Market View: December 23

Markets have been trading in a range now for more than 2 months, and everytime it tests the barrier at the end of its channel, it reverses back violently. Seems like it would stay within this range for eternity - but then, it appears this way most of times before the final break-out happens. The key question now is not whether the market would break-out, but when.

A lot of participants have lost hope of break-out this calender year, and believe that the next few days would be calm. The implied and realized volatility are both at their 1-year lows. Implieds went below 20 perhaps for the first time this year, and even the US VIX has taken a dip into the sub-20 ocean. Just for the point of comparison, the 20 year average for VIX has been 20, with high of 89, and low of 9. So, we are currently standing at the historical average level of volatility. I think this is a very good time to buy long term volatility (1-year) - just for the comparison, this is how the 1-year realized vols on Nifty has moved:

2001: 26%
2002: 17%
2003: 20%
2004: 29%
2005: 18%
2006: 27%
2007: 26%
2008: 45%
2009: 35%

I'm assuming the volatility next year should be somewhere around 30 (on the conservative side). Remember, most of these years have been bull market period with low volatility, so the current sub-30 volatility is indeed a very good buy.

My view on the markets is again back to bullish - too much of liquidity still waiting on the sidelines, and even though fundamentally valuations have got over-stretched and everything, I think we have steam left to go all the way upto 6000 on Nifty. Banks have become very aggressive on increasing their balance sheet, and this is after a pause of around 2 years. So, am assuming with increased lending, we would see economy coming back to higher growth levels, and corporates having access to easy liquidity in form of debt. All the corporates who have been running a tight leveraged scenario, and have taken a beating, might be the best performers over first half of next year. I think likes of Suzlon, Unitech, DLF, Idea, ICICI and Tata Group would be out-performers.

On the sectroal front, I think Autos have run out of steam as well as good news. Already sitting at the record sales numbers for the past 3 months, I guess its time for some correction. The vehicle sales would continue to surprise over the next 3-4 months, but most of that has already been factored into the current prices. I think market leaders such as Hero Honda and Maruti may be weak from here going forward, whereas Tata Motors may outperform relatively.

Banks would be the big sector next quarter, and whether they are able to take the shock from RBI measures would determine the market direction to a large extent. If the sector cracks (in case of hawkish measures), then we may see weakness in the whole market. However, my feel is that RBI won't be too aggressive in tightening, and we may see record loan growth over the next few quarters. I would go long the banks at the current levels, and review the position after the RBI policy announcements.

On Real Estate, I'm largely bullish, and think there would be huge upside in the sector over the next year. There is a huge pent-up demand, and I think the sector would return back to its glory days of 2006 and 2007. There would a sharp rise in housing activities, as well as trasnsactions happening.

 

Credit Crisis and Banking Bonuses

If last year it were the CEOs of large banks who were on the firing line, this time around its the banking community which is facing the backlash. And the worst part is, its the politicians who are meting out the punishment.

Yesterday, UK passed a special one time tax on 2009 year-end bonuses. This is in addition to the income tax payable by the employee. Somehow, the blame for the whole crisis has passed on to the banks, and more specifically to the bank employees. Which is as good as blaming Vijay Malaya for your the drinking habits of society, or the Casino owners for all the money lost by gamblers. Everyone is supporting the cause of middle-class which has been short-changed by the bankers. However, what everyone is conveniently ignoring is the underlying greed of effectively the whole world. Banks are responsible only to the extent of ‘selling dreams’ – they enabled people to buy houses and maintain lifestyles which they otherwise couldn’t afford. How on earth does one justify every T, D & H in the world buying 1 MM worth of houses?

Banks just earned their cut (which would be 1-2% in the whole transaction). What about all those property developers who sold their apartments at 200-500%  premium to their pre-crisis levels. It is them who made the biggest profit out of this whole mess – and yet, no one is pointing any fingers at them. Banks have been caught napping, just like the rest of the world. And to a large extent, they are in the same boat as everyone – fooled by the crisis, and lost all their equity.

I’m not a supporter of complex financial instruments per se – but somehow I think its not the complexity that took the world down. It was simple plain vanilla naked Greed which caused all this mess.

Market View: December 9

This was to be the year of surprises, and hence, it was apt that the last couple of months were also on a predictable trend – defying all the expectations and market views. There were people who were clamoring for a year-end rally (including myself), and then there were the Bears who thought sanity was just around the corner. However, it was not to be – nothing happened in the last few weeks.

Apart from the shocks of Dubai (where everyone over-reacted, and then quickly forgot all about it), and downgrade of Greece (which almost no one took notice of), nothing has really happened. All the central banks have continued to stand by their expansionary policies, giving their own sets of reasons. Gold crossed over its previous best, only to come down again (though might go up on another round of central bank purchases), and EUR also is getting closer to its highs. There is a high chance that this would be a quite year end – and a small chance of a small correction.

I’m not bullish on the markets anymore, and think the rate hikes would start earlier than most people anticipate. Inflation is going through the roof, and if the government has to even perform lip-service to the poor strata of the society, then they would need to at least try to bring them down. And whatever they may say, inflation is not totally a supply-side problem in India. Give them loans at 7-8% (which is the trend now), and you know that people would buy almost anything. Markets seem to be running out of steam (though this may be the December effect also with lot of money managers on vacation). 

Gold Cross $1200: Way to Go

An interesting milestone was reached today in the markets, and Gold finally broke through the USD 1200 barrier as well. With the Central Banks of China and India standing in queue to buy more and more Gold from IMF, I think this would go a long way up from these levels as well.

I would think even a level of $1500 is possible, and would buy gold at these levels also. Its common knowledge now that most of the reserve rich nations want to diversify out of USD, and in absence of any credible alternative, will stock up Gold for the time being. I think Gold would the thing for the next few years, and may see newer peaks in coming days.

Brain Drain: A Tale of Two Centuries

Whenever we hear the term ‘Brain Drain’, we usually think in terms of migration of labor to developed economies. We associate it in terms of geographical movement of ‘brain’. However, equally important is the phenomenon of Brain Drain between industries, though it is much less talked about.

Automobile sector to IT sector
I remember receiving a chain mail long ago which compared the rate of innovation between the automobile industry and the IT industry. It went on to say that if the pace of innovation in automobile was as good as IT, then the current generation cars would be much better than what they are.

If automobile technology had improved at the same rate since 1960, a new car would cost less than an entry fee to the cinema hall, and we could drive through the length of our own country on less than a litre of petrol or diesel.

