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.