REBUILD YOUR PORTFOLIO

18 May 2009. What an amazing day in market. Indian bourses created history by locking into upper circuit, giving a resounding thumbs up to election results. And why not, why ever not! Election results gave the incumbent UPA Govt clear mandate to rule for another five years.

With euphoria at its peak we need to look at supply zone of Nifty to be fully into cash. Nifty selling will come around the pivot of 4515. This pivot is in the supply zone from 4447 to 4600. So one should begin to convert his portfolio holdings completely into cash around the pivot point.

From the level of 4500 the correction should take Nifty to 3750 where one should look at buying again in tranches. As a retail investor, the process of re-building your portfolio should begin from 3750 Nifty.

Nifty Put Option

On 07 May 2009 I had given recommendation to buy 3400 Nifty Put Option of June contract at a premium of Rs 146. That was when Nifty had closed at 3684. This was to be averaged if Nifty was to reach 4150. Today Nifty opened and closed with upper circuit at 4323 giving no chance to retail participants to enter into trade. Tomorrow one could get opportunity to average the Nifty Put at about Rs 20. If not one could look to buy the Nifty Put around selling zone mentioned above.

Another Logic Defying Day In Market

Do you believe in logic? Are you a logical trader? There are times you wished you were irrational beings. Today was one such day. Indian markets did everything that defied logic. Uncertainty roaming the political corridors at large and yet Bulls did not want to take a breather from buying spree!! What were they celebrating? Do they already know the outcome of the General Elections and are factoring in victory of a market-favourable-party? Today you want to scream "YES". And why not!

Despite all logical conclusions, today the Indian markets closed with commendable strength. Nifty gained 78 points and closed near its day high, a clear testimony to the fact that Bulls were totally in control with not an iota of doubt in their minds regarding the future direction of markets. But just wait a moment. Don't get carried away.

Markets always did exactly opposite to what most on the streets expect. If there is tsunami, earthquake or a terrorist attack of major proportion, markets always exhibited bullish behaviour. So in that perspective today was no different. Uncertain results of General Elections and prospect of a hung Parliament are all playing in the minds of the Big Bulls. But they are not willing to let you know that. And what better way than to do big time buying to hide their fears? Retail investors should not take any cue from today's buying pattern, because the big guns will pull out money suddenly once most of us are lulled into believing that buying is the only virtue in this market.

In my previous post on 07 May 09 I had indicated that the upper ceiling that Nifty has is 3770. Till the time that ceiling holds we have a situation where no buying should be contemplated by retail investors. For momentum and swing traders the game is still on. Day traders who have a compulsive nature will of course trade. But just be careful for wild swings. For heaven's sake don't get trapped on both sides of the trade and get butchered by fierce volatility.

LOOK OUT FOR SELLING BIG TIME - BUY PUT OPTIONS

Are you amongst those who have been surprised by the sharp up move of the stock markets around the globe? If yes, then be rest assured that you have company. Such surprises in Bear market are part of the game. A smart momentum trader would have benefited from this surge in stock markets. He may still take positions and ride the wave. But in case you are an investor then make sure to take money home from your profitable positions. The reason is simple. We are riding at the top end of the wave where taking fresh buy positions is fraught with dangers.

Looking at Dow Jones charts it is evident that the rally can stretch up to 9400. So the selling spree should be witnessed anytime. Dow closed at 8512 on 06 May 09. The zone of selling for Dow is between 9000 and 9400.

Nifty on the other hand is in its sell zone. Its present ceiling is 3770 which means that it should witness selling around present level of 3700. The moment it shoots up through its ceiling then it will be ready for a move up to 4150. However in Nifty charts one can sense that there is formation of an Evening Star in Candlestick pattern which foretells big time selling.

Since you cannot think of buying at this level and selling Futures can be disastrous if Nifty marches to 4150, therefore one should shift focus to buying Put option. One can start building positions in Nifty Put option from here on till Nifty reaches 4150. Let me be more elaborate in my present strategy. Since Nifty has a ceiling at 3770 it is prudent to buy Nifty Put option now. In case Nifty penetrates its ceiling then take similar position when Nifty reaches 4150. If Nifty doesn't violate its ceiling of 3770 then the Put option that you have taken now will give you good return. Why good return? Because any confirmed move downwards will surely have Nifty trading at 3150 in next to no time.

In a scenario where Nifty refuses to be contained within 3770 then the next step would be to buy Nifty Put option of the same strike price at around 4150. This would make a WINNING average to your Put position. Since there is possibility of 4150 in Nifty therefore time factor will assume greater significance in deciding the month of contract. Hence I would be more comfortable to go for a Nifty Put of June contract which will take care of time decay factor of May. This is just a precautionary step in case Nifty doesn't fall in May. As for the strike price, 3400 will be quite conservative out of money Put. The premium is not steep and you can make quite a packet if Nifty falls from present level. In case it doesn't, then buying same Put when Nifty is at 4150 will give you a good average to profit from.

In short, my recommendation is to buy 3400 Nifty Put of Jun 2009 at current market price. On 07 May 09 this Put traded at 146.2 before close.

CELEBRITIES AS POLITICIANS : CAN THEY LEAD EFFECTIVELY

We in India enjoy a democratic set up to govern and manage the affairs of the nation. We wield the right to select people amongst ourselves to help us in running our country. Right from the Village Panchayat to Assembly at State level and to Lok Sabha at National level, it is the ubiquitous politician elected by us who works to manage the matters of the country.

If the politician is to be chosen by us from amongst one of us, then celebrities have all the right to be chosen as politicians. And in case they are not allowed then this will amount to discrimination. In India we don't believe in discriminating against any citizen.

