The Effect of News Events on the Market

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The Effect of News Events on the Market

Some charts of market averages list major news events that occurred at specific times during the last 12 months. This information can be extremely valuable, particularly if you retain and review old back copies. You then have a history over many years of the market averages, together with important news events that may have influenced the market's direction in the past.

History can repeat itself. If you have solid information about how markets behaved during certain past incidents, then you can develop better judgment for the future.

It is valuable to know, for example, how the market reacted in the past to a change of administration in Washington, rumors of war, wage and price controls, discount rate changes by the Federal Reserve Board, or "panic" news circumstances.

The chart on the next page of the general market averages shows several past cycles.

The Big Money Is in the First Two Years

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The Big Money Is in the First Two Years

Almost always, the really big money is made in the first one or two years of a normal new bull market's upward movement. This, then, is the point in time you must recognize as soon as possible and fully capitalize upon while the golden opportunity is there.

The remainder of the up cycle usually consists of back and forth movement in the market averages, followed by a bear market. The year 1965 was one of the few exceptions, but this strong market in the third year of a new cycle was caused by the advent of the Vietnam war. In the first or second year of a bull market, you should have a few intermediate-term declines in the market averages, usually lasting a couple of months, with the market indexes dropping 8% to occasionally 15%. After several sharp downward adjustments of this nature, and once two years of a bull market have passed, heavy volume without further upside progress in the daily market averages could indicate the
beginning of the next bear market.

Since the market is made up of supply and demand, you can decipher a chart of the general market averages almost the same as you read the chart of an individual stock. The better publications display the Dow Jones Industrial Average and S&P 500 in the front of their periodicals. They should show the high and low and close of the market averages day by day for the prior year, together with the daily New York Stock
Exchange volume in millions of shares traded.

Bear markets normally show three legs of price movement down; however, there is no rule that says you cannot have two or even five "down" phases or more. You have to objectively evaluate overall conditions and events in the country and let the general market tell its own story. And you should learn to recognize the story the market is
attempting to tell you.

Stages of a Stock Market Cycle

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Stages of a Stock Market Cycle

The winning investor should understand how a normal business cycle unfolds and the duration of these periods, paying particular attention to recent cycles. There is no foolproof guarantee that stock market cycles will last diree or four years because it happened that way in the past.

Dedicated market students who desire to learn more about cycles and the longer-term history of U.S. economic growth may want to write to Securities Research Company, 101 Prescott Street, Wellesley Hills, MA 02181 and purchase one of their excellent long-term wall charts. The stock market ordinarily bottoms out while business is still on a downtrend, anticipating economic events months in advance. Analysts refer to this phenomenon as "discounting of the future." In like manner, bull markets frequently top out and turn down before economic recession begins.

Therefore, using economic indicators to tell you when to buy or sell the stock market is generally an exceedingly poor procedure. Yet some firms have people trying to do this very thing. It's a somewhat ridiculous approach, but it does seem to make those
who don't understand the stock market very well feel better.

Ironically, economists also have a rather faulty record of predicting the economy. A few of our U.S. presidents, themselves lacking sufficient understanding of the American economy, have had to learn this lesson the slow, hard way. Around the beginning of 1983, just as the economy was in its first few months of recovery, the head of President Reagan's Council of Economic Advisors was a little concerned because the capital goods sector was not very strong. This was the first possible hint that this particular advisor might not be as thoroughly sound as he should be, because capital goods demand is never good at the early stage of economic recovery, and particularly so in the first quarter of 1983, when American plants were operating at a low percentage of capacity. You should check earlier cycles to learn the sequence of industry group moves at various stages of the market. For example, railroad equipment, machinery, and other capital goods industries are late movers in a business or stock market cycle. This knowledge can help you determine what stage of the current market period you are in. When these groups start running up, you know you're near the tail end.

Overbought/Oversold: Two Risky Words

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Overbought/Oversold: Two Risky Words

The short-term overbought/oversold indicator, which is avidly followed by some public investors, is a 10-day moving average of advances and declines in the market. Caution: Sometimes in the beginning of a new bull market the index will become substantially overbought because it has just come out of a long decline. This should not be taken as a sign to sell stocks. A similar occurrence can happen in the early stage or first leg of a major bear market when the index becomes unusually oversold. This event is really telling you that an eminent bear market may be beginning.

I once hired a well-respected professional who relied on such technical indicators. During the 1969 market break, at the very point when everything told me the market was beginning to get into serious trouble and I was aggressively trying to get several portfolio managers to liquidate stocks and raise large amounts of cash, he was telling them that it was too late to sell because his overbought/oversold indicator said the
market was already very oversold.

You guessed it, the market split wide open after the index was oversold and really started to decline.Needless to say, I rarely pay attention to overbought/oversold indicators.

What you learn from years of trying experience is generally more important than the opinions and theories of experts using their favorite indicator. Sometimes, the more widely quoted and accepted the market or economic expert, the more trouble you might, on occasion, get yourself into.

Who can forget the expert who in the spring and summer of 1982 insisted that government borrowing was going to crowd out the private sector and interest rates and inflation would soar back to new highs? The exact opposite happened; inflation broke and interest rates came crashing down. Conventional wisdom is rarely right in the market.

Psychological Market Indicators Can Help

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Psychological Market Indicators Can Help

There are several other indicators which may provide further data about the trend of the general market. The percentage of investment advisors that are bearish is an interesting measure of investment psychology. Near bear market bottoms, the great majority of advisory letters will be bearish, and near market tops, the majority will be bullish.

In other words, the majority is almost always wrong when it is most important to be right. The issue here is a question of degree. You cannot blindly assume that because the last time the general market hit bottom and 65% of investment advisors were bearish that the next time the advisors' index reaches the same point, a major market decline will be over.

One of the great problems with indexes that move counter to the trend is that you always have the question of how bad it can get before everything finally turns. In this line, most amateurs in the market follow and believe almost religiously in  verbought/oversold indicators.

Industry Action That Led to the Creation of Discount Firms

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Industry Action That Led to the Creation of Discount Firms

Some constructive changes were brought about several years later, after a more thorough and proper period of analysis and testing. However, it should be noted that when negotiated commissions were finally adopted to replace fixed rates, the end result was as follows: Many smaller research firms were put out of business or forced into mergers with industry giants, commissions to institutions were immediately cut in half, and commission rates to individual investors were actually raised several times, thereby laying the foundation for the successful development of numerous discount brokerage firms.

How You Can Spot Stock Market Bottoms

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How You Can Spot Stock Market Bottoms

Once you've recognized a bear market and scaled back your stock holdings, the big question is how long you should remain on the sidelines. If you plunge back in the market too soon, the apparent rally may fade and you'll lose money. But if you hesitate at the brink of a roaring recovery, opportunities will pass you by.

Again, the daily general market averages provide the best clues. Watch for the first time an attempted short-term rally follows through on anywhere from its third to tenth day of recovery. The first and second days of an attempted improvement can't tell you if die market has really turned, so I ignore them and concentrate on die follow-through days of the rally. The type of action to be looked for after the first few days of revival is an increase hi total market volume from die day before, with substantial net
price progress for die day up 1% or more on the Dow Jones or S&P Index.

