Where next for Nifty

I am a very strong believer in the philosophy of trend following and hence this post of mine is a sort of anathema to my doctrine. But a belief in a certain approach should not mean that we close our eyes to strategies which we may not like but one’s which may have their advantages.

While catching a falling knife maybe disastrous to a short term trader who more often than not is leveraged beyond his capacity, the same cannot be said for a investor who is willing to take calculated risks with the intention to profit when the trend shifts to the other side.

As with all such falls, it’s normal for noise to obliterate the signal that is present alongside. As with every other fall, it’s becoming the new normal to see people comparing this to the start of the fall that we saw in 2008. This time around, we have the additional benefit of this being compared to the 1991 payment crisis India faced and the 1997 Asean Crisis (which did not affect India but caused large scale economic devastation across most countries of South East Asia.

Fortunately our current situation is comparable to neither of the two situations being referenced. While it’s true that we are having huge troubles in containing the Rupee, we still have a strong forex backing (which we did not in 1991) plus we have seen a pretty large depreciation already happen without it being a one off shocking event.

As to the Asean crisis, RBI has not tried to act the way the central banks there acted to save their currency from depreciating (since most of them had fixed exchange rates) which made the situation worse than what it was already. While we do have some similarity in the foreign exchange exposure of local companies like they had, as a percentage of total debts, its still very much on the lower side and something that should not break the bank when the time comes for repayments.

The recent sharp depreciation has been due to the lower arbitrage between US yield and India yield and unless we start to believe that companies in US will be able to pay huge costs to borrow, some reversion to the mean is bound to happen and one that should result in some amount of reversal of money back to India.

Having said all this, is this a time to Buy India (or rather Indian stocks), I am not sure on that count since the mere fact that many companies are available cheap does not make them anymore worthwhile then they were a couple of months ago. In fact, many face even bigger problems as Interest rates are not bound to come down anytime soon and that should have an impact on all firms which are leveraged with debt or dependent on leveraged customer for its revenue.

While markets seen to have fallen a great deal in recent times, a cursory analysis seems to suggest that the fall we have seen till date is around the average fall we have been seeing in every correction post 2009. The recovery from the said falls on an average seems to have returned a average gain of 18% which is a pretty fair gain after the bone crushing fall one would have seen just a couple of months earlier.

If anything, volatility was much higher (swings much larger) in the period from 2001 (post IT crash) till 2008 with average fall being to the tune of 20% and average gains being seen at 59%. But the overall bullishness made the deep cuts more acceptable than at the current juncture when with sentiments already running bad, even the slightest of cut seems not tolerable.

While I continue to remain bearish (on medium to long term investment) on the Indian markets, I believe that for a trader, a great opportunity maybe on the horizon with a minimum gain of 10% to a maximum of 18% seemingly in the taking. What that requires is not just the vision of Bharat nirman, but the ability to take long trades whenever one feel s that this maybe a bottom. By using stops, one can ensure that in the worst case scenario, all we suffer is a slight bruise and not fingers lost for life 🙂 

 I for one believe that this fall would not beat 2008 either in speed or magnitude, but if it does, well, we know that my predictive ability is close to zero 🙂