Maintain 40-50% of your portfolio in CASH.
Give a man a fire and he's warm for the day. But set fire to him and he's warm for the rest of his life. –Terry Pratchett
I may not understand the above quote, but I'm assuming that once you set fire to someone, that's the end of their life, so yes, that would imply that setting a fire to someone will keep them warm for the rest of their life. I'm going to keep you warm by lighting you on fire! I'm going to tell you what's going to happen in the markets next week, next month and next year! Nothing to panic, just prepare for the turbulent time ahead.
This article is written so that you can caution yourself and go slow in doing investment during next 6 months.The band-aid approach taken by the world only sets the stage for more booms and busts ahead. And given the magnitude of intervention, the booms could be even more dangerous than the original excesses that set off this economic crisis. Based on the economic confidence model and the looking at the latest developments across world especially banking/currency crisis, FED's QE2, strong dollar/rising interest rate, Ireland/China issues etc and taking clues from the QE done in Japan in 2001-03, I would like to CAUTION you for next 6 months which can turn out to be a high volatile period in the market.
Next phase of the banking crisis in USA
USA government released new data showing that the FDIC's list of "problem banks" now includes 903 institutions. That's ten times the number of bad banks on the FDIC's list just two years ago. The banks on the list have $419.6 billion in assets, or SIXTEEN times the amount of two years ago.
Consider what happened on September 25, 2008, for example. That's the day Washington Mutual filed for bankruptcy with total assets of $328 billion.
But just 30 days earlier, according to the FDIC's press release, the aggregate assets held by the 117 banks on its "problem list" were only $78 billion.
In other words …
Washington Mutual alone had over FOUR times the sum of ALL the assets of ALL the banks on the FDIC's list of problem banks!
Now you can think, how much FDIC is hiding & how much they are reveling?
QE2 - It's actually hurting the markets
With the financial markets facing uncertainty about the balance sheets of banks and governments in Ireland, Spain, and Portugal, continued weakness in stocks, commodities, and precious metals remains a possibility. From a risk management standpoint, it is important for us to understand the possible downside risks in the short-to-intermediate-term. QE2 program (FED decision to buy another $600 billion in Treasury bonds) is just not helping. It's actually hurting the markets. The goal of the policy is to create higher stock and housing prices by pushing the dollar and interest rates down.
Bernanke is going to come under fire from all sides: domestic, international, political, financial. Everyone wants the FED to remain the rock of Gibraltar, because the world is holding trillions of dollars' worth of Treasury debt. If the dollar falls, those who hold T-bills and T-bond will be exposed as suckers – lapdogs of the Federal Reserve. No one wants to be seen as anyone's lapdog, especially when he really is.
During a visit to India on Nov 10th, Obama argued that QE-2 is in the world's best interests. "I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole. And the worst thing that could happen to the world economy, not just ours, is if we end up being stuck with no growth or very limited growth," Obama argued.
Simply running the printing presses in order to pay-off your debts is no way for a great nation to behave. The US-government is essentially bankrupt, and can no longer service its debt, by running a balanced budget. Instead, the only thing standing in the way of an outright default by the US-government on its debts, - is the Fed's electronic printing press. Still, China and Japan were net buyers of $43-billion of US T-Notes in September, - and so, the shell game goes on awhile longer.
A stronger dollar and rising interest rates are not good for stocks. Now we have both!
The S&P 500 chart shows a potential double-top forming. It looks like the next bear market may have started a few days ago. I disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
The Fed's purchase program has also met broad opposition from other central banks and I share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.
Economy changes but history repeats : Nikkei fell down by 34% due to QE from BOJ in 2001
As you can see in the chart, the Nikkei shot up 22 percent following the BOJ's quantitative easing announcement in March 2001. But the party was a short one …
After 22% upside from March to Apr 2001 (3 months), from May 1, 2001 through September 17, 2001 (5 months), the Japanese market lost all of those gains — and more — tumbling 34.1 percent.