There will be some scarce cases where whipsaws may occur; however, in almost every situation where the rally has a valid follow-through and then abruptly fails, the market will very quickly come crashing down on furious volume, normally the next day.
Just because the market corrects the day after a follow-through, however, does not mean the upward follow-through was false. When the general market bottoms, it frequently backs and fills (testing) near the lows made during the previous few weeks. It is usually more constructive if these pullbacks or tests hold up at least a little above the absolute intraday lows made recently in the market averages.

Follow the Leaders for Market Clues

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Follow the Leaders for Market Clues

After the daily general market averages, I would say the second most important indicator of primary changes in stock market direction is simply the way leading stocks act. After an advance in stocks for a couple of years or more, if the majority of the original price leaders top, you can be fairly sure the overall market is going to get into trouble. Of course, if you don't know how to recognize when the more aggressive market leaders are making tops and behaving in an abnormal fashion, this method of market analysis won't help you very much.

There are numerous indications of tops in individual stock leaders. Many of these securities will break out of their third or fourth price base formation on the way up. Most of these base structures will appear wider and looser in their price fluctuations and volatility and have definite faulty characteristics in their price patterns. A faulty base can best be recognized and analyzed by studying charts of a stock's daily or weekly price and volume history.

Some stocks will have climax tops with rapid price runups for two or three consecutive weeks. A few will have their first abnormal price break off the top and display an inability to rally more than a trivial amount from the lows of their correction. Still others will show a serious loss of upward momentum in their most recent quarterly earnings reports. The subject of when to sell individual stocks will be presented in great detail in the next two chapters.

Key Market Factors to Recognize and Use

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Key Market Factors to Recognize and Use

During a bear market, stocks frequently open strong early in the morning and close weak by the end of the day. During bull markets, stocks tend to open down and come back later in the day to close up strongly. (The market opens at 9:30 a.m. and closes at 4:00 p.m. New York time, 6:30 a.m. and 1:00 p.m. California time. But it is subject to periodic change.)

Catch a shift with this easy test: see if you show a profit on any of your last four or five purchases. If you haven't made a dime on any of them, you might be witnessing a negative shift in the overall market.

Additionally, if stop-loss orders are used and either placed on the stock exchange specialist's book at specific prices or mentally recorded and acted upon, the market that is starting to top out will mechanically force you, robotlike, out of many of your stocks. A stop-loss order instructs the specialist in the stock on the exchange floor that once the stock drops to your specified price, it then becomes a market order and
will be sold out on the next transaction.

In general, I think it is usually better to not enter stop-loss orders. Watch your stocks closely and know ahead of time the exact price at which you will immediately sell to cut a loss.

If, on the other hand, you can't watch your stocks closely or you are the vacillating-type investor who can't make decisions to sell and get out when you are losing, stop-loss orders might help protect you against your distance or indecisiveness.

If you use them, remember to cancel the stop-loss order if you change your mind and sell a stock before the stop-loss order is executed; otherwise, you could later accidentally sell a stock you no longer own. Such errors can cost you money.

One of the biggest faults investors have is that it takes time to reverse their positive views. If you sell and cut losses 7% or 8% below buying points, you will automatically be forced into selling as a general market correction starts to develop. This should make you begin to shift into a questioning, defensive line of thinking sooner.

A sophisticated investor who uses charts and understands market action will also find there are very few leading stocks that are correct to buy at a market-topping juncture. There is also a great tendency for laggard stocks to show strength at this stage. Seeing a number of sluggish or low-priced, lower-quality stocks becoming strong is a loud signal to the experienced market operator that the upward market move may be
near its end. Even turkeys can try to fly in a windstorm.

A peculiar tendency during a bear market is for certain leading stocks to resist the decline and hold up in price, creating the impression of true strength. This is almost always false and simply postpones the inevitable collapse. When they raid the house, they usually get everyone.

A 33% Drop Requires a 50% Rise to Break Even

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A 33% Drop Requires a 50% Rise to Break Even

The critical importance of recognizing the direction of the general market cannot be ignored, because a 33% loss in a portfolio of stocks requires a 50% gain just to recover to your break-even point. For example, if a $10,000 portfolio is allowed to decline to $6666 (a 33% decline), the portfolio has to rise $3333 (or 50%), just to get you even. Therefore, it is essential to try to preserve as much of the profit you have built up as possible rather than to ride most investments up and down through difficult cycles like many people do.

I generally have not had much problem recognizing and acting upon the early signs of bear markets, such as those in 1962, 1966, 1969, 1973, 1976, and 1981. However, between 1962 and 1981, I twice made the sad mistake of buying back too early. When you make a mistake in the stock market, the only sound thing to do is correct it. Pride doesn't pay.

Most typical bear markets (some aren't typical) tend to have three separate phases, or legs, of decline interrupted by a couple of rallies that last just long enough to convince investors to begin buying. In 1969 and 1974 these phony, drawn out rallies lasted 15 weeks. Many institutional investors love to "bottom fish." They will start buying stocks off the bottom and help make the rally convincing enough to draw you in. You will usually be better off staying on the sidelines in cash and avoiding short-term counterfeit rallies during the first few legs of a bear market.

The Hourly Market Index and Volume Changes Give Hints Near Turning Points

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The Hourly Market Index and Volume Changes Give Hints Near Turning Points

At sensitive potential turning points, an active market operator can watch hour-by-hour market index price changes and hourly NYSE volume as compared with volume the same hour the prior day.

A good time to watch hourly volume figures is during the first attempted rally following the initial decline off the market peak. You should be able to see if volume is dull and dries up on the rally. Plus you can recognize the first hour that the rally starts to fade, with volume picking up on the downside.

Another valuable period to observe hourly volume data is when the market averages reach an important prior low point and start breaking that support area. What you want to determine is the degree of pickup in selling that occurs as the market is collapsing into new low ground.

Does the hourly volume pick up dramatically or only a small amount? After a few days of undercutting of previous lows on only mildly increased volume, do you get one or two days of increased volume without further downside price progress? If so, you may be in a shakeout area ready for an upturn. This occurred on April 23 and 24, 1990.

Some institutional trading departments or technical chart rooms plot the market averages and volume on an hourly basis every day.

The Initial Market Decline Can Be on Lower Volume

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The Initial Market Decline Can Be on Lower Volume

Most stock market technicians are fooled by the initial market decline off the top when they see volume contracting. They do not understand this is a normal occurrence after heavy distribution has occurred on the way up around the top.

Volume begins to pick up on the downside, days or weeks later, when it becomes obvious to more investors. But as in anything else, if you wait until it becomes obvious to most people, it is going to cost you more. You will be selling late.

Similar top indications can be seen on the S&P 500, New York Stock Exchange Composite, or even on occasion an index of the current cycle's speculative growth stock leaders. These averages should be followed together because sometimes one average may give a much clearer and more definite sell signal than another.

The speculative, or swinger-type, stock index is occasionally significant because market movements are almost always led by a few aggressive stocks. The leaders of the original move up may at times turn on their heels first. Therefore, a speculative index may highlight the one-day price reversal or stalling action on increased volume. I term this "heavy or increased volume without further price progress on the upside."

