision to sell at the available price. At this stage complaining that you lost your wealth is not the right way to approach this asset.

If you are participating in the stock market with commitment and confidence, hold on till suitable conditions prevail. If the situation changes and shakes your confidence, then take a stand to move out either with available profits or even at a loss. Again, you need to understand the conditions and take action.

In reality, wealth is not lost. It was only a notional value. When a group of investors decides to move out, the prices drop bringing down the notional value. At all times we will have some set of investors wanting to exit for various reasons and that is market dynamics.

Be invested as long as your confidence in the stock or the market is intact. Exit when your goal is reached, or the conditions change, altering your view and confidence levels. Once we are investing with this clarity, ups and downs in the market will not disturb us or make us take a decision midway to exit.

So, when markets come down in value, no one loses any physical money, it is only the notional value that comes down. Stay invested with your confidence and objective and you will get rewarded adequately.

LTCG Brings Selling Pressure To The Markets

Our markets have been waiting for a correction since long. The market is scaling peaks since April 2017 on the back of two truths –

  1. The strong flow of retail money coming into the markets
  2. Government intervention in every possible way to keep the positive mood in the market.

Now the much awaited Long-Term Capital Gains Tax (LTCG) coming back at 10% has triggered the sell buttons. In one way it is a sign of relief. Investors were haunted by fears that a correction will take away weak hands in the market and move out weaker stocks from managed portfolios. It is required once in a while to cleanse portfolios too. Like servicing our vehicles after periods of use, a review and cleaning help to put things in a condition to move on further.

The reaction to the LTCG tax is disturbing. The proposal to grandfather gains made till 31st Jan 2017 and tax the income from there off has driven many to think of immediately selling their long-term holdings before 31st March 2018 to claim tax exemption and then re-invest. These are actions that mature fund managers or fund houses would not take because they know that there is no benefit, and only adds more accounting effort.

Retail investors, thinking that they are smart, are going ahead with selling their holdings. Most of the times, after they sell, prices will drop further, and they will get comfortable with their decision, deciding to wait and get in at a better price later. Why they want to buy again? The stocks they hold are good ones, so they want to be invested. Only that, they do not want to pay tax on the gains.

The savings will be 10% of whatever gains they have made so far. While what will happen later is that, in the bargain to time the market, they will miss the next move and probably not buy again or take entry at higher levels. In both ways, they will only end up losing more, leaving the government and brokers with more income. And all these efforts are only possible for the next two months, after that, markets are going to be there, and there will be profits to be made, on which taxes must be paid.

Such kind of immature moves are the reasons why retail investors are always losers and professionals are consistently gainers.