SKS Micro – A study case in Trend Following

I am a strong believer in Trend following. Systems I build and those I trade are those that incorporate the same in one way or the other. In fact at 2 recent seminars where I gave a talk, I talked purely about trading the trend without any focus on why the trend is weak or strong. The only reasoning required is to know the trend in the time frame of your choice and then decipher how to get a entry point / exit point.

SKS Microfinance is a example of how a trend can continue in a single direction with strong news coming at every low (or higher in cases like Crude / Silver, etc). The news in itself may or may not have exited earlier, but when the news flow comes in, the trend just becomes stronger.

At the recent BgSE organised workshop I spoke about how to exit / enter using simple breakout strategies. The audience was not thrilled coming as it was right after a very good friend of mine spoke on Fundamentals and how a investment of 10K in Infosys was now worth 6 Crores or something of that order as well as how a 10K investment in Wipro / Cipla / etc would have worked out.

But a cursory glance at SKS chart says that the first breakdown happened at 1035 level. The breakdown level was tested but never did the market close above it. Its been downhill ever since and suffered its second major breakdown at 600 level. The fall has been so sharp since the listing that the 200 day MA is not even in operation 🙂

Unfortunately I guess that like Silver where a lot of small players am told were stuck with Short positions, here the opposite would have happened. The stock would have moved from strong hands to weak hands (read Retail players).

One of the surprises that SKS offers is that a lot of FII’s have been locked in and hence have no way to exit. Am saying this since a question was asked of me of why Karnataka Bank was falling despite JP Morgan having picked up a huge quanity of shares (this was at the workshop which was held a day after the JP Morgan buy. The fact is that FII’s need not be smart (as can be seem from SKS Micro / Satyam (where a lot where there before the fall and still are with it) and many others.

Buying Cheap (read low) is never IMO a good strategy in the markets since its like rowing a boat against the flow of the river. Tough and may not yield the desired result.