Be Prepared for Abrupt Rally Failures

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Be Prepared for Abrupt Rally Failures

Frequently, the first stock market rally during a beginning downtrend will fail abruptly. After the first day's resurgence, the second day will open  strongly. But toward the end of the day, the market will suddenly close down. The abrupt failure of the market to follow through on its first recovery attempt should probably be met by further selling on your part

Watch for Heavy Volume without Further Price Progress Up

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Watch for Heavy Volume without Further Price Progress Up

What signs should you look for to detect a market top? On one of the days in the uptrend, the total volume for the market will increase over the preceding day's high volume, but the Dow's closing average will show stalling action, or substantially less upward movement, than on the prior few days.

The spread from the daily high to the daily low of the market index may be a little larger than on earlier days. The market average does not have to close down for the day, although in some instances it will do so, making it much easier to recognize the distribution as professional investors sell or liquidate stock.

Normal liquidation near the market peak will only occur on one or two days, which are part of the uptrend. The stock market comes under distribution while it is advancing! This is one reason so few people know how to recognize distribution (selling).

Immediately following the first selling near the top, a vacuum exists where volume may subside and the market averages will sell off for perhaps four days. The second and probably the last early chance to recognize a top reversal is when the market attempts its first rally, which it will always do after a number of days down from its highest point.

How You Can Identify Stock Market Tops

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How You Can Identify Stock Market Tops

When market indexes peak and begin major reversals, individual investors should take action immediately and raise 25% or more cash by selling stocks at the market prices (use of price limits on orders is not generally recommended). Lightning action is even more critical if your stock account is on margin. If your portfolio is 50% margined with half of the money in your stocks borrowed from your broker, a 20% decline in the price of your stocks will cause you to lose 40% of your money.

Don't wait around after the first few definite indications of a general market top. Sell quickly before real weakness develops.

Napoleon once wrote that he never hesitated in the battlefield and thereby gained an advantage over opponents. For many years he was undefeated in battle. Similarly, in the market battlefield there are the quick and there are the dead!

General market top reversals are usually late signals—the last straw before a cave-in. In most cases, distribution or selling in individual market leaders has, for days or even weeks, preceded the approaching market break. Use of individual stock selling rules, which we will discuss in the next two chapters, should lead you to sell one or two of your stocks on the way up just prior to the general market peak.

After the top, poor market rallies and rally failures in the averages will occur. Further selling is advisable when these weak rallies or rally failures are recognized.
If you miss the S&P or Dow Jones topping signals, which is exceedingly easy to do since they occur on only one or two days, you will be wrong on the direction of the market and wrong on almost everything you do.

Recognizing when the market has hit a top or bottomed out is 50% of the whole complicated ball game. It is also the key investing skill that all-too-many professional and amateur investors seem to lack.

You can also try to plan ahead and write down on charts, based on the market's historical precedent, where you expect the Dow to go and when the rally or decline might end. But it is best to watch the market, as it will eventually tell you when the correction or uptrend is finally completed.

Study the General Market Chart Every Day

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Study the General Market Chart Every Day

The general market should be studied closely every day, since reverses in trends can begin on any one day. I emphasize this practical method rather than that of interpreting other subsidiary indicators that are supposed to tell you exactly what the market should be doing or listening to the many stock market letter writers or technical analysts that pore over twenty indicators and tell you what they think the market should be doing. Market letters sometimes may create doubt, uncertainty, and
confusion in an investor's mind. Markets tend to go up when people are skeptical and disbelieving.

Learn to interpret a daily price and volume chart of the general market averages. If you do, you can't get too far off the track. You really won't need much else unless you want to argue with the trend of the market. Experience teaches you that continually arguing with the market can be very expensive. That's how people go broke!

Note New Stock Positions Bought in the Last Quarter

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Note New Stock Positions Bought in the Last Quarter

Many investors feel disclosures of a fund's new commitments are published after the fact, too late to be of any real value. This is riot true. These reports are available publicly about six weeks after the end of a fund's quarter. The records are very helpful to those who can single out the wiser selections and understand correct timing and the proper use of charts.

Additionally, half of all institutional buying that shows up on the New York Stock Exchange ticker tape may be in humdrum stocks and much of the buying may be wrong. However, out of the other half you may have some truly phenomenal selections.

Your task, then, is to weed through and separate the intelligent, highly informed institutional buying from the poor, faulty buying. Though difficult, this will become easier as you learn to apply and follow the rules, guidelines, and principles presented in this book. Institutional trades usually show up oil the stock exchange ticker tape
in most brokers' offices in transactions of 1000 shares up to 100,000 shares or more.

Institutional buying and selling accounts for more than 70% of the activity in most leading companies. I estimate that close to 80% or 90% of the important price movements of stocks on the New York Stock Exchange are caused by institutional orders.

As background information, it may be valuable to find out the investment philosophy and techniques used by certain funds. For example, Pioneer Fund in Boston has always emphasized buying supposedly undervalued stocks selling at low P/E ratios, and its portfolio contains a larger number of OTC stocks. A chartist probably would not buy many of Pioneer's stocks. On the other hand, Keystone S-4 usually remains fully invested in the most aggressive growth stocks it can find. Evergreen Fund, run by Steve Lieber, does a fine job of uncovering fundamentally sound, small companies.

Jim Stower's Twentieth Century Ultra and his Growth Investors funds use computer screening to buy volatile, aggressive stocks that show the greatest percentage increase in recent sales and earnings.

Magellan and Contra Fund in Boston scours the country to get in early on every new concept or story in a stock. Some other managements worth tracking might be AIM Management, Nicolas Applegate, Thomson, Brandywine, Berger, and CGM. Some funds buy on new highs, others try to buy around lows and may sell on new highs.

In a capsule, buy stocks that have at least a few institutional sponsors with better-than-average recent performance records.

An Unassailable Institutional Growth Stock Tops

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An Unassailable Institutional Growth Stock Tops

In June 1974, we put Xerox on our institutional sell list at $115. We received unbelievable flack because Xerox was then one of the most widely held institutional stocks and had been amazingly successful up to that point. However, our research indicated it had topped and was headed down in price.

Institutions made Xerox their most widely purchased stock for that year. Of course that didn't stop it from tumbling in price. What it did prove was how sick the stock really was at that time, since it declined steadily in spite of such buying. The episode did bring us our first large insurance company account in New York City in 1974.

They had been buying Xerox on the way down in the $80s until we persuaded them they should be selling instead of buying.

Is It "Overowncd" by Institutions?

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Is It "Overowncd" by Institutions?

A stock can also have too much sponsorship and become "overowned." Overowned is a term we coined and began using in 1969 to describe a stock whose institutional ownership had become excessive. In any case, excessive sponsorship can be adverse since it merely represents large potential selling if anything goes wrong in the company or the general market. On the other hand, Snapple, in April 1993, was underowned.

The "favorite 50" and other lists of the most widely owned institutional stocks can be rather poor, and potentially risky, prospect lists. By the time performance is so obvious that almost all institutions own a stock, it is probably too late. The heart is already out of the watermelon.

