Skip to main content

Premium: What To Do If Markets Fall From Here

Deepak Shenoy6 min read
Quick Facts
What is "Premium: What To Do If Markets Fall From Here" about?
What category is this article in?
Premium
Who wrote this article?
Deepak Shenoy, Capitalmind's research team.
When was this article published?
Published 25 June 2014.
How long does this article take to read?
6 min read
What does the "Small Caps Went Berserk" section say?
While the smallcaps went up huge recently,they’ve come down a litte now. Here’s the smallcap index in terms of how much more returns it has given compared to the Nifty. The high number recently (30%) shows us how much retail has loved Mr. Modi.
What does the "The Fundamentals Are Changing" section say?
Rail fares were increased. Sugar import duty was increased, indicating sugar prices would go up.
What does the "A Tough Budget" section say?
The budget is due. While there is a lot of speculation that this will be a good budget on July 10, we at Capital Mind think we might see one without much fanfare.
What does the "Volatility and Regret" section say?
In volatile times there will be a lot of regret. Let’s take the Capital Mind Portfolio. We got stopped out of a few stocks - Sintex was one, GAIL was another and Kaveri Seeds was a third. They are all back up over 10% from where we exited.
What does the "Preparing for a Down Move" section say?
In a volatile situation, we would suggest a few things:
What does the "Disclaimer" section say?
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educationa l or informational matter only, and is provided as an opinion.

In the markets we’re starting to see a round of consolidation.

The market’s like a roller coaster, but if you don’t prepare for the fact that there will be ups and downs, and the momentum will scare the daylights out of you, you’re going to have a really uncomfortable ride. The worst part of the markets, for us, is the time that it looks like stability has been achieved. And that seems to be now.

[level-capmind-pro]

For the last three months, markets have been on a tear. Suddenly, they’ve slowed down a bit. We’ve seen a fall, and a little bit of a rally. The Nifty just bounced off the 20 DMA.

However this looks unconvincing as a rally. Unless it breaks above 7650, we aren’t convinced and the downmove might go all the way down to the lower bollinger band.

The CAPM 20 indicator continues to show a potential move down:

To those who are new, the CAPM20 is Capital Mind’s proprietary indicator that measures the number of Nifty stocks about their 20 Day Moving Averages, minus those that are below. This can be only between +50 and -50. It usually oscillates and gave us the first indication of a downmove last week as it flipped from +35 downwards. We haven’t visited the -30 area in a while - our belief is that we’re likely to do so.

Small Caps Went Berserk

While the smallcaps went up huge recently,they’ve come down a litte now. Here’s the smallcap index in terms of how much more returns it has given compared to the Nifty. The high number recently (30%) shows us how much retail has loved Mr. Modi.

The Fundamentals Are Changing

Rail fares were increased. Sugar import duty was increased, indicating sugar prices would go up.

A crisis in Iraq has taken up the price of oil to $114, a 7% increase over the average prices earlier, and while petrol prices will surely increase we might see that translate into LPG and Kerosene prices too.

The monsoon remains deficient, at 36% less than normal (though these are early days).

Suddenly, Dubai’s gone into a tailspin. Their stock market has fallen 21% in June, with the big fear of a large real estate developer, ArabTec which built the Burj Khalifa, is going under. (Their exposure in India seems to be limited to two joint projects with the Rahejas in the NCR region).

The rupee’s back down to 60 (from the 58 levels seen earlier in the month). The 10 year bond has quietly moved to 8.71% up from the 8.55% lows earlier. FIIs are starting to slow down their purchases, which have driven the markets up sharply in the recent past.

A Tough Budget

The budget is due. While there is a lot of speculation that this will be a good budget on July 10, we at Capital Mind think we might see one without much fanfare.

  • Some measures have to be taken to handle the fact that the last government dumped a lot of decisions on to the new one.

  • A great election mandate gives the government the ability to do the tough things first, especially while the world is flush with money.

  • Removing subsidies will only be possible now; in later years, they will find it difficult.

  • There’s really no point cutting taxes in July; you might as well wait till next February.

We think the big budget - with tax cuts, removal of exemptions and a big change to the budgeting process - will happen in 2015. This means a simple budget with minor tweaks, but possibly curtailing the deficit by reducing wasteful spending on the big subsidies. Expenditure on defence will be hiked,and some manufacturing sops will be added. We’ll have some detailed budget pieces coming up - but we believe the actual budget will not be called a ‘home run’.

Volatility and Regret

In volatile times there will be a lot of regret. Let’s take the Capital Mind Portfolio. We got stopped out of a few stocks - Sintex was one, GAIL was another and Kaveri Seeds was a third. They are all back up over 10% from where we exited.

The first feeling of regret comes in, and you wonder if this whole stop loss thing is idiotic and you should just stay invested. Many people are showing you their portfolio and talking about how the best time to sell is never. But regret is a normal feeling - and the only thing you can do is to ask yourself if you would have been okay that the stock went 20% down after it went 10% down.** After all a stock that’s down 90% first fell 80% and then halved.**

(We would still add Sintex beyond the 103 price point, and both GAIL and Kaveri seeds look good right now for a 15% stop loss based move up. More when we actually add them.)

Preparing for a Down Move

In a volatile situation, we would suggest a few things:

  • Don’t get over-excited. The markets will go where they have to go. Just follow your entries, exits and position management. The stock market is supposed to be boring.

  • Respect stops. Don’t stay with a stock if it’s crossed its stop loss. I continue to like Sintex but I will buy more only above 103. Below that it’s a nice stock but my stop was hit so I had to go.

  • **Beware of the phrase “long term”. **A number of investors have big loss making positions because they chose to hold because of “fundamentals”. If you find yourself liking a stock so much it can become your long term investment, then ask if you’re doing that just because the stock price fell? Would you do the same thing if the stock kept going up?

  • If you’re hedging, hedge. If you’re trading, trade. A number of people buy puts on a downturn as a speculative trade, but then if the market reverses they keep holding on to the put calling it a “hedge”. Don’t; a trade’s a trade and if it loses, get out. Especially in options.

  • Resist the urge to sell on bad news. You will hear stuff the market will take badly. Like if oil prices went up 10% overnight. Let the stop loss be hit, and only then exit a position. Premature action is the highest premium you will pay for education.

Our action strategy is:

  • We’re long December puts on the Nifty as a speculative trade.

  • If the VIX spikes up, we would prefer to write call options instead. Right now it’s not a big deal at 19.

  • We’ll clear out short positions if the CAPM 20 turns positive again. (goes up towards the +35 mark)

Stay safe!

Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educationa

l or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

Footer

[/level-capmind-pro]