MF Trailing Stops 21-08-2020

As the whole market is moving up now, all the trailing stops in Mutual Fund schemes have been moving up and locking profits. Stop losses for the funds tracked and discussed in our You Tube Channel are published on weekly basis in this blog.

The use of stop losses in Mutual Funds is for conservative investors. Investors, those who have clear defined objectives on their investments.

If you want to increase the returns on your investments with defined risk like say, you are ok to take a 5% risk on your capital and the rest you want to be protected. In such conditions, out of your total investments, find the 5% amount.

Using the risks given for each scheme, calculate how much you can invest and set aside only that much of capital for the fund. As long as the fund is going up, hold the investment. Stop loss will be trailed as the NAV climbs up.

When the fund performance turns and hits the stop, move out & book profit.

Using this strategy, you will be able to manage your investments more prudently.

Let’s take an example. If an investor wanted to take 5% risk & in April he had invested in SBI Pharma fund, which carried a 5% risk. Today, in 3 months from the time we took the position, this fund has locked 17.40% gains.

By taking a 5% risk on the capital, this investor has made 17.40%. This strategy helps investors to maximize gains with conservative approach. In case the investment had turned sour, he would have only lost 5%. The balance capital is safe.

In this process, investments should be taken only when opportunities are available. When there is no opportunity, park the funds in debt funds to have returns that are above bank FD’s.

Reliance – costliest Oil company

With the run up in price of Reliance stock, which nearly doubled in three months, post the pandemic lockdowns. Reliance has become the costliest Oil company on the planet.

Market cap of Reliance has moved past 12 lakh crores, where the stock PE is at 40. On the business side, both sales and profits are down substantially when compared to last year.

This is not a COVID impact, Reliance business on Oil could have taken a hit as consumption dropped in the lockdown period. Even this for the March 2020 quarter, should not have declined as the lockdown was only for 10 days in the month of March.

Once market became jittery about the debt that Reliance carried, promoters got into fear mode and began selling rampantly. Now, the whole world has a share in the company. Google, Facebook & Microsoft kind of ownership. Also with ARAMCO, now the promoters hands are tied on future dreams.

They will not be allowed to blow money and kill competition. One very good blessing in disguise for the competitors.

With so much cash in their kitty, it cannot be kept idle. After clearing debts the future profits of Reliance, the parent of the telecom venture will get moved to some other activities, not into Oil business for sure.

They are now planning to sell stake in Retail too, looks like, apart from the stakes they will hold in the Oil, Tech & Retail, this company will become a bigger financial services firm which will invest into new technologies through the start-up ecosystem.

The next big challenge is for the PE & Venture capital firms globally, as Reliance will compete in bidding to acquire stakes globally into new businesses.

How good their dictatorship mindset will play in the totally competitive space that they are venturing will get known in a couple of years.

Reliance stock is not a favourite among institutions. All the holdings that Mutual Funds hold in the company are process based. Very few fund managers have a liking to this stock because of all kinds of clueless decisions that the management makes.

All of these views expressed are our beliefs, which can differ largely against others.

Above 50 EMA Index

This blog post talks about one of the big picture features available on our website, the Above 50 EMA Index.

What is the use of the Index and how to interpret its signals?

This index tracks the number of stocks that are trading above their 50 Day Exponential Moving Average.

Why 50 days and not more or less?

50 days represents 10 weeks of market activity, which forms almost 20% of the year. It is a shorter term strength guidance for a stock. So, if a stock is trading above 50EMA it is termed to be bullish and below the EMA the stock is termed to be bearish.

How to use this Index?

When the index moves above 75 market is likely to turn down and when the same goes below 25, the market is likely to turn up. When such instances come up, traders can look to identify stocks that have made a base at the bottom for going long or stocks that are forming weakness at the overvalued zone to go short.

When the index is at 75, investors can use the signal to exit some of their long term holdings which are finding it tough to move up. They can even be good stocks, which are facing resistance in price moves on the short term. By selling and buying back when they get a little cheaper, you get an opportunity to reduce the weakness in your investment portfolio when there is a correction in the markets.

What is the logic behind this thought of 75 & 25?

If the index moves above 75, it means 75% of the stocks in the market are bullish. At the same time, not all of them are at the same levels of bullishness. Some of them would have up even when the market was down while some would been early risers, which were the ones that ticked the index to move up. These old timers and early birds would have completed their journey when the index reaches above 75.

When most of the market is bullish, some early investors and institutions who are holding big positions running for a long period would want to book profits. Some of the stocks that went up due to fundamental strength will begin to slow down on their growth, triggering a downward price move. At the same time some stocks would have run up on expectations of big results where the companies would not have met the expectations and have triggered a selloff.

All of the above happens at the top and thereby qualifies as a selling level when the index moves above 75.

The same happens with buying when the index goes below 25. As more and more stocks turn down, those that began the downward move would have completed their bottom and base formation. After drop in prices, company’s earning would look attractive on the stocks valuation. Turn around will trigger institutional buying. Along with this the common adage,’ when there is fear in the market, go ahead and buy, you will make the biggest gains’.

Many such instances of turn around from the bottom can be seen in the chart. July 2019, Oct 2019, Feb 2019 & Mid-May 2019. Now it is again below 25 on 12thJuly 2019. Exactly 1 year from where it also had a similar pattern.

It is time now to look for stocks that have bottomed on their prices. Stocks having bullish divergence on the MACD or histogram on the daily charts. Stocks that are showing strong bullish patterns in the weekly chart and come down in price to reach value zone. These are stocks that will have big rally on a turnaround.

One can easily find a minimum of 5 stocks with the above qualifies and most of them end up giving above 3 times the risk exposed on the positions.

The Above 50 EMA index chart is published on our website with weekly updates. It has been populated on Weekly updates to have a smoother chart, else it will be more crowded if it is populated with daily data.