What Is Institutional Sponsorship?

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What Is Institutional Sponsorship?

Sponsorship may take the form of mutual funds; corporate pension funds; insurance companies; large investment counselors; hedge funds; bank trust departments; or state, charitable, and educational institutions.

For measurement purposes, I do not consider brokerage firm research department reports as institutional sponsorship, although a few exert influence on certain securities. Investment advisory services and market letter writers are also not considered to be institutional or professional sponsorship in this definition.

Financial services such as Vickers and Arthur Weisenberger & Co. publish fund holdings and investment performance records of various institutions. In the past, mutual funds have tended to be slightly more aggressive in the market, but banks have managed larger amounts of money. More recently, numerous new "entrepreneurial type" investment counseling firms have been organized to manage institutional monies.

Performance figures for the latest 12 months plus the last three- to five-year period are usually the most relevant. However, results may change significantly as key portfolio managers leave one money management organization and go to another. The institutional leaders continually rotate and change.

For example, Security Pacific Bank (now merged into Bank America) had somewhat modest performance in its trust investment division up to 1981. But with the addition of new management and more realistic concepts in the investment area, it polished up its act to the point that it ranked at the very top in performance in 1982. In 1984, the top manager of Security Pacific left and formed his own company, Nicolas
Applegate of San Diego.

If a stock has no professional sponsorship, chances are that its performance will be more run-of-the-mill. The odds are that at least several of the more than 1000 institutional investors have looked at the stock and passed it over. Even if they are wrong, it still takes large buying to stimulate an important price increase in a security. Also, sponsorship provides buying support when you want to get out of your investment. If there is no sponsorship and you try to sell your stock in a poor market, you may have problems finding someone to buy it.

Daily marketability is one of the great advantages of owning stock. (Real estate is far less liquid and commissions and fees are much higher.) Institutional sponsorship helps provide continuous marketability
and liquidity.

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Control Data—Abnormal Strength in a Weak Market

During a trip to New York in April 1967, I remember walking through a broker's office on one day when the Dow Jones Industrial Average was down over twelve points. When I looked up at the electronic ticker tape showing prices moving across the wall, Control Data was trading in heavy volume at $62, up SV-j points for the day. I immediately bought the stock at the market, because I knew Control Data well, and this was abnormal strength in the face of a weak overall market. The stock subsequently reached $150.

In April 1981, just as the 1981 bear market was commencing, MCI Communications, a Washington, D.C.-based telecommunications stock trading in the over-the-counter market, broke out of a price base at $15.

It advanced to the equivalent of $90 in the following 21 months. MCI tripled in a declining market. This was a great example of abnormal strength during a weak market. Lorillard did the same thing in the 1957 bear market. Software Toolworks soared in January 1990. So don't forget: It seldom pays to invest in laggard performing stocks even if they look tantalizingly cheap. Look for the market leader.

Always Sell Your Worst Stock First

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Always Sell Your Worst Stock First

If you own a portfolio of equities, you must learn to sell your worst-performing stocks first and keep your best-acting investments a little longer. In other words, sell your cats and dogs, your losers and mistakes, and try to turn your better selections into your big winners.

General market corrections, or price declines, can help you recognize new leaders if you know what to look for. The more desirable growth stocks normally correct l'/2 to 2/2 times the general market averages. However as a rule, growth stocks declining the least (percentagewise) in a bull market correction are your strongest and best investments, and stocks that plummet the most are your weakest choices.

For example, if the overall market suffers a 10% intermediate term falloff, three successful growth securities could drop 15%, 20%, and 30%. The ones down only 15% or 20% are likely to be your best investments after they recover. Of course, a stock sliding 35% to 40% in a general market decline of 10% could be flashing you a warning signal, and you should, in many cases, steer clear of such an uncertain actor.

June 1972, a normally capable, leading institutional investor in Maryland bought Levitz Furniture after its first abnormal price break in one week from $60 to around $40. The stock rallied for a few weeks, rolled over, and broke to $18.

Several institutional investors bought Memorex in October 1978, when it had its first unusual price break. It later plunged. Certain money managers in New York bought Dome Petroleum in September 1981 after its sharp drop from $16 to $12, because it seemed cheap arid there was a favorable story going around Wall Street on the stock. Months later Dome sold for $1, and the street talk was that the company might be in financial difficulties.

None of these professionals had recognized the difference between the normal price declines and the highly abnormal corrections that were a sign of potential disaster in this stock. Of course, the real problem was that these expert investors all relied solely on fundamental analysis (and stories) and their personal opinion of value (lower P/E ratios), with a complete disregard for what market action could have told them was really going on. Those who ignore what the marketplace is saying usually suffer some heavy losses.

Once a general market decline is definitely over, the first stocks that bounce back to new price highs are almost always your authentic leaders. This process continues to occur week by week for about three months or so, with many stocks recovering and making new highs. To be a truly astute professional or individual investor you must learn to recognize the difference between normal price action and abnormal activity.
When you understand how to do this well, people will say you have "a good feel for the market."

Pick 80s and 90s That Arc in a Chart Base Pattern

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Pick 80s and 90s That Arc in a Chart Base Pattern

If you want to upgrade your stock selection and concentrate on the best leaders, you could consider restricting your buys to companies showing a relative strength rank of 80 or higher. Establish some definite discipline and rules for yourself.

If you do this, make sure the stock is in a sound base-building zone (proper sideways price consolidation pattern) and that the stock is not extended (up) more than 5% or 10% above this base pattern. This will prevent you from chasing stocks that have raced up in price too rapidly above their chart base patterns. For example, in the Reebok chart shown at the end of Chapter 3, if the exact buy point was $29, the stock
should not be purchased more than 5% or 10% above $29.

If a relative price strength line has been sinking for seven months or more, or if the line has an abnormally sharp decline for four months or more, the stock's behavior is questionable.

Why buy an equity whose relative performance is inferior and straggling
drearily behind a laige number of other, better-acting securities in the market? Yet most investors do, and many do it without ever looking at a relative strength line or number.

Some large institutional portfolios are riddled with stocks showing prolonged downtrends in relative strength. I do not like to buy stocks with a relative strength rating below 80, or with a relative strength line in an overall downtrend.
In fact, the really big money-making selections generally have a rela-live strength reading of 90 or higher just before breaking out of their first or second base structure. A potential winning stock's relative strength should be the same as a major league pitcher's fast ball.

The average big league fast ball is clocked about 86 miles per hour and the outstanding pitchers throw "heat" in the 90s. The complete lack of investor awareness, or at least unwillingness, in establishing and following minimum realistic standards for good stock
selection reminds me that doctors many years ago were ignorant of the need to sterilize their instruments before each operation. So they kept killing off excessive numbers of their patients until surgeons finally and begrudgingly accepted studies by a young French chemist named Louis Pasteur on the need for sterilization.

It isn't very rewarding to make questionable decisions in any arena. And in evaluating the American economy, investors should zero in on sound new market leaders and avoid anemic-performance investments.

Is the Stock's Relative Price Strength Below 70?

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Is the Stock's Relative Price Strength Below 70?