It's really ironic …
When the twin bubbles in Japan burst — a stock market bubble followed by a housing bubble — the Japanese authorities answered in exactly the same way their U.S. counterparts are doing now.
They implemented the same fiscal and monetary policies grounded in the same faulty arguments — and failed miserably. Even more ironic is the fact that the U.S. was Japan's sternest critic.
Here we go: Same problems, same short-term fixes — yet Bernanke is hoping for different outcomes. But given all that ails the economy, I think Helicopter Ben is in for a very unpleasant surprise.
ECM shows Caution from Jan 2011
As per the economic confidence model (EMC) designed in 1997, a stock market moves approx 3-6 months ahead of real economy, hence what will be the tone of economy 3-6 months hence will be reflected now in stock market.
Now, look at the chart above....you can see highest peak in 2007.15, it means around 2007 Feb/Mar we had best time for economy and probably Jan'07 was best for stock market. When I say best time, it can be best time for US or UK or Asian Countries. For Indian markets too year 2007 was best for investment followed by fall in 2008.
It Doesn't Matter Until it Matters
Let's check this model, if it is really working or not?
- 2008.225 - This says economic confidence will be down in Mar/Apr'08, so subtract 3-4 months from this will tell
clearly that in Jan'08 stock market will be down which you know was true.
- 2009.30 - Economic confidence will again goes high in Mar-Apr'09, so you can expect stock market going higher around Jan-Mar'09 which actually happened in the month of Mar-Apr'09. From Mar'09 till May/June'11 - As per the chart Mar-Apr'09 is just the start of bull run which will lead to Sensex above 21K and Nifty above 6K. Recently we were close to the peaks indicated based on chart pattern.
- 2011.45 - Worst period comes here...sentiments will be lowest in mid 2011, subtract 3-4 months, so stock market is expected to crash by March 2011 beginning itself (It is highly possible that Jan-March 2011 can be a high caution months).You must book most of your profits sometime in the beginning of 2011 itself to avoid wealth destruction. I would like to CAUTION you from Jan-July 2011. Keep 40-50% cash in hand & rest 50-60% invested.
Just to sum it up…
Jan-Oct'08 - Stock Market will get bottomed out, which we have already seen.
Mar'09-Jan'11 - Stock Market will again moves to Peak, may be higher than earlier peak. These two years will be very good for equity market. We have already seen this period and now in Nov'10 we can see weakness in the market getting developed.
Jan'11 onward - Finally 2011 will be year similar to high volatile period in equity market where I advice caution approach. One can expect a correction up to 20-25% in 2011 from peak.
Study on next market move till 2016.
Source: Princeton Economics. Martin Armstrong discovered the 8.6 year PI Economic Confidence Model that has predicted many Economic Confidence crisis.
The 8.6 year PI Economic Confidence cycle is expected to bottom in June 2011 and 2020. Notice how well it predicted the bottom in 2002 and the top in 2007 on a year basis. The graphic shows that the model is predicting a top in 2010 before heading down into a long-term low in June 2011. This is economic confidence model and as you all know stock market is 3-6 months ahead of the real economy so one can expect market to top by March-Apr 2011 or in worst case even in Jan-Mar 2011.
Expect Sensex @ 35-45K by 2013
After correction in 2011 which is most likely to be a deep correction of 20-25%, we can see a massive rally where in Sensex can be seen at 35,000-45,000 levels by 2013.
You might have missed buying in 2008 rock bottom, but do not miss bottom fishing during 2011 correction. Keep 40-50% cash in hand to take advantage of this opportunity.
You MUST maintain a cash levels of 40-50% to take advantage of the upcoming correction in the market which is likely to start soon or may have started already.
Europe's debt crisis is contagious
Ireland –
Irrespective of how big Ireland is and of what importance it is to EU, let me just give you a clue of what has happened in Ireland and what the scenario is currently with a simple statistic. They have an index of whose name I am unable to recollect but is similar to what we call the Bankex or the index of the banks. And this particular index of Ireland is currently 2% of what its highs were 3 years ago. Just this number can explain in what condition the banks are in Ireland and the financial system in the country.