There was a huge shift in skilled labor from the automobile industry to the IT industry in the 1960s– and this led to the huge growth in technology over the past few decades. No other sector was able to match the rate of innovation, and companies came out with real surprises every now and then. However, now the IT industry finds itself in the shoes of automobile industry, and it too has been relegated to the ‘second choice’ employer status. Currently leading the pack are Goldman and the likes. And if we see the innovation across different sectors, we realize the impact of these changes.

IT sector to Finance sector
When I first learnt about the securitization business, I was dumbstruck. In the traditional model of banking, banks acted as the intermediaries between people with surplus cash, and people who needed cash. They used to take deposits from the public, and use the same to make loans. The sole purpose for the existence of banks was the match the source and need of funds – and they earned a margin for this. Also, they used to bear the counter-party risk in case of default, and the world largely was unaffected.
In the world of securitization, the banks sold-off these loans to institutions as well as public – in various forms (but lets not get into that). So, essentially, banks were accepting deposits as earlier, but not giving out loans in the same way. They used to give loans, but later sell them off to get the money which they further lent (and it went on and on). So, in the current scenario, banks weren’t matching those who had cash with those in need of it, but rather they redistributed everything. So, it was like a giant network where everything was connected to everything else. And banks were just acting as agents providing operational support to the whole system. In this system, everyone depended upon others, and if one link failed, the whole system would collapse. This was the ultimate dream for any bank – a vast ocean of people who lent money to each other, more directly than ever before – and these guys just controlled this massive spider web. In terms of IT sector, this is very close to the concept of Grid Computing. And whereas the concept is still in early stages in the IT industry, it has been done to death in the financial circles. And if the brain drain continues, very soon IT sector would also be left to the same fate as that of Automobile sector – and die a slow death. 

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Over the last few years, the financial industry has been the top choice for most of the fresh graduates and post-graduates. Hence, its no wonder that they have been miles ahead of other sectors in terms of innovation.

Market View: November 27, 2009

Something Is Not Right!

Markets were spooked by the Dubai storm, and bears finally had their long awaited wish. Everything was falling, and people rushed to buy protection. Nifty futures were back to trading in discount, and it seemed like bear market was back.

Nifty opened close to 5100 on the expiry day (26th day), and traded in a range for most part of the day. However, towards the end, it succumbed to the global pressures, and went into sharp fall. Thankfully US has a Thanksgiving and so it didn't add anything to the fall. And today as well the markets continued to fall amidst higher fears on the Dubai default (which seems unlikely, and a clear case of over-reaction currently. Unless...). Nifty touched 4820 levels, but recovered soon after HK closed, and went on to regain most of the fall. It finally closed at 4940 levels - quite a rally from its intra-day lows.

As I write this, Europe has re-bounded, and is trading in green. However, I think even if Dubai is averted, there are others waiting to explode. Its a liquidity rally, and nothing more than that - and NOT A RECOVERY RALLY. We are still groping in the dark about the way forward. Spain is struggling, Ireland is close to default, and now Dubai joins the list.
I would be surprised if this party continues for another year. I would be happy to buy Nifty 5000P December 2010 at current levels. Something doesn't seem to be right in this rally - and I don't know what.

Market View: November 6

Markets have been making a fool of bears for a long time now, and there was nothing new in its behavior over the past couple of weeks as well. Initially, it appeared that all the bulls have gone quiet taking a breather, and bears came out with their daggers. A week of fall in the markets, and we all thought ‘This is IT’ – a phrase which eventually got related to Michael Jackson more than the markets.

So, it wasn’t this time again, and the party continues. US has made it very clear that they aren’t going to raise the rates anytime sooner. Effectively, they would continue to write blank cheques, and the champagne would keep flowing.

With all the talks of rates hike marginalized, I go back to my bullish stance, and think that the round for correction is over. Now, we are back to listening to the Rally Monkey chants. Last year, there was no year end rally, but this time around, there may be one.


Food for Thought: Markets for the last couple of years (from when I have started observing) haven’t changed their trend in the months of November and December. In 2007, the party continued late into the night, and the music stopped early in January. Similarly, in 2008, the markets continued to fall down, and only recovered in March. So, in both the years, November and December just continued the overall annual trend of the market. And think it would be same this time around. If not a sharp rise, we shouldn’t end lower than the current levels.

Automobiles Sector Basics: 101

Market Movers

This is not amongst the largest sector in the Index (~3% weight), and is affected by news flow.

1. Monthly numbers: Vehicle sales numbers are declared on 1st of every month
2. Interest Rates: Lower interest rates mean higher sales for the industry - as loans would be cheaper
3. Capacity Addition/Suspension: Affects the supply and competition in the industry
4. Economy: Related to economic growth as well, over the medium term

 

Reading the Statements

1. Auto-stocks are most sensitive to EBITDA margins (as volumes are known beforehand).
2. Primary costs are Raw Material expenses - 70-75% of net sales

 

Long Term Concerns/Factors

1. GDP Growth
2. Loan Growth - and interest rates
3. Tax Cuts - Income tax cuts would boost auto sales
4. Demographic - long term growth potential

 

Industry Structure

1. Two wheelers is highly consolidated industry with top 3 players (Hero Honda, Bajaj, and TVS) accounting for 80% market share.

2. Cars are also very much a consolidated markets, but there is a threat of increased competition going forward.

Banking Sector Basics

Overall Picture
Banks have very high linkage to the overall macroeconomic environment, and have very standard practices across the globe (can be compared with global peers on different ratios). This being a very important sector, is very tightly controlled and highly regulated.
One key unique feature of the industry is that here equal emphasis is given to the balance sheet (along with Income statements).
 
Asset Liability Mix
The asset side of the balance sheet mainly consists of Loans and Advances (~60%) and Investments (~27%). Most of these investments are into G-Secs (meeting the SLR requirements), and very little investments in other assets.
On the liabilities front, bulk of it is from the customer deposits (~75%).
 
Competition
More than 75% of the loans are from Public sector banks, with SBI group alone having a 25% share. Private banks have only 25% of the market now, but are growing rapidly.
 
Market
India has amongst the lowest Loan/Deposit ratio in the world. And total loans are still ~50% of the GDP. Also, consumer loans are just 10% of the GDP, so there is a tremendous opportunity for growth.
A large chunk of household savings flow to Bank Deposits - more than 50%. Good opportunities in Wealth Management, and Insurance - private banks are well positioned to capitalize on these.
Historical growth rate has been high at 12-20%, and this seems sustainable for another decade. Penetration level has improved considerably, though still much below global standards. NPLs have continued to drift down.
 