Here is a simple, easy-to-remember measure that will help tell you if a security is a leader or a laggard. If the stock's relative price strength, on a scale from 1 to 99, is below 70, it's lagging the better-performing stocks in the overall market. That doesn't mean it can't go up in price, it just means if it goes up, it will probably rise a more inconsequential amount.

Relative price strength normally compares a stock's price performance to the price action of a general market average like the Standard & Poor's (S&P) Index, or in some cases, all other stocks. A relative strength of 70, for example, means a stock outperformed 70% of the stocks in the comparison group during a given period, say, the last six or twelve months.

The 500 best-performing listed equities for each year from 1953 through 1993 averaged a relative price strength rating of 87 just before their major increase in price actually began. So the determined winner's rule is: Avoid laggard stocks and avoid sympathy movements. Look for the genuine leaders!

Most of the better investment services show both a relative strength line and a relative strength number and update these every week for a list of thousands of stocks. Relative strength numbers are shown each day for all stocks listed in the Investor's Business Daily NYSE, AMEX, and NASDAQ price tables. Updated relative strength numbers are also shown in Daily Graphs
charting service each week.

Avoid Sympathy Stock Moves

 Tags: stock market, stocks, stock market useful guide, stocks tips, Earn Money from stock

Avoid Sympathy Stock Moves

There is very little that's really new in the stock market. History just keeps repeating itself. In the summer of 1963, I bought Syntex, which afterwards advanced 400%. Yet most people would not buy it then because it had just made a new high in price at $100 and its P/E ratio, at 45, seemed too high.

Several investment firms recommended G. D. Searle, a sympathy play, which at the same time looked much cheaper in price and had a similar product to Syntex's. But Searle failed to produce stock market results. Syntex was the leader, Searle the laggard.

Sympathy plays are stocks in the same group as a leading stock, but ones showing a more mediocre record and weaker price performance. They eventually attempt to move up and follow "in sympathy" the powerful price movement of the real group leader. In 1970, Levitz Furniture became an electrifying stock market winner. Wickes Corp. copied Levitz and plunged into the warehouse furniture business.

Many people bought Wickes instead of Levitz because it was cheaper in price. Wickes never performed. It ultimately got into financial trouble, whereas Levitz increased 900% before it finally topped. As Andrew Carnegie, the steel industry pioneer, said in his autobiography, "The first man gets the oyster; the second, the shell."

Buy among the Best Two or Three Stocks in a Group

Tags: stock market, stocks, stock market useful guide, stocks tips, Earn Money from stock


Buy among the Best Two or Three Stocks in a Group

The top two or three stocks actionwise in a strong industry group can have unbelievable growth, while others in the pack may hardly stir a point or two. Has this ever happened to you? In 1979 and 1980, Wang Labs, Prime Computer, Datapoint, Rolm Corp., Tandem Computer, and other small computer companies had five-, six-, and seven-fold advances before topping and retreating, while grand old IBM just sat there and giants Burroughs, NCR, and Sperry Rand turned in lifeless price performances. In the next bull market cycle, IBM finally sprang to life and produced excellent results. Home

stocks: Pipavav Shipyard

Pipavav Shipyard
BSE:533107
CMP:57.60
Volume: 1376372

Our sources suggest that one of the leading broking fIrms has been accumulating Pipavav Shipyard in a big way. The firm is bullish on the counter and our sources hint at some fireworks before X’Mas on the counter. The scrip is available at Rs 58. Go for it to add to the cheerfulness of the season.

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Stocks: SAIL

SAIL
BSE :500113
CMP:188
Volume: 1838799
This PSU steel company saw some renewed interest on the bourses as some of the domestic as well as foreign funds are looking at it from an investment point of view. They feel that the counter will command a good premium due to better liquidity on account of its planned FPO. The counter is available at Rs 190 and is expected to provide capital appreciation of near about 10 per cent in one month’s time with target price of Rs 210.

Stocks: Mahindra Satyam

Mahindra Satyam
BSE: 500376
CMP: 103.4
Volume: 8712057
One of the market veterans has been very bullish on this counter and he believes that it will emerge as one of the best out-performers in the IT pack. The counter has been down by 12 per cent in the last one week and is available at Rs 104. The target for the scrip has been put at Rs 140 by Diwali next year. Would you like to follow him?

Stocks: Reliance Capital

Reliance Capital
BSE: 500111
NSE: 908.25
Volume: 3036810
After the Mukesh Ambanicontrolled Reliance Industries declared a bonus, now our sources suggest that Reliance Capital, controlled by Anil Ambani, may soon announce one too. Our sources further claim that the counter will surge in the corning days as this bonus will be well- appreciated by the inves • tars. However, a point to be noted is that the • Reliance Industries’ bonus announcement did not really enthuse the investots to the level expected and so one cannot be sure of what response Reliance Capital will fetch from them. But do expect some wild movement on either side. If you wish play on the counter go for a straddle strategy on F&O.

Stocks: Ratnamani Metals

Ratnamani Metals
BSE:520H1
CMP: 102.25
Volume: 126968
One of the domestic research houses that also has forayed into mutual funds, has been tracking this Ahmedabad-based pipe company and has come out with a ‘buy’ report as it feels that the scrip is likely to be a winner on the bourses due to a huge latent demand for power projects. The scrip is available at Rs 102 and is expected to provide capital appreciation in the region of 30-40 per cent in one year’s time.

Tax benefits on Income from house property

Will the new Direct Taxes Code be effective from next year or is it still to be cleared?

Direct Taxes Code is a comprehensive legislation for direct taxes, namely, the income tax and the wealth tax. The draft of the Code is circulated to invite public commentary
and reactions and after the suggestions are considered, incorporated and accordingly amended, the same would be placed before the Parliament for legislative approval and to be made into a law. After the approval of both the houses of parliament, the Direct Taxes Code will be applicable w.e.f. financial year 2011-2012. The Direct Taxes Code will then replace the present enactments namely, Income Tax Act, 1961 and the Wealth Tax Act, 1957, and the rules made thereunder. In case the same is not approved or delayed for any reasons, the present laws will continue to be in force.

Tax benefits on Income from house property

Will the new Direct Taxes Code take away the tax benefits available for interest and principle paid on home loans? Can you please elaborate more on future of tax benefits?

• As per the new Direct Taxes Code, the provi sions relating to income from house property are contained under sections 23-27. Section 25(1) states that the gross rent in respect of a property shall be the higher of the amount of contractual and presumptive rent for the financial year. Further, section 25(4) states that the gross rent shall, regardless of anything to the contrary contained in sub-section (1), be taken as nil if the property consists of a house or a part of a house which is not let out. Further, section 25(6) states that the provisions of sub-section shall, in a case where a person owns more than one house, shall apply only in respect of one house which the person may specify at his option. Further, section 26(2) states that the aggregate of deductions referred to in sub-section (1) shall be nil in respect of the property referred to in section 25(4). Thus, no deductions can be claimed in respect of self-occupied property which is presently available under the IT Act, 1961. If the house is rented or if the income is included in the computation of income, being the additional houses other than the self-occupied house as specified by the assesseee at his option, the interest on borrowed capital in respect of the said houses will be allowed as deduction in entirety without any limit.