The top banks in Ireland, which as you hear elsewhere is loaded with bad debts and is seeing outflow in deposits in double digit percentages for the last several months. The sustainability of these top banks in Ireland and the financial system in the country is under serious threat in which case you should have easily identified that there is going to be a bailout package.
While we had expressed that Ireland receiving the bailout package can fix the European issues for now, there are already talks on Serial bailouts in Europe. However, it should be noted that even during Greece bailout, talks of contagion were on for a while, before it was swept under the carpets. So, is this time going to be different?
China's attempts to tackle inflation
The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis. Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to save its banking system.
China –
I am not really sure which of these factors Ireland or China spooked the markets or if they really did. China's problem is entirely different from what we saw in the last heading. The Chinese authorities have flooded the financial system with money like anything in the last 2 years. They have also been relatively late in tightening the liquidity in the System.
In such a scenario, the country being aggressive in financial tightening is obvious. This is also something that we should expect happening going forward. While the Chinese authorities increased the reserve ratio for the banks in two quick successions recently, the next move could be increasing the rates. And these moves will impact the global sentiments since China is and has been the Savior, trying to pull the world out of the slowdown at least to an extent.
But, unlike the European problems, liquidity tightening in China may not have any real effect on the markets going forward.You do it once and for the first time – markets do fall, you do it again – the fall is probably negligible and you do it again – it is expected and becomes the norm.
Issues like fighting between North and South Korea, Europe's debt crisis and China's attempts to tackle inflation are already impacting stocks markets. With nerves already frayed thanks to the Irish bail-out saga.
After 2G Scam, now Housing loan scandal
While many people continue to see the European problems to have impacted our Indian markets, I have always been suspicious of a local factor. In spite of the so called European woes, it should be noted that none of the major 3 indices from Europe fell down by more than 2.5%, while the Indian markets are down by close to 8% in about 2 weeks. So, this gives way to a question – Is there anything uncomforting within? I have always had this view that if a correction were to come that's probably going to be before the markets make a new high.
One of the latest news which might future take the market down is - CBI busted a housing loan scandal racket and arrested CEO of LIC Housing, General Managers of Bank of India and Central Bank of India (New Delhi) and CGM of Punjab National Bank. Several other bank officials have also been arrested on bribery charges. LIC Housing Finance being involved in a multi-crore scam surfaced sending realty and banking stocks spiraling down. The CBI, which was said to be questioning a slew of people involved in the scam, included officials from LIC Housing, Central Bank of India and a real estate developer, whose identity was not disclosed.
Such developments are really very bad for the market, sentiments will go for down & we are in for another 3-4% correction in very short term. The visible downside for the markets are between 18,400 to 18,800 and there is a very high possibility that the markets will consolidate between 18,800 to 21,000 for a while. In such a scenario, I would like to advise you to HOLD on to your positions. I am not recommending to sell any of my Multibagger Stocks in a loss. You can maintain 50% cash position by booking profit from profitable counters.Which stocks to buy when the market falls will be informed based on the extend of fall & value of stock at that point of time.
No irrational exuberance seen in the market
In the last two weeks the broader indices have witnessed a correction of 7-8% bringing down SENSEX from it's highs of 21,000 to 19,460 odd levels and this has already made many capital market participants jittery. The 2008 crash is still quite fresh in their mind and keeps surfacing every now and then. This time the nervousness is more especially on account of the fact that SENSEX attained a level of 21,000 for a very brief period and since then it's been falling. However, I would like to make things a bit clear by commenting on the valuations for now (2010) and then (2008) and would also like to make investors aware that instances like 2008 crash or dotcom bubble burst as in 2000 take place on account of irrational exuberance which is not the case at present.