Financial Services Opportunities
1. Brokerages
2. Wealth Management
3. Life Insurance
 
Key factors affecting Stocks

• Loan Growth: Slowing down recently, from 30%+ levels in 2007 to ~17-18% now.
• Earnings: Major contributors are Growth and Portfolio Gains (in falling rates scenario)
• Interest Rates: Meaningful -ve correlation between stock prices and interest rates. However, key is the distinguish whether low rates are due to liquidity (positive for economy) or lack of loan demand (negative).
• Asset Quality: This factor is quite passive, and is talked about only in cases of sharp asset deterioration

Stock Futures Basics

Advantages of Stock Futures

1. Leverage
2. Lower Transaction Costs
3. Hedging/Shorting

Market Participants

1. Cash volumes are mainly generated by Long Only funds, DII and Retail participants. The volume in retail is fairly stable over time, compared with futures volume.

2. In Stock Futures, major participants are retail speculators and hedge funds – looking for high leverage.

3. Index Futures are mainly used for hedging purposes by institutional players – long only funds.

OI Information
Stock Futures OI largely are a function of speculative activities in the market. In periods of heavy bullishness (2007-end), there was huge OI build-up in the stock futures (and not much in Index Futures). However, that corrected after the crash, and came back to normal levels. Index Futures OI do not fluctuate too much as hedging requirements do not wildly fluctuate.
 
Important Indicators

1. Basis: Sign of pressure from longs or shorts
2. Open Interest: Amount of interest in the underlying
3. Price Change: Direction of the momentum in the underlying

Have to see these indicators together to make sense of the activities of the market participants – for example, when basis is strong, and OI is rising, a price rise indicates long side speculative activities.
 
Index Arbitrage
Nifty futures usually trade at a discount to the fair value (as it is used as a hedging instrument by the long only guys), and as a result, arbitrageurs put up positions in Long Nifty Futures and Short Stock (or SSF).
A large chunk of this position is sticky, in line with the fact that a large chunk of short Nifty (hedge) is also sticky. However, not all arbitrage players have access to the full 50 stocks at all times, and hence they usually have to short a few SSF also in the stock basket. Hence, some of the stock futures also trade at a discount due to this factor (mostly those whose inventory is not readily available). Most of the under-owned stocks trade at discounts (only Nifty stocks).
 
Futures Rolls
At expiry, investors have the following options:

1. Unwind
2. Expire
3. Rollover
4. Convert to Spot (buy/sell spot in VWAP)

Considerations during the expiry

1. Basis: If the futures have been trading in premium over the month, then there would pressure from the long side – rolls also might happen at a premium (the premium in near month would move to next month close to expiry)
2. Market Trend: A rising market would imply futures in premium – and hence rolls also might happen at a premium
3. OI with Price Action: A rising OI with price increase would also mean more and more pressure on the long side, and higher roll premiums.
4. Historical Rollover Ratio: The proportion of futures positions getting rolled every expiry also gives a good indication of the remaining interest in the counter.

Exit Point

Why do all the trading literature concentrate so much on entering a trade? The successful exit strategy is as important as entry. And that would many a times make the difference between a profitable trade and an unprofitable one.

More on this later, when I finish some of the Technical Analysis books that I have got.

Market View: October 23

Nifty Movements: Nifty lost some of its gains this week, and ended the week a shade below the mark of 5000. However, the market was quite strong, and despite the bad news from the RIL front, managed to close flat on today. Think the market would continue to hold over the short term, and may end the year at a high. Usually, markets do have a tendency of rallying close to the year ends, and if that happens, we may be in for another 10-15% up move from here.
 
Stocks: Telecom stocks have been very weak recently, and they continued to be under-performers. Real Estate also faced sell-off for a couple of days. However, the big under-performer has been RIL – marred in controversy and court battle, and then the Hardy pullout. IT companies surprisingly have held out well in spite of a stronger outlook on INR, though going forward we may see some weakness there. Another sector to watch out for could be the metals, with bad news expected from China.
 

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Next Week Views: The main risk remains the Chinese markets, and if the news coming out of there about the overheated economy and inflation concerns indeed is true, then we may see weak markets. However, there is not much bad news coming out of West at the moment, and if the results continue to surprise, the markets may even accommodate modest bad news from China.
I think we are standing at some sort of an inflection point – there are people who believe markets would reach new highs, and there are people who believe we are in the middle of a ‘W’. And the rational from both the sides seems to make sense. May be, this is the way markets are designed to be – capturing all the present information, and standing well in balance. I haven’t seen a bull-run from a trading floor before, so am not sure how they appear. Were there equal number of skeptics way back in the bull markets of 2003-2007 as well?

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Food for Thought: How do you think the consumption patterns would change in the next 10 years? What would be the next generation consume more, and what they would consume less? I think all the things traditional would be consumed less and less (in value terms adjusted for inflation). And people would consume more and more technology. Just like there has been a great shift in ‘Telecom’ consumption over the last decade, I think people would consume some technology a lot more than what they are consuming now. If I have to put a bet on different industries, this is how I would think:

1. IT wouldn’t remain an industry servicing large brick-mortar corporation. As more and more things start happening online, more and more IT services would be consumed by all organizations. And I would think there would be a drastic shift in the IT-related expenditure for all firms.
2. Telecom would continue its march, and might develop into the biggest industry. Most of the telecom companies would offer all sort of communication services – Television, Media, Broadband, and Telecommunications (they have already started). I think the opportunity here is huge, and we have just hit the tip of the ice-berg. The usage for the communications would increase greatly, and if somehow they manage to replace the credit cards as payment options, then it would be unprecedented. And I see nothing that a credit card offers which a mobile phone can’t do better.
3. Media/Entertainment: This is another industry which I would think would grow. Currently media is not being priced correctly, and most of time people make bundled payments (when paying for all the channels). With selective view-based pricing, and more and more cities coming under the multiplex chain, media revenues make take a quantum leap sometime in the next few years (with multiplexes opening just in the metros, the revenues from movies leapt from 10-20 Cr average to 50-60 Cr average).

Rally Monkey: Still Playing At a Market Near You

Nothing describes the current markets better than the Rally Monkey music. This one has to be played out loud in the office during the market hours (you will need to turn ON the sound on this page).

Disclaimer: The webpage actually has nothing to do with the markets, but all the investors indeed dance to similar tunes :)

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The markets have been correcting for the past few sessions, and daggers are out on the sustainability of the rally. A growing number of people believe that the markets have run up too high, and are long overdue for a correction. Well, I’m not completely bearish even now, and think there are still a couple of legs to the rally. I might be wrong here, and might have to eat my words pretty soon (for October isn’t over yet), but I would still stick to the long view.