Investing For High Returns

Jam 33-yea r-old and am a regular reader ofyour column. Regarding my portfolio I am contri buting to three SIPs as follows:
1. Fidelity Equity Fund - Growth Rt 1,000 p.m. since two years and still continuing
2. DSP BL Tax Saver Fund Ri’ 10,000 - 2 years back - still locked in
3. DSP BL Tiger Fund Regular - Growth SIP of Rs 1,000 since
2 years still continuing
4. HDFC Equity Fund - Growth SIP of Rs 1000, just started this month
Apart from this, I have invested in Cash Back Policy of ICICI Pru Lfr. Please suggest me how I can enhance my portfolio to get high returns in the long run.

Mitun, there is a basic contradiction in your requirements —. high returns and guaranteed returns don’t go together! You can have either of the two. As the asking rate of return increases, so does the uncertainty of it.

If you have a time horizon of more than three years, you could enhance returns by investing in better equity funds. HDFC Equity Fund is fine, and so is DSP TIGER for the next few years. But Fidelity Equity is not one for aggressive investing. You can include mid-cap oriented funds such as Sundaram Select Midcap or IDFC Premier Equity to add returns to your portfolio. These are more volatile, but then that is the price for higher returns. ICICI Pru Discovery, which is a value fund with a tendency to have more of mid- cap stocks, is another possible choice.

Is SIP The Best Option?

I am 23-year-old and I have a job with a sala?y of Rs 22,000 p.m. My current portfolio is given below. Please help me in building a portfolio for my child and myself
Jam contributing Rc 7,300 p.m in PE
I have SBI ULIP Plan of Rs 25,000 p.a. for 3 years
• Ihave LIC plan of Rc 51,000 pa. for 15 years My SIP investments are as follows..
• SIP of Rc 1,000 p.m in Reliance Regular Saving - Growth - started in October, 2009
• SIP of Rs 1,000 p.m in HDFC Top 200- started in October, 2009 Now I can invest about 3, 000 p. m. more. Please tell me finvesting through SIP is the best option for me? Ifyes, then please recommend the SIP scheme in which I should invest.

Sunil, recently as I was traveling back from :LI’1r Hyderabad, a youngster working in an American tech company engaged me in conversation. As he came to know my profession, he started questioning me on which were the best investments.

It is difficult to hold back when I am confronted with such a sweeping question! By the time I was through, he declared that I had mostly likely changed his way of thinking and spending. What were these simple truths that I had disclosed to him?

Savings without direction is like a ship without a sail, (to use a cliché). You need to have a target; the target must have a time scale, a clearly identified need and must be quantified.

I sense a desire to provide for your child — but for what use, when and how much? These questions have not been asked by you. Unless these are clear, a plan cannot be repared. For instance, there could be a desire to provide for your child’s professional education. This becomes your direction. It would be required when your child reaches the age of 17 years — this becomes your time scale. In this instance, assuming tuition fees for a professional education as Rs 10 lakh, the same could cost around Rs 32 lakh after 15 years due to inflation. And this future cost becomes the quantification. Now we are in a position to make a plan to save towards it. Assuming that a balanced portfolio can provide compounded returns of around 12 per cent p. a., one must save Rs 6,900 p.m. through an SIP If one desires to be more aggressive since time is at one’s disposal and go for a 80 per cent equity and 20 per cent debt portfolio then your assumed return can be higher at 13.4 per cent p.a. — in which case your SIP can be bought down to Rs 5,500 p.m.

Another simple tip that I had discussed with my fellow traveller was regarding insurance. Though he had sufficient health insurance for his entire family, he was ignorant of the type of insurance ideal for his life cover. Insurance must be talked about in terms of ‘how much cover’ and not just ‘how much premium’. Premium follows the cover; meaning the first determination should be ‘how much cover’ do I need? The answer is that you need as much as your family would require to survive without you as a bread earner. A simple rule is ten times your annual income and costs of fulfilling any goals you have for your family members, less your accumulated savings. Please add liabilities, if any.

You can continue your SIP in equity funds. But for the debt portion, you may choose Birla Sun Life Dynamic Bond Fund.

How to Trade Through Internet?

Internet trading is quite popular among investors, but they need to take utmost care while trading.

What is the Internet trading?
Internet Trading or Online Trading refers to the trading via the Internet. In an information hungry world, the investor community is not left far behind. Gone are those days of running behind a broker and managing loads of paper work. The capital markets are today literally at your fingertips. The onset of online trading changed the traditional value proposition of trading, allowing online brokers to supply investors with rich, interactive information in real-time, including market data, investment research and robust analytics. The result is an integrated trading experience that combines execution with interactive analysis shown by the growth of the online customer community from a mere 23,000 average trades on NSE per day in year 2000 to over 35,18,266 average trades in 2007. Presently, NSE has capability to handle 10,00,000 trades per day.

How is Internet trading advantageous?
a. Time:
Time is money, and if you ask yourself, most of us don’t find the time in our hectic schedules to go to our Depository Participant (DP), fill out a requisition slip.. .so what’s your alternative — an online account. It gives you not only the advantage of saving time; it also enables you to trade from anywhere. Imagine a person sitting in a small town in Rajasthan wants to contact his broker in Mumbai to get a trade through. Now, he can conveniently trade from anywhere using the tool of the Internet, Investors who travel frequently also need not miss out on trading opportunities. All you need is
a computer, a modem and a internet connection and
Bang!! You can trade online. In the bull market, nobody wants to miss out on the up trend. And, one way of ensuring this is keeping a track on the prices and place
buy/sell orders

b. Flexibility:
The sites offer you immense flexibility of trades at your fingertips. Want to cancel your order.. .do it in seconds. Want to modify the order... can do it easily. This flexibility is the greatest advantage of the online trading. Take a scenario here. You have placed an order to buy stock B at Rs.50. You keep tracking the movement of the stock for and in a couple of minutes you find that the prices are heading south. What do you do? Modify your order immediately and put a buy at Rs.45. Essentially you are cashing on the market opportunities. Adapt this to the rally. Replace the buy with a sell and interchange the figures. You are now sitting on an extra profit of five rupees.

c. Elimination of Physical Brokers:
You never liked your broker. He kept doing things at his pace and it is pretty tiring to track him down. Get rid of your frustrations as you eliminate the middleman. Now it’s just you, your DP, the custodian and the exchange. All electronically connected with each other.

d. Standardized Procedure:
Another hassle you face with your broker — ‘When will he give me the money (or shares)’? This too is erased from the picture. When your order is accepted by the exchange, it will give you your pay-in and pay-out dates. So, now you know when to expect cash or shares to be credited to your account.

e. Value Added Services:
Service providers offer a variety of trading options. Like BTST (Buy Today Sell Tomorrow) gives you the advantage to take short-term positions in the market and take advantage of price fluctuations. This is very useful when you want to cash in on news specific developments. Margin trading allows an investor to buy stocks without paying the entire purchase price. You are required to pay just the margin. For instance, if stock A costs Rs.100 and it is expected to appreciate to Rs.1 10 by the end of the trading session. The return is, therefore, 10 per cent on an investment of Rs.l00. However, if you opt for margin trading (assuming that margin payable is 20 per cent), then your return on investment is 50 per cent (Rs.10 on investment of Rs.50). Itis clear, that less capital is blocked for trade, i.e., you can use the balance Rs.80 for other purposes. Other options include Quick Cash where the DP will pay out cash on the same day and you do not have to wait for the exchange payout date, Loan against securities, etc. Features like short selling allow you to cash in on intra-day fluctuations.

f. Human Touch is available if necessary:
Service Providers combine off-line as well as on-line services. They give you the personal touch added to etrading thus combining structured advice and fast trades. It helps you to avoid getting carried away in a boom.

g. One stop shop:
Bank statements and transaction statements can be viewed at the click of a button. You don’t have to run behind the bank executives to get your monthly statements.

h. Informed Research:
Service providers carry stock analysis for your reference. This helps you in making the right choices. Let’s be practical. All of us cannot afford to hire analysts to review the stocks and companies. Given our situation, sites that provide research reports could be useful.

i. Flexibility of timing:
You can place orders even before the start of a trading session.