The Sensex P/E stands at 22 times as of date for historical 12 month's earnings for FY 10, while for forward FY 11 earnings SENSEX P/E stands at around 19.This means we are around 18% higher than the long term average P/E of 16 times (data from brokerage reports), while if we look at the historical P/E values during the last few bull runs, especially 2008 then during the Dot-Com bubble we were at an astronomical 33 times earnings and during the Great American Subprime Bubble (2008 crash) we were at 28 times multiple. So, all this points to the fact that we are still better placed in terms of valuations and thus one should derive some ease and comfort from the same.
Another 3-4% correction on the cards
Now talking about the recent correction, it was more on account of Profit booking from the institutions who were already sitting on good gains on their long position. The FII's were the net buyers during the last two months starting September 2010 which resulted in 15% appreciation in the market, however over the last two weeks the flows have turned negative ignited by the resurfacing of Ireland debt woes and China's monetary tightening.
I believe that there is another 3-4% correction on the cards (19,000 for SENSEX and 9,700 for Small Cap Index) especially since the Central Bank of China on late Friday announced that it is contemplating increasing the key policy rates by another 50 basis points (1 basis point = 0.01%) in order to tame inflation.
I don't see the above move as negative and also consider the recent correction healthy for the market's in the longer run, however at this moment I am not suggesting a buy and would like to wait for the market to stabilize over the next 1-2 week. It is better to maintain cash position in order to take advantage from market fall if any.
Excess supply zone for Nifty is 6100-6055
The Indian market is currently reeling under pressure under the multiple factors which are evident on the global as well as domestic economic horizon. The emerging markets including India experienced a rush of capital before the announcement of quantitative easing. The markets back home succumbed under the pressure of the recent developments on the global economic horizon. The role of the institutional market participants is ironical in order to understand the current turbulent selling momentum in the benchmarks. The market makers were net buyers in equities from nearly 40 trading sessions who have now turned their course of action. The current downward slip on the charts could be attributed to the profit booking by the institutional clients on their long positions.
Also the political uncertainty which has emerged over the Indian diasporas will have momentary impact over the benchmark which currently seems to be a bit overdone. In the immediate term, the 6100-6055 levels would prove to be a point of excess supply for the markets both technically as well as psychologically. The resurfacing of the European debt crisis with Ireland as the latest entrant over this economically plagued continent is questioning the sustainability of the on-going global recovery.
Markets are yet to factor in the recent indication by the People's Bank of China which has increased the key policy rates by 50 basis points to strengthen liquidity management and moderately regular supply of credit, on account of the inflationary pressure hovering over the domestic economy. This move is expected to dampen the outlook for equity markets in the region in the immediate time frame.
Technical Charts [6 months]
Strong Support @5785/5635
The technical picture on the charts seems to be near an inflection point in the present market conditions. The short term moving average (15-EMA, 6099) is presently trading near its Medium term counterpart (30-EMA, 6080), which in case of a possible crossover would be an important technical development on the charts pointing towards the downward side in the intermediate time fame.
Also, the ADX trend indicator (>30) suggests that the present correction on the charts is a trending move, which is going to continue for the time being. The Demand Index (DI) is trading in the negative domain indicating presence of selling momentum on the bourses. Keeping in view the periodic nature of these indicators, the first line of defense for the indices would be near the 5785 levels. However in case of a prolonged correction, the markets would be getting support near the psychologically important 5635, if in case the global economic recovery looses its sheen.
In very short term, markets could bounce back on account of short covering which should not be mistaken with strength in the benchmarks and should be utilized to clamp down the exposure in equities for immediate term time frame.
On a medium to longer term time frame, equities are still the best bet to generate handsome returns on the invested capital, if supported by a "Top Down" and followed by selective buying.
Note:- Please view the charts/images by downloading them to understand them clearly. This article is written with limited knowledge that I have. One should do there own homework to understand and interpret the scenario's better. Information obtained is deemed to be reliable but do not guarantee its accuracy and completeness. Readers using the information contained herein are solely responsible for their action.