Oil is back at $80 levels, Gold is trading at record highs, EUR has gone back to 1.50 levels and Equities are almost at their early or mid-2007 valuations. But China is still 50% down from its peak. The country best placed to avert the crisis, inspite of all the steroid-led growth stories, hasn’t seen too much of a recovery. And even though it makes sense (as China’s growth is led by export to US), I don’t think US would remain with 10% unemployment numbers for a long time. And hence, there is a strong case of rise in Chinese stocks, adding another leg to the global rally.

The underlying rational for all my bullish thoughts is the assumption that US isn’t going to have a lost decade. Japan’s case was different – Yen wasn’t the world’s reserve currency. Here, US is the master of the world – and any holes in its economy would be plugged by Qatar or Singapore or anyone else. There is a strong queue waiting to bailout US, for its the safest asset in the world. And as US comes out of the crisis, the whole world would follow, sooner or later.

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Food for thought: I got an answer to my long puzzling puzzle of why markets tend to go up more often that not. Money Supply growth is quite large compared with the World population growth, and hence, with each passing day, world is getting richer and richer. And there are only two avenues to use this money – consumption or investment. Inflation measures the rise in consumption demand, and rising markets measure the rise in investment demand. And since the marginal propensity to consume goes down as income increases, the rise in investment demand increases more than the inflation. And hence, the world markets are in perpetual bull runs.

Market View – October 5

Oktoberfest has started in Germany, but the Oktobercrash is nowhere in sight. And with each passing day, I’m getting more and more pessimistic about the possibility of it (rather than sounding optimistic, I have tried to use a double negative here).

1. To start with, I don’t see too many companies posting very bad results. Most of the times before the crash happens, the results are really bad (like in 2008) – which though not the final trigger, but atleast contribute to the weak markets. This time around, with the lower expectations, results won’t be ‘exceptionally’ bad for most of the companies. Hence, one of the crucial requirements of a crash is missing.

2. Another factor which shoots down a possibility of a big crash is the fact that rarely have the markets crashed in two consecutive Octobers. Historically, we have had crashes separated by a decade or so (atleast in near history, with 1987 crash, followed by 1997 Asian crisis, and 2007 credit crisis). So, it might be too much to expect a crash in 2009. I would rather put my money on a 2017 crash here :).

3. Last year, there was a great uncertainty in the markets – job markets as well as asset markets. No one seemed to have any clue as to how many banks would go under, or who’s next, or whether one would be left with any jobs at the end of the year or not. There was panic everywhere, and people had put on hold all their investment plans – manifested in the falling property prices, no IPOs, decelerating loan growth, etc. Somehow, this time around, that fear is missing. Property prices have risen by 20-40% in Mumbai, people are no more ‘too’ concerned about their job prospects, and all the asset classes are booming. Somehow, the fear factor seems to be gone.

4. Relentless FII buying in India is in fact making me believe that we may be in for a big rally soon (even from these levels). FIIs have bought stocks worth USD 12-13 Billion this year, and this is inspite of the initial selling in the months of Jan and Feb. To put figure into perspective, in 2007, FII had bought stocks worth USD 17 billion, and in 2008, they sold worth USD 13 Billion. So, the buying this year is almost on a record scale, and won’t be surprised if the locals start jumping in anytime now. Post-diwali, I think there would be a queue of people trying to get into the markets, and that might take it another 10-20% from here.

So, I would stick with my year end estimate of 20,000 on the Sensex. This might sound ridiculous, but then, 2009 as a year has been exactly that.

The Chase for Alpha

Much has been written and publicized by the investment managers about their ability to generate Alpha – above market returns. Most of the Mutual Funds offer documents and advertisements talk about how the fund has consistently beaten the market over the past years. And surprisingly, using very carefully chosen time frame as well as parameters, most of them have data also to substantiate their claims.

So, does it mean that these managers actually beat the market? Well, very unlikely – and if one adds the entry load (1-2% for most schemes), management fees (~2% annually), and exit loads (0-1%), there is very very miniscule chance that an investor would be better off by investing in a fund as against directly in the market index. Assuming an average all-expenses of 3% for a fund, you need the manager to beat the market by more than 3% to be actually able to generate alpha to his end clients. Add to it the fact that alpha is strictly a zero-sum game, and for every manager who beats the market, there would be another one who has been beaten by the market.

I’m strictly against use of Mutual Funds, atleast by people who can understand the basic nuances of stock market, and have the resources/skills to invest directly in the market. Most of the time we are afraid of losing money in the market – a fact compounded by frauds like Satyam, and we always run the fear that we may be caught on the wrong foot. However, the reality is that the same is true for a professional fund manager as well, and in fact I would like to think that they would have a larger tendency to take risks. And most of the fund managers in reality were caught napping during the Satyam fiasco.
So where does this leave an average retail investor? There are two choices for generating the market returns - (a) Using Index Futures, and (b) Using ETFs. I tend to prefer the latter over the former as futures are by their very nature a short term betting instrument, and if one plans to have an investment horizon of atleast an year, then futures would entail rolling the contract at every expiry – a costly as well as cumbersome exercise. ETFs are nothing but essentially a basket of all the stocks in an index, and have a small ticket size (currently INR 500 for Nifty BeES). Much goes behind the scenes with regard to how they are structured, and how they are able to track the Index. However, for a small investor, it would be sufficient to understand that they would tend to trade very close to the actual index value, and the management fees are much lower (0.50% or so) for these funds. So, if one just wants to have a plain exposure to the market, ETFs present a much better option compared with the mutual funds.

Why there is no word called ‘Bear-sh*t

To start with, let me put the disclaimer first:

I have a very strong belief that most of the asset classes in the world always trade at a premium over their fundamental value – defining fundamental value as what people would earn if they indeed keep the asset till perpetuity. I have a term for it as well – the ADR phenomenon. It goes like this – any ADR can anytime be converted into the underlying stock, and hence the value of an ADR will seldom fall below whatever an investor can earn by buying the ADR and then immediately converting that into stock. So, ADRs most of the time trade at a premium to the intrinsic price of the underlying share. The price of the stock here is the ‘Opportunity Value’ of the ADR – which could be derived any time the investor wants to. The same rational goes for the stocks or any other asset class – they always trade at a premium over what people can earn by holding them to perpetuity (their “Opportunity Value’). Only in times of deep recessions and market crashes do they trade below their values. So, more than 80%-90% of the times there is a bubble in the market.

Now building on my belief about the perpetual asset bubble in the world, any rational person would most of the time expect the market to correct (looking deeper into the terminology here – market falls are called ‘correction’, while the rise in markets are given terms like ‘bubbles’, ‘frenzy’, and ‘euphoria’). So, there is an inherent bias in the market where more people always believe that markets should fall. Whether they expect the fall to happen immediately or later is where the opinion differs, but they are all united in their belief that they are over-valued. There seems to be slight sophistication in thinking ‘Bearish’ – anyone who thinks markets would keep on rising is termed a naive retail speculator, whereas anyone who can substantiate a market fall is an ‘Economist’ or a ‘Trader’. So much are the professionals in the field biased against the bulls that they have named the ultimate description of crap as ‘Bull-sh*t’.