‘What are the disadvantages of the Internet trading?

a. Limited Knowledge:
Elimination of a broker could mean trouble. If you are not Warren Buffet (and we are not saying that your broker is), it could prove risky to enter the capital game without the structured advice. Expertise and experience helps to some extent. In a bull phase, moneymaking is not a difficult task. When you make a quick buck, you start feeling like a market genius. You get carried away and may make some mistakes that could be more than your risk appetite.

b. Outdated Informed Research:
Many sites let you have the ‘Added Advantage’ of research reports, all right!! But, take a look at one of the four corners of the web page and see the date of the analysis. In a market that changes fast, a two-year old review does not carry much weight. Look out for this catch-22 situation.

c. Flipside of value added services:
Features like Margin Trading have an unlimited upside plus and downside. Especially in a boom, as most of us get carried away by the market wave and take positions that are extremely speculative in nature. Remember, even if your hunch is right, the market can turn against you and expose you to unlimited short-term risks. If you don’t find the time to cover your short positions at the right time, the DP will square off the trade on your behalf before the end of the trading session at whatever price is available. At the end of the day, your demat balance may not be a pretty picture.

Another point to remember when you trade online:
Higher Brokerage: Get this situation. Buy stock A at Rs.50 on September 1. Sell it at Rs.70 on September 5. Wow! You land up thinking you have made 40 per cent in just five days. Forgetting any thing? Think again. The DP is charging a brokerage. Now get your calculators out and your return could be well below 40 per cent. Don’t be paranoid, but it’s prudent to have a look at your account at regular intervals, in case you are not a regular trader. As rightly said, ‘Precaution is definitely better than Cure’.

‘What are the pre-requisites to do the online trading? The pre-requisites for any investor to trade online are:

a. A bank account: This bank should be having an alliance with the online trading service provider. This bank account will facilitate as a payment and receipts gateway.
b. A depository account: The depository account also should be having an alliance with the online trading service provider. This account will act as a bank for the shares you hold.
c. Online service provider account:
This can be opened with any of the major service providers mentioned above.

IDFC Small and Midcap Equity Fund-Growth BUY Rs 14.36

With its focus on taking the choicest pickings offered by the mid and small-cap segment, this scheme not only offers good returns but takes advantage of diversifications too.

In view of the fact that the current flavour in the market is that of small and mid-cap stocks, we have decided to pick a scheme that has been doing extremely well with its stock selection from these two segments. The year-to-date performance of IDFC Small and Midcap Scheme is at 93.62 per cent returns while for the last one year it has been at 103.33 per cent as against category returns of a mere 60.83 per cent. What makes the scheme exciting is that it has done equally well in the last three months and the last trailing one month with returns of 22.32 per cent and 3.85 per cent respectively. It must be noted that the Sensex in the last trailing one month has been negative with 2.22 per cent returns against which the scheme could yield positive returns. Also, we would like to draw our readers’ attention to its monthly returns wherein the scheme for November (as on the 13th) has provided returns of 8.33 per cent which is good at a time when the markets have been very volatile. This shows the capability of the fund manager to generate returns during even such phases of highs and tows.

In our opinion, the scheme should do well from a one-year point of view and hence our recommendation is that investors must opt for it with its present NAV of Rs 14.36 with a one year target of Rs 20, thereby creating space for 40 per cent appreciation.
But before we discuss its portfolio compositions and industry exposure let us touch upon the brief background of the scheme. The scheme was launched on March 7, 2008 as a close-ended scheme with the disclosure that it would automatically be converted into an open-ended one after three years. But very recently, i.e on September 11, 2009, the scheme has been converted into an open-ended one and is now available for buying and selling.

As regards its portfolio, the fund manager has given the highest preference to Oracle Finance with weightage of 4.95 followed by 4.56 on Spice Jet. The top ten holdings account for 38 per cent of the total portfolio. Industry-wise, the highest exposure is on consumer non-durables with a weightage of 22 per cent followed by software with 14.61 per cent and cement with 9.69 per cent. The scheme has a good balance of growth and steady companies and that should augur well for it to perform well in the future. As on October, 87 per cent of the fund has been invested in equity while the balance is in cash and instruments like short-term debt.

In other words, the fund manager was sitting on a cash component to the tune of 13 per cent by end of October. Despite that, as mentioned before, the scheme yielded excellent returns in the first half of November. We would suggest that the scheme should not only be selected for the portfolio from a returns’ point of view but also from a diversification point of view as many of the other schemes are heavily tilted in favour of large and mid-cap companies. With this scheme one could diversify and ride the rally in the mid and small-cap companies’ segment. So go ahead and invest in this one.

Funds NAV as well as returns are as on 13/11/09

Sensex @ 1,00,000 By 2020?

In view of the fact that the BSE Sensex has yielded an internal rate of return (IRR) of 17.25 per cent since its inception in 1979, the chances of it hitting the 1,00,000 level over the next decade are not too dim.

The Bombay Stock Exchange (BSE) launched a Sensitivity Index with the title ‘Sensex’
in 1979 to track the movement of the prices of the major stocks trading with it so as to work as a barometer for the benefit of the investor community and to understand the general trend of the direction of the capital markets. Over a period of time, Sensex has become synonymous to the Indian capital market and has garnered significant top-of-the-mind brand recall value. The eternal question on the minds of the market observers and the investor community always is: ‘Where is the Sensex heading towards? And how is the market expected to perform?’ in this connection, we have just made an attempt to see where will the Sensex levels reach in the coming future and whether historic trends will continue in the future too?

Hitting The Crore Level
Over a period of the past 30 years i.e from 1979 to 2009, the BSE Sensex has yielded an IRR (internal rate of return) of 17.25 per cent per annum. And, 30 years is a sufficiently long enough period to take as a basis to deduce the long-term average IRR. If history can form any basis for the future and if the historic average IRR of 17.25 per cent per annum has to be maintained, the Sensex will reach whopping high levels of 1,00,000 or more by 2020. And, by 2050, the Sensex shall reach a level of about 1,17,50,000. To maintain similar IRRs of 17.25 per cent per annum, by 2100 the Sensex should be at the 3,354,90,91,491 level — that is about 3,354 crore.