Now the question arises whether as politicians celebrities can do justice as leaders of this vast and diverse nation. Will celebrities be serious politicians taking their job with requisite diligence that it calls for? Will they connect with the common man at the grass root level and be ready to serve them with all sincerity? Or are they trying to join politics simply to garner more wealth and fame.

It is but natural to raise such doubts about capabilities and effectiveness of celebrities as politicians. After all it is generally understood that celebrities move around in super rich circles and live in an almost unrealistically comfortable posh world, a world far removed from the harsh realities of a common man's existence. In such a scenario is it possible for the celebrity politician to ever understand the pain and struggle of the man on the street? Will such a politician come down to ground zero and put his make-up in disarray under a scorching sun , or get his manicured hands soiled working in his constituency? There are many more such questions that crop up in our minds the moment we hear of a celebrity turning politician. But I guess its now time to do a rational analysis of efficacy of a celebrity politician vis-a-vis a normal politician. In succeeding paragraphs we will carry out a reality check on these issues and try to arrive at a considered conclusion.

The basic foundation on which democracy prospers is educated leaders leading a literate population. Most of our present politicians are barely educated, with some blissfully uneducated. In comparison almost all celebrities are sufficiently educated to lead a democratic nation. Now it is for you to decide as to who is better poised to handle the complicated affairs of a nation at various levels.

Most of our present day politicians are either linked to some cognizable crime or connected to criminals. On the other hand only a handful of celebrities can be accused of hobnobbing with criminals. Then why do we object to celebrities joining politics! At least we'll have cleaner political parties if celebrities join politics in droves.

Successful politicians have a mass appeal and grass root support base. That is the mantra of their success. Celebrities, especially movie stars, also have mass appeal and can cement a support base. But what if after winning an election a celebrity politician doesn't go on ground and work in his constituency? Big deal!! Doesn't the situation sound familiar even today minus the celebrity politicians?

Even if we accept that celebrity politician is looking for continued wealth and fame, lets admit that a normal politician is also doing the same. In that case should we be overly worried of such intentions? On the other hand, as an educated and a clean personality having mass appeal there are more chances that a celebrity politician will deliver more than the lot we have to currently contend with. If we accept celebrities as politicians then we have a higher probability to do better as a nation, considering the political bankruptcy that India faces today.

PERILOUS OVERHANG IN MARKET : RETAIL INVESTORS BEWARE

Two-month-long-run in the markets around the globe has been spectacular to say the least. Lets take a bow to that. Uncertainties have been brushed aside with utter disdain and Bulls have demonstrated amply as to who the boss was. We have had a situation where Bulls have scorned all negative news and pooh-poohed even swine flu panic. What we need to remind ourselves is the fact that all this has been achieved while nothing materially had changed on ground as far as present global financial crisis is concerned. Hence the need to take a bow!

Though we have all been pleasantly surprised, but what unnerves me a trifle is that there seems to be a concerted effort right across the world markets to give a "Short Squeeze" to Bears. And the effort has been as if a global cartel was at work. Isn't that a little scary?

Not to be daunted by such feelings, here I am taking up cudgels on behalf of retail investors to fight and win against big fishes of the market. Above 3150 Nifty was expected to reach 3450 which I had mentioned in my 31 Jan 09 post titled "Stock Market Bottom- Revelations". Nifty has been around this level for the past fortnight and closed at 3474 on 29 Apr 09. I would still maintain that from this level there has to be a decent profit taking by big fishes. No amount of good news can propel Nifty higher. So here is the time for retail investors to book profits and not think of higher Nifty levels.

If Dow is our guiding light then I must confess that even Dow has become exhausted. From relentless northwards march, Dow needs to take a breather. On 01 May 09 Dow closed at 8212. Even if Dow has to move up from here, which in itself is a remote possibility, it has to first cool down to 7600. Cartels galore cannot possibly engineer postulates of Dow Theory to fail, something which have stood the test of time. One of the postulates reminds us that manipulations can be effected for short term only.

The outlook for the US market for next week is uncertain with a negative bias. Take a peek at some of the important pointers to US economic health vitals:-

• On 02 May 09 Warren Buffet, Chairman of Berkshire Hathaway, refused to repurchase shares of his company because in his wisdom the company's shares are not yet trading "demonstrably lower than intrinsic value".


• Mother of all present US economic woes is the Jobs Report which will be out this Friday. The only way you can kick start the US economy is by increasing consumer spending since 70% of its GDP is linked back to consumer. And consumer spending is linked back to jobs. The report on Friday is expected to show slower decline but turn around is still nowhere in sight.


• Thursday, a day earlier than Jobs Report, will unfold the critical report on US Govt's Supervisory Capital Assessment Program, aka "Stress Test" imposed on 19 major banks. One can expect severe shocks here since last week media reports indicated that Bank of America and Citigroup had capital shortfalls.


• Coming Wednesday market can get wind on private-sector employment from ADP . On Tuesday, the Institute of Supply Management will report its April index for the service sector. On Monday, data on pending home sales for March will be made public. And on all these fronts uncertainty looms large.


• As if all these uncertainties were not enough for the coming week, we will also have Ben Bernanke testifying before Congress and you can wonder your way to high heaven about its outcome.
  

Where does all this leave the retail investor in India? The situation demands that we show some more patience before buying. Those making profit from their portfolio should consider to make their positions lighter. And if you are the brave hearted kind, do stop by to buy some good put options. I shall also be recommending some put options in a subsequent post. However for buying in cash segment I can only recommend that you take a deep breath and hold on to your purse for some more time. Nifty has to at least test 3150 again before any further move up is feasible. In the meantime you can look up the Link List in my blog for some really good reading material. You will not be disappointed.