So, little wonder that all the ‘E’s and ‘T’s of the world are united in terming the latest rally as overdone, and are predicting another crash to happen ‘any moment’. No one likes a rising market – anyone can make money there. The dumbest of people end up making the most mullah in a bull market – as they don’t have the slightest of fear about a market fall. If one was born in US in the last 1970s, and discovered their senses in mid-1980s, then he/she saw was an ever rising market. How on earth would someone explain him/her that markets could fall as well. They were living in a ‘fool’s paradise’. NNT also warned against the bull markets, and bought deep OTM options – in the full knowledge that markets one day would fall big, and he would make a killing. He did make it, but that came after years of painfully watching the market move up, and seeing all his options expiring worthless (he did get all his money back, but that was from the sale of his books, rather than from the markets). No one ever loses everything in the market – either you make money, or you learn.

In the end, everyone is right about it – but seems that if you do not think about it too much, you are right on more occasions than the rational thinkers. You might lose everything you made in just one bad year, but then, its the same with the other side as well. So next time an expert warns you against a crash, just tell him that you would rather lose money in a couple of crashes, than being worried about it for all your life. And for all the ‘bears’ in the world, there is one simple answer - ‘Ignorance is Bliss’.

Market View - August 13

This is getting really interesting with the whole world now divided almost equally between the Bull and the Bear camps. Past two years we have seen people all over having similar views. 2007 was the year of the bulls, whereas 2008 was the peak of bearishness. This year has been a mixed bag for both the camps, and people have often changed their places.

The fight quarter truly belonged to the bears, and they kept sitting tight over the market. It was a classic range bound market between January and March, and Index almost finished flat at the close of the quarter. The second quarter belonged to the bulls with market seeing returns of 15% and 28% in April and May respectively. The bears were left too stunned and circuited to do anything about it.

As we moved into the 3rd quarter, the bulls have done well with momentum with them. However, lately they seems to be running out of the 'good news' fuel at their end. The markets are more than 75% up from their low, and still 33% away from their peak. However, the peak of 2007 was a result of exeberance where the word 'RISK' completely disappeared from the world. Whatever progress we have made over the past years, whereas it may be debated that we are out of depression zone, but certainly we are far far away from the exuberance period as well.

So, I'm turning a little cautious on the markets, and think that over the medium term, 4800 could well turn out to be the pivotal point for the markets. If they are able to cross it by the end of September, I would believe that we would end the year on a high. Else, we may be pulled into the deeper holes of recession once again. This rally is no doubt driven by liquidity, and one needs this ponzy scheme to keep feeding itself till the time the global economy recovers. However, if this thing falls flat, and the train is stopped too soon, we may be back to square one. The markets would need to keep going up to sustain the bull run - much like the space rockets. The printing press all over the world have injected fuel into the markets to move out of the recession zone, however, if the markets are stuck into a zone for even a month, and public confidence gets lower, we could all be into a big mess once again. 

Are IPOs Underpriced?

In my B-School, I wanted to do a term paper on the Under-pricing of the IPOs. Sadly, the concerned professor had already been approached by many other students, and he rejected my application. And when I joined my job, the markets crashed within a short span, and IPOs almost dried up.

Now 2009 promises to be a good year for the IPOs, and I would expect at least 5 big offering to hit the market over the next few months. And I would really like to test the theory of under-pricing by actually subscribing to them. 

The first issue to hit the market is NHPC, and it has already opened. The price band is INR 30-36, and I would expect it to be over-subscribed by as much as 10 times at the least. Lets see how it performs!

Have we entered the Bull Market?

It initially started with disbelief, and people were laughing at any levels above 3000 for Nifty. Everyone though there was free money to be made by writing Calls, and people wrote OTM and even ATM calls in size. People blindly sold 3000C and 3100C, in the belief that we wouldn’t be seeing these levels in the whole of 2009. Once that was crossed, 3500-3600 become the TOP for the market, and people continued to write calls to cover for the losses they made on 3000-3100 Calls. Had it not been for the Knock-Out punch delivered by the election results, people might have foolishly continued to write calls even up to 4500 levels.

Now markets are flirting with 4500-4600 upper limits, and have been trading into a range between 4100 and 4500 for some time. I’m slowly turning quite bullish on the markets. While I will agree that valuations have turned quite costly, and rationally one should be selling the stocks at these levels. However, markets tend to move with a ‘herd mentality’, and there are legs to every rally/correction. This is due to the fact there are different classes of investors who invest at different points of a move. And where we are standing today, we still haven’t seen too much participation from ‘Long Only’ and ‘Private Equity’ guys. These guys are sitting with huge chunk of cash, and even though some of it has been deployed, the majority is still ‘all cash’. And the longer the market sustains at these levels, the more probable is this money flowing into the equities.

My overall sense of the market is that we won’t be seeing any more ‘crash’ in the market going forward. There would be issues on the loan books of the commercial banks, as well as concerns over the credit card defaults. However, I think these won’t escalate into very big problems, and would result into a couple of billions of charges and write-downs. Other potential triggers could be some Sovereign defaults, but again I think we won’t be seeing any major nations defaulting. Overall, I think we don’t have too many downside triggers for now (I repeat FOR NOW).

On the upside, the buying pressure from local Mutual Funds could pick up in the coming days. I think they would soon be launching new schemes, and public would come back to the markets after staying away for some time. Equity allocation has been close to a low in recent times, and I expect more and more people moving their debt funds into equities. Another upside shock could be the results – the results would surprise on the upside for most of the corporates.

On the volatility front, I have now changed my view. I now believe that we will have a low volatility period from July to September. Markets would trade in the range, and might slowly move up from here. Volatility might continue to drift down, and we may enter the sub-30 phase soon. That would also mean VIX entering a sub-20 phase, and when that happens, the funds would start flowing back into the markets.

On currencies, I think INR would appreciate from these levels, and we may touch 45 levels by the end of this year. I would be a seller of USD at any level close to 49 (currently).

Recession Over?

I am completely clueless about the markets right now. However, am not sure which is better – being completely clueless about the market, or being totally wrong about it. I guess in most scenarios, the former follows the latter.

All over the world, the markets are rallying, and the bears can no longer the dismiss it as just another bear-market rally. Somewhere down the line, the bears became too bearish about their predictions, and people lost it in their gloomier and gloomier forecasts. I’m not saying that the current rally is indeed THE RALLY, and we are out of recession. Personally, I have a feeling that the worst is yet to come, though am too scared to put the view into positions.