Bullish To The Extreme
Further, since the commencement of the ‘great bull phase’ of the Indian capital markets in the year 2003, the BSE Sensex has yielded an IRR of 26.21 per cent per annum. If such an IRR of 26.21 per cent per annum has to be maintained, the Sensex has to reach a level of 2,23,000 by 2020. And, by 2050 the Sensex shall be at 24,05,77,897. And to maintain similar IRRs of 26.21 per cent per annum, by 2100 the Sensex should be at the 27,28,626,29,99,684 level - that is about 27 lakh crore.

Predictions And Projections
We do not have any idea what’s there in store for Indian markets and the Sensex levels in the next decade or century. However, the sheer levels that the Sensex should reach just to maintain the average IRR levels of the past is simply breathtaking! Of course there can be innumerable factors and hurdles which can emerge in the path of the Sejisex in reaching any of these levels. For sure, there will be bouts of ups and downs with significant volatility. Further, to achieve these levels of the Sensex what shall be the levels that the individual stocks are likely to reach? This is done assuming that all the 30 Sensex components are going to contribute to it in line with their respective weigh rage.

For indicative purposes we have calculated the estimated stock specific levels through the years 2020, 2050 and 2100 for five stocks viz. Bharti Airtel, Infosys, L&T, Reliance and SBI. Over the next decade or century, different stocks will perform at different rates of return. For sure, some of the Sensex components will out-perform the Sensex and others will under- perform. The earnings’ potential and sustainability of several companies may also differ over the next decade. However, the levels that several stocks should reach make for an amazing scenario, if they are going to contribute in line with the Sensex.

Conclusion
If anybody gets a feeling that the indicative Sensex levels or stock levels discussed here are hypothetical and out of reach, we won’t complain because the indicative levels surely are ‘sounding’ exaggerated. However, it leaves us wondering if equities can’t even yield 17.25 per cent per annum IRR in the next decade (that is the period which is widely expected to be the ‘decade of India’) and do equities really match the risk-return spectrum involved?

More Reasons To Invest In Mutual Funds

More reasons to invest
There are two more solid reasons to invest in mutual funds. Securities & Exchange Board of India (SEBI) has abolished entry load on mutual fund units. This has benefitted the investors as they no longer have to pay any charge while buying units of mutual funds. However, the move has had some negative fall-out as abolition of entry load is a disincentive for MF distributors. “At the aggregate level, the industry was growing at the rate of close to 40 per cent in October on a y-o-y basis. But what concerns us is that there has been no growth in the equity segment. In fact, there has been net outflow both in August, September and October. This may be because people want to book profits and new people are not coming in. Not much incremental money is coming from the retail sector,” says Kurien.

SEBI proposal to allow MF units to be traded on stock exchanges in the near future would also benefit the investors. This move is expected to take mutual funds to all the nooks and corners of the country. “The rationale behind this move is to enhance the reach of mutual fund schemes to cover more towns and cities beyond Tier 2 towns by leveraging the existing infrastructure set-up (1,500 locations, 200,000 terminals) for stock trading.”, says Trivedy.
“SEBI’s new guidelines to enable the brokers to buy and sell mutual funds through the stock exchanges will increase the reach and provide easy facility for investors and distributors to invest in mutual funds,” says Dr. AP Kurian, Chairman, Association of Mutual Funds in India.

But Caution Is The Key
The cardinal truth that mutual funds are subject to market risks needs to be borne in mind by all mutual fund investors at all times. Mutual fund NAVs fluctuate depending on the market movement. However, they should never try to time the market, because mutual fund investing is not about timing the market. Mutual funds are not for the traders because the NAVs don’t fluctuate violently like the stock prices do at times on a single day. The upward or downward movement of NAVs is slow and steady, so mutual funds are for investors with a medium to long-term view. However, the benefits of investing in mutLial funds far outweigh the risks. Hence, one can say without any hesitation that equity mutual funds are the best route to invest in the stock market for retail investors. And the best time to invest in Indian mutual funds is now.

More Reasons To Invest In Mutual Funds

More reasons to invest
There are two more solid reasons to invest in mutual funds. Securities & Exchange Board of India (SEBI) has abolished entry load on mutual fund units. This has benefitted the investors as they no longer have to pay any charge while buying units of mutual funds. However, the move has had some negative fall-out as abolition of entry load is a disincentive for MF distributors. “At the aggregate level, the industry was growing at the rate of close to 40 per cent in October on a y-o-y basis. But what concerns us is that there has been no growth in the equity segment. In fact, there has been net outflow both in August, September and October. This may be because people want to book profits and new people are not coming in. Not much incremental money is coming from the retail sector,” says Kurien.

SEBI proposal to allow MF units to be traded on stock exchanges in the near future would also benefit the investors. This move is expected to take mutual funds to all the nooks and corners of the country. “The rationale behind this move is to enhance the reach of mutual fund schemes to cover more towns and cities beyond Tier 2 towns by leveraging the existing infrastructure set-up (1,500 locations, 200,000 terminals) for stock trading.”, says Trivedy.
“SEBI’s new guidelines to enable the brokers to buy and sell mutual funds through the stock exchanges will increase the reach and provide easy facility for investors and distributors to invest in mutual funds,” says Dr. AP Kurian, Chairman, Association of Mutual Funds in India.

But Caution Is The Key
The cardinal truth that mutual funds are subject to market risks needs to be borne in mind by all mutual fund investors at all times. Mutual fund NAVs fluctuate depending on the market movement. However, they should never try to time the market, because mutual fund investing is not about timing the market. Mutual funds are not for the traders because the NAVs don’t fluctuate violently like the stock prices do at times on a single day. The upward or downward movement of NAVs is slow and steady, so mutual funds are for investors with a medium to long-term view. However, the benefits of investing in mutLial funds far outweigh the risks. Hence, one can say without any hesitation that equity mutual funds are the best route to invest in the stock market for retail investors. And the best time to invest in Indian mutual funds is now.

Mutual_Fund_Terminology

Mutual_Fund_Terminology

Net Asset Value (NAV): Net Asset Value is the market value of the assets of the scheme, less liabilities. The per unit NAVis the net asset value of the scheme divided by the number of units outstanding on the date of valuation.

Sale Price: The sale price, or the ‘offer price’ is the price you pay when you invest in a scheme.

Repurchase Price: The price at which units under open-ended schemes are rep urchased by the the mutual fund. Repurchase price is always NAV related

Redemption Price: The price at which close-ended schemes redeem their units on maturity. The redemption price is also NA V-related.

Sales Load: Also called jo nt-end’ load or ‘entry’ load, it is a charge collected by the mutual fund scheme when it sells units. SEBI has abolished entry load for MF schewmes recently.

Repurchase Load: Also called ‘back- end’ load or ‘exit’ load, it is a charge collected by a mutual fund scheme when it buys back the units ftom the unitholders.

Why invest in MFs? | Investing in Mutual Funds

Why invest in MFs?
Mutual funds are ideal investment avenues for retail investors because a single unit of mutual fund provides a bouquet of diverse shares, debt and money market instruