Market mood and current scenario! A perfect text book picture of doing exactly they have done before!!!

Around a month ago in one of the discussion I talked about S&P range of 1010 and that is where it got tested!

I love to talk in numbers, however sometimes its better to speak logic and not just the numbers. I would like to share few points which have indirect or may be direct relation to market movement and can help us analyze the current situation where we stand and what should we do???

1. Mean Convergence is something that can never be ignored. S&P in its recent rally had gone far ahead of its mean (which ever you follow, I follow Mean Overshoot beyond moving average). So it needs to cool down and we are seeing the cooling effect.

2. First leg of any positive movement (from times immemorial) start in such kind of extreme panic. First correction is seen as a caution by most people as thoughts of recent meltdown still are fresh in minds of everybody. This factor is also proving true. 3. USD, everybody is speaking against it. (Only 5% people are bullish). So logically it is forming a base and I think may be a long term bottom. We should see strength in USD. 4. Gold, the channel its moving in, if you see the chart is getting narrower and narrower, which indicates that it need to chalk out its new course very soon (may be Oct), and things should work against it if USD rises and thats a possibility.

5. Sugar went into correction much before the rest of the things and whatever reason we say (Excessive rains in Brazil or less rains in India), it is bouncing and bouncing hard. Will other commodities follow, take your call.

6. China, and other Asian tigers once again have proven their metal. They are roaring and roaring hard, not dependent solely on Western Consumption. Now if you add a bit of Western recovery, then expect much better numbers.

7. Baltic Dry Index which was at $700 in December is now close to $3000 and is more or less close to rates where world trade and ship usage start getting normal.
8. Recent good set of numbers by so many companies (yes quality of numbers can be debated), expect numbers closer to these in coming quarter as well and that can contribute to lowering PE multiples, as its always easy to climb from lower base.

9. For the time being inflation argument has been thrown out of the window and central banks need not to worry about raising interest rates just to control inflation, the most common step they take. It seems that inflation will be normal.

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10. After all it is the money flow that will drive the market, scenario right now is, we all (investors, traders etc) are deploying the money to stocks, brought the market to these levels, now all of us want to book some profit, we talk of hitting bottom again, but are we pulling out completely, I think, "no", Actually we are cautiously looking for an opportunity to enter the market as very few people took the benefit of recent rally to an extent they can feel satisfied.

So to conclude, please sit back and take a overall look, I am seeing this a perfect example of "Fear Overplaying+Markets Outplaying+ Smart guys doing exactly what they need to do, be fearless but diversified and watchful".

Why Gold is Gold and where is it heading?

I hear lot of people talking that, why Gold is so precious, why people talk so much about it when it is just like any other metal from earth!!! Apathy is I have heard even some of the most intelligent people and Gold Traders talking this. Let me through some light on it.

Gold is precious because of its stable chemical properties.

Let me clear few points about why Gold enjoys the status of Gold!

Gold is among the least corrosive among the metals. It is most malleable and ductile metal. 1 ounce (28 g) of gold can be beaten out to 300 square feet. Gold kept at home for 100 years will weight almost same.Whereas, other metals like iron will corrode and lose weight as well as properties. We need to keep iron etc polished to save it from corrosion but not gold. This was one of the important reasons of Gold being chosen as the reserve currency in old times and even today.

There is no other stable metal that can replace gold.

Now coming to Gold bubble.

Gold has tried to cross $1000 level and has formed triple top. It is slipping of its support bed and level of $875 is very important. If Gold breaks this level, then it can head further down. However, if by any chance Gold crosses $1000 (very distinct possibility in near future), then we can see a new era Gold prices.

Hope it helps on knowing why Gold is Gold.

Analysis of Nifty 10% down, still room for correction

I follow a very different indicator to evaluate the market levels and to answer the question--How much is too much? We do quant analysis for North American Markets, however due to my personal interest I do test the levels of Nifty too.

This indicator is based on the theory of mean convergence, everything need to converge back to towards its mean and the comfortable zones of activity are upto the standard deviations.

I like to check the index overshoot beyond its Moving Averages (50 day, 100 day and 200 day). Moving Averages are lagging indicator but this overshoot make them leading indicators too to an extent.

For nifty, historically if it overshoots by 15.33% more then its 100 day moving average, its time to be cautious. Next level is 24.9%. Highest ever overshoot was of 88% in early nineties.

Nifty historically has stayed for 13% of its days in this overshoot range of beyond 15%. So even though you book profits at these ranges, you do expectionally well, they serve as good stop losses too.

Current rally took nifty to a overshoot of 43% beyond its 100 day moving average, and that was way too much. The correction has brought us back to 26% which is still bit over extended. So on short term I would like to wait and I will open new positions only once the range of overshoot is under 15% levels.

One more thing is, in 17 years of nifty data I analysed whenever nifty crossed the 25% level, it fell back to its Moving Average or below it, before it made a new neat upmove. Now this time if we get a special outlier, great, but I dont believe in planning around execptions and so personally will wait for some further correction or atleast a consolidation.

Stock Overshoot beyond Moving Averages, how much is too much?

Some of us rely on fundamentals, some on technicals and some on both. Question always is, how much move in stock market is too much. When can we know it is an excess? Can we quantify the excess? In search of these answers I did a study on US Indices. Lets take the example of S&P: I found that if S&P overshoots its 20 Week Moving Average by 5.15%, that is time to be cautious and if it overshoots its 20 Week Moving Average by 7.5%, then it is too much and one needs to be very cautious. As and when this has happened in history, the index comes down below its Moving Averages or atleast kissses it back for a re-run. On June 15th, 20 week moving average was 7.6% and results of my study was in line with the movement we saw after June 15th. Here is the link to check the outcome for 10 different Indices and Im sure you will find some amazing results in this work Click here to read priliminary report on Stock Price Overshoot beyond its Moving Averages.and here to read on US Index Stock Overshoot beyond Moving Average Study

I have not yet compiled it in simple plain language, which I will do soon. However still it is worth seeing and it helps a great deal in anticipating the next short, mid and long term market move, depending on the average we take. I am testing it on individual stocks and very soon I will try to come out with a simple way to calculate this Overshoot numbers which signifies caution. Your feed back is welcome.

Regards Harman.