In my personal opinion, what caused this rally is the fact that globally the central banks infused massive dollops of cash into the system. The printing press all over the world went into the over-time mode, and printed millions of green and blue backs. The cash was supposed to be used to plug the holes into the balance sheets of the banks (and other corporations essential for free money supply into the economy). However, all the cash went into investment assets, and led to the massive short squeeze. People jumped to buy everything available - junkier-the-bond, longer to queue of potential buyers. Risk became history, and all the high beta names sky-rocketed. This is where we find ourselves as of now.

There are two possible paths which the markets could take from here. If the central banks indeed didn’t screw-up big-time, then we may well have seen the bottom, and are unlikely to go there again. The markets would then become a buy-on-dips market, and we would see the mother of all rallies in the emerging nations. Considering the massive amounts of cash sitting with the domestic as well as global asset managers, the BRIC and other developing nations could well go past their past highs. And the buzzword succeeding ‘recession’ would be ‘de-coupling’ for the next few years.

The second scenario, which I think has slightly a lower probability at the moment (but higher payoff if it materializes), is that the central banks erred in their bailouts and packages. And instead of reaching the ones who needed it the most, it ended up just creating a mild bubble in the asset classes. When the tides goes down again, the quarterly results would come back to haunt everyone, and the governments world-wide would by then have run out of ammunitions. Given the high deficits being run by all the governments, we are close to using the full quota of bailout funds. And for some reason, this bubble dies, then we would be in a free-fall again.

Lets see how things pan-out in the coming weeks. I think the picture would become clearer by the end of July as most of the corporates would announce their Q1 results. I’m expecting another quarter of record profits by the US banks, and if it happens, we could see the markets going into the stage 2 of this rally.

Market View: June 20

Markets have been trading in the range for the past few weeks. And surprisingly, have hold very well after the recent up move. One would have expected the correction to have come thick and fast, but the markets have refused to comply with the bear wishes. There are many people waiting for the market to fall, and as the reports claim, there is plenty of fund lying on the sidelines which has to be deployed.

I’ve become slightly bearish now on the markets, and think everything has moved up all too fast and too much. As for the markets holding up, I think its more of funds trying to play catch up, and investing late into the rally. We have seen good buying by the domestic funds in the past couple of weeks.

There are plenty of things that could decide the market moves in the coming weeks. And given that the list is quite long, I would expect the volatility to move higher from the current levels.

1. Quarterly results of domestic companies: With the result season starting, we may have a few surprises. Already we have seen some patterns with the advance tax numbers (with banks posting good results, while manufacturing sector lagging), and we may see high dispersion between sectors in their results.

2. US Bank results: No longer the size they used to be a year or two back, the US bank results still are eagerly awaited. They had all posted very good numbers in the last quarter, and another good showing could really seal off the recession here. However, a set of bad numbers could really hurt badly as well.

3. Indian Budget: With budget coming in the first week of July, expectations are quite high with the dream team. However, as with the T20 World Cup, expectations may well have exceeded the upcoming reality.

4. Swine Flu: Markets have completely stopped reacting to any news on this front. With fresh cases being reported almost everyday now, it might surprise the markets on the downside.

5. Budget Deficits: With all the governments around the world facing huge and still mounting budget deficit, we may see rates rising through the roof. Already we have had a failed auction, and a couple more could be the trigger for this.

6. Oil: Oil has slowly moved from 40-something to 70s now, and its not far away from where it would start hurting India. A level above 80 in the next couple of weeks, and then we would start having pressure on the currency again.

7. FII Selling: FIIs have been sellers in the market over the last 1 month or so, and if the selling continues, we may well see both INR and Equity Markets falling back to the earlier lows.

The Inflection Point?

The economists and traders around the world are engaged in the debate whether its a bear market rally, or the markets have actually turned around. The doom sayers are leaving no-stone to make everyone believe that their time under the sun hasn't finished. Whereas, the investors and money managers around are world are jumping to buy at every opportunity.

Its very difficult to say as of now which way the markets are headed. The short term momentum is certainly on the long side, but the valuations are getting costlier by the day. And unless the economy and earnings show a quick turnaround, we may see an over-heated stock market.

S&P has stayed close to 900 range for a few weeks now, and it has failed to break on the either side. There is good consolidation happening around this range, we may see a decisive move in either side very soon. If one is long vol, it may be a better idea to hedge less frequently as markets may be trending in one direction from here. I would expect S&P to be either below 800 levels or over 1000 levels by the end of June.

VIX also has been staying close to its 30 support levels, and even though it the breached it for a couple of days, it has failed to remain below the range for a longer period. We may see a gradual move up in volatility in the coming days, and I would rather be long vols at these levels.

Nifty has been playing around in the 4200-4500 range now, and contrary to all the initial expectations, markets haven't yet broken below the levels reached after the 'Super Monday'. Shorts have been cleared in the system, and the futures premium has jumped to high levels. Might seem silly to say, but I don't think markets are going to cross 4600-4700 range in the near term. With budget around the corner, long term investors would shy away from committing large funds.

EUR and GBP have been gaining against the USD, and last I saw, EUR was trading at 1.41 levels. Somehow, I am not very bullish on the Eurozone, and think the currency would depreciate. US economy in the shambles, and with General Motors filing for bankruptcy, another chapter in the US economic history comes to an end. However, I don't think EUR or GBP are the alternatives for the future.

Gold has been climbing for over a month now, and is trading close to 950 levels (mostly on the back of USD weakness). Oil has also been moving up, and is currently at 65. If the Oil keeps climbing, and moves into the 80+ zone, we may all be back to square one.

Market View: Gone in 60 secs

Election results came out on the weekend, and all the remaining bears in the market were brutally squeezed by the rising euphoria. We saw the first ever up-circuit in the market, and in less than 60 seconds, BSE sensex had risen by more than 2100 points.

Everything has changed in the markets, and FII continues to pump in billions into the markets. As things stand, we may be in for a long up move. There is a big gap in the market, and a lot of people have completely missed this rally.

Like someone said, one shouldn't worry too much about a single day's move. The trick is just to survive to see another day.

Market View: May 2009

Markets world-wide have seen the mother of all rallys in the past 7-8 weeks, and all across stocks have risen by anywhere between 30-100%. Nifty has moved from its 2700-2800 levels to 3600+ levels!!!

The big turnaround has been led by good financial results (in a system oozing with liquidity, that should have been expected), and some aggressive moves by the fed and treasury officials in US. Everyone could see the 'green shoots' in the economy in the form of falling unemploment numbers, rising output levels, rising retail sales, etc. And the result was an almost angry rally, wiping out all the 'nay-sayers'.

As we stand at the present, everything is up, and lot of people have shifted from the bear-camp to the bull-camp. March was scary as everyone (including me) was giving lower and lower target levels for the Nifty (with people quoting figures as low as 1200!!!). Now there is greater sanity in the market, and there is a suitable opposition to all the gloom-and-doom predicators.

S&P has been flirting with the 900 levels for whole of this week, and after breaking it, has come down again. If it breaks above 900 once more, a move towards 1000 is highly possible. However, if it fails to break it in in another week or so, then we may see the return of blood on the street.

Gold surprisingly has been going up even during this rally, and is currently at 925 levels. With all this bullishness, I would have expected gold to trade at sub-800 levels. So, there is a correction due in atleast one of the markets.

Credit markets have been improving, and JPM Emerging Market index is now at 500 levels. Still much above the pre-Lehman times, but this has improved considerably from its 800-levels seen in October'08.

My view on the Indian Market is that we may see this rally continue till 4000 levels. Unless something goes really wrong worldwide, we may see everything moving up. Elections, which have been the talk of the tinsel town over the past couple of months, may turn out to be a non-event. Either the NDA, or UPA could be making the parliament, and who amongst the two noone gives a damn.

EUR has surprisingly out-performed against USD, and has climbed to 1.35+ levels. However, I still believe its a ticking time-bomb, and might turn out to be very difficult to diffuse (unless the central banks round the world keep pumping liquidity into the system).

The Best Aspect Of Trading

The best part about trading is that you just need to be good at something. One can spend all their lifetime trading just one stock, or one sector, and make good amount of money.

I am trying to understand a few of the stocks, and form views on them. Would be starting with a very small set (2 or 3). Over time, would increase the set to include about top 10 names in the market.

Put Call Ratio

I was looking over the internet to find some interesting articles on the Put/Call Ratio based strategies. As of now, have just found out one:

1. Put/Call ratio in themselves are not very helpful in predicting the market direction. However, extreme values (compared with say 50DMA) may indicate a rise/fall in market volatility.

Addendum (March 28, 2009):

a. Usually Volume PCR is a more useful indicator during the day as it accurately reflects the ‘current’ market activity. OI PCR, on the  other hand, is slightly out-dated, and may be skewed by long-tenor options as well as past trades (which may be deeply OTM/illiquid now).

b. PCR works as a contrarian indicator in the bear markets (when majority of the people are wrong). When the ratio reaches high levels, it indicates that there is already a lot of ‘protection bought’ by the market, and hence the chances of a crash are relatively lower. On the other hand, when the ratio becomes abnormally low, then it reflects the ‘euphoria’ and ‘complacency’ in the market.

It works exactly the reverse during the bull market (when majority is right). A low PCR indicates people expecting markets to go up, and it indicates that.

Market View: March 20

Markets have rallied globally in the past couple of weeks, S&P has briefly flirted with 800 levels again (after falling from 800 to 680 in almost a single breath).

Going by the volatility in the market, trading has become extremely difficult. Markets have been moving 10-15% every couple of weeks. (Similar is the case with FX markets where we have seen lifetime highs and lows for a lot of currency pairs in the same year).
Expiry view has gone completely wrong, and now I believe that the down leg would start after the expiry. With impending results announcements, and the upcoming elections, there is plenty of bad news that could come out.

I'm still sticking with the negative view, and think that the markets are now in for a steep crash. With rising unemployment all over the world, a 20% rally is the last thing one would expect. We may see a 2400-2500 expiry range for the April and May expiry from here.

US Dollar: Inevitable Fall?

In their latest policy action, Fed has started buying US Treasury Bills from the market. Finally, they have realized to the reality that they are running out of ammunitions. And this is the first indicator that US economy may be in much deeper sh*t than everyone thinks it is.

The Fed ran out of ammunition as the rates were already hovering around zero. And to provide more incentives to the market, they were left with one last option - printing money. So, on one hand, the government is running huge deficits, and is issuing bonds to finance them. On the other hand, it is printing more $ to repay the same. This is as blatant a misuse of their stock currency status as is possible.

The world markets have reacted sharply to the news, and USD is down against all the major currencies. GBP and EUR are currently trading at YTD highs of 1.44 and 1.36. Initially, I had a view that economies of UK and Europe are in shambles, and we may see massive devaluation of their currencies. Now it seems that USD has also joined the club.

I think we may see USD weakening a lot from here. China, the world's largest investor in the US treasury has openly expressed their concerns over their holding, and going forward I see more of their investments going into EUR, GBP, JPY, and Gold. In addition, they might prefer investing in commodities rather than US T-bonds. And once this process starts, USD may fall off a cliff, literally.

I would be short USDINR at levels of 51-52, with a year-end target of 47. We may see INR weakening to 53-54 levels in the short term (on the back of fiscal concerns, and election uncertainty), but I think the issues with USD are much serious and long term in nature.

Market View: March 13

I have been wrong in my market views so far for this month. As against the initial expectations of market falling towards 2500-2600 band, we have seen major rally across the world for the last 2 days. S&P after moving from 800 to 680 levels in a week has bounced up sharply to 750 levels.

However, keeping the initial view intact, I still believe that we would be seeing a 2500-2600 expiry range. Nifty is currently trading at 2720 levels (which is a very strong resistance level now). I don't think we would gap open on the +ve side on monday (unless US moves by another 2-3% today, which seems unlikely).

This rally was also long overdue as markets had become over-sold. Nifty futures were trading at a discount of ~100 bps. And any gap-up opening was bound to cause huge short-covering - which is exactly what happened today. Now the Nifty futures discount have come down to 3 points, from 20-25 levels earlier. Now it seems that markets have over-reacted on the +ve side, and we would soon see a discount in the range of 10-12 points.

INR has remained flat at 51.5 levels, and going by the quantum of FII selling, I think we may even see 54 levels soon. Add to it the possibility of rate cuts.

Market View: March 3

February expiry was a surprise of sorts for everyone, though market returned to their earlier levels on the first couple of days of march expiry. Nifty futures have broken below the 2600 levels, and unless there is a huge swing in the US in either direction, we may have an expiry close to 2600 levels.

In US, S&P has broken its 800 support, and has sunk to 700 levels. It might rest here for some time, and then go towards the 600 support. I guess 600 would be the target level for s&P for this year end, and we may reach there sooner than later.

Europe is in a complete mess, and its surprising how the currecy hasn't broken down completely. I won't be surprised to see the Euro break down to 1.0 levels, and GBP go down to 1.20 levels. Given the high vols in the currency markets, we may see huge swings in all the currencies.

Gold crossed the USD 1000 resistance briefly, and crossed INR 17000 level in India. However, it has returned to slightly saner levels at 900, and I think it might go all the way down to 700. I would be short the metal at these levels.

On the volatility front, we haven't seen too much volatility in the markets. Even though we are within breathing distance of the October lows, the market seems to be taking it very clamly. There is slow and steady drift in the markets, and this way, we might see 2200 levels in Nifty by June 2009. March-April results may the next big trigger for the world markets. And going by the trend, the results are going to come much below the consenses estimates.

Market View: February 16

Nifty is going to become a free-float weightted index, and as a result of this, a large number of stocks would have their weight changed in the index. Stocks such as Infosys, ICICI, L&T, and RIL which have large free-float would see their weight increase in the index. Other stocks such as ONGC, Bharti, SAIL, TCS, Wipro which have a low free-float would reduce in weight.

Just as it was in Jan, I have a bearish view on the market. However, I don't think 2500 levels would be broken in the next couple of months. With elections around the corner, I don't think there would be huge movements in the market either way. A hung parliament may give the final downward push to the market, but that is still far away. In the near term, I expect the market to creep towards 2600 levels, and stay in the 2600-2700 range for some time.

On the volatility front, I think the volatility may remain low till april, and then shoot up. However, given the fragile state of the market, I would rather be long vols than short it. And at current levels, its quite attrative for longer tenors.

Market View: January 28

Markets world-wide have been rallying for the past couple of days, and seems like that its going to continue for another day atleast. Nifty has moved from 2650 levels on friday to 2850 levels today, and we might see a 2900 expiry (though I would still like to believe that markets might still come below 2800 tomorrow).

World-wide markets have been moving up on renewed optimism, inspite of below expected earnings from a lot of major corporates. I think this rally has been caused due to short covering of the excessive short positions in the system, and might continue till tomorrow's expiry. We might see another downleg in the coming days, and market may touch its earlier bottoms.

2820-2840 was a good resistance band for Nifty futures, and it has broken through the band today. Tomorrow's opening might decide the day market movement. If it opens on the postive gap, we may see a run to 2900 or even 2950. A down gap opening however may take the markets below 2800 levels.

Nifty futures were trading at a discount throughout this month, and rolls happened at INR 5-6 absolute discount.

UK and its much talked about downgrade

After Ireland and Spain, it might be UK's turn to be downgraded. A lot of speculation has been going on on whether UK would be able to maintain its AAA rating.

The most recent quarterly numbers shook everybody up, and GDP has contracted by 1.5% in a quarter. To get an idea of how bad this number is, none of the G-7 countries have contracted by more than 3% annualized in the last 50 years. In addition, there are talks doing round that GBP as such is an inflated currency, with nothing in real economy to justify its levels. UK as an economy is ruled by a few sectors: Energy, Financials and Tourism. And in the current year, all 3 have been badly affected.

While its much outside my knowledge to comment on whether GBP is inflated or not, I certainly feel that the path going ahead is not very rosy for the country. US is a much better placed than UK to contain its crisis. 2009 might see a massive devaluation of EUR as well as GBP. GBP has already fallen from its >2.0 levels to 1.40 levels, and there are reports doing rounds which predicts a rate of parity pretty soon. Same goes for EUR as well, which after trading above 1.60 earlier last year, is now down below 1.30 levels.

We might end up the year with EUR at 1.0, GBP at 1.20 and Yen close to 100 levels.

Market View: January 23

Markets continued to move down on the back of bad news from all around. Companies around the globe are posting bad results, and latest to join the list are the electronics majors Samsung and Sony. Both of them reported record losses, and further outline the common belief now that the recession has expanded into the main street now.

UK economy offically shrank in the last quarter, and now the world growth targets really look far fetched. GBP has been hammered pretty badly, and currently trades at 1.37 (or 67.70/INR).

Back in India, markets broke their 2700 support levels, and traded below it for most part of the day. However, I have a feeling that we might see a small bounce from these levels in coming days. Not that I have a view that markets are going way up from these levels, but I do not expect too many incremental bad news coming out from India. All the large corporates which have announced their results haven't come out with any 'extraordinary' losses. Results of all the big names like Reliance, Infosys, Bharti, Wipro have been 'not-too-bad'. So, I have a feeling that market may remain range bound at these levels for some time now (in absence of a major worldwide shock).

Strangely, vols aren't picking up. Last time markets were at these levels, vols were at 60s and 70s levels, and this time they are peacefully trading in their 40-50 band. I wont be surprised if we see a down leg in vols towards the 40 support.

Market View: January 22

Markets have already fallen by more than 5% since monday, and we are now below 2700 levels (on 1M futures). Going ahead, I think 2700 would act as a strong resistance, and we may see expiry around these levels.

Today the market moved sideways for whole of the day, without making any convincing moves in either direction. There was good money to be made trading intra-day gamma at smaller intervals. Interestingly, I think in these markets both short gamma and long gamma positions can end up making money. For a short gamma positions hedged at the end of the day, there aren't too many large 1-day moves to worry about, and for long gamma positions, markets really move up and down a lot (even a slightest news from any corner of the world spook the markets). Will be testing the same for January data after the expiry.

The expiry view still remains the same, in the 2600-2700 range. And on the volatility front, now there is a slightly lesser chance of vol spikes in this month. Quite a few results have already come-in, and going by the trend, there are no major surprises to worry about.

Market View: January 19

Today was a holiday in US, and hence it was expected to be a dull day. Indian markets opened at almost their previous closing levels, and traded well within throughout the day. Lately, we have been so much used to the volatility that a day where market doesn't move more than a percent point appears too dull.

Markets slowly kept moving up throughout the day, and even as the bad news kept pouring in (RBS announcing a loss of $41B, Spain getting its rating cut from AAA to AA+), markets kept their momentum. It was only during the final 30 mins that market showed slight -ve bias, and started paring some of their earlier gains. Still, on a day to day basis, they closed higher by more than half a percent points at 2850 levels.

Europe which was trading at gains when Asia closed is now trading close to -2.5% down from its previous close. RBS is trading 70% down for the day, and seems like a very bad day ahead tonight for all the markets. Thankfully, US is closed for today, else we could have had another spooky day for Citi and Bank of America.

As I had said earlier, I expect markets to break from these levels (may be triggered by a bad earnings from one of the large caps) in the coming days. January expiry could be at a level close to or below 2700. On the volatility front, I do not expect vols to come below 40 levels anytime soon. Even though the realized vols are currently at a lower level, I think the implieds would continue to trade in a 40+ range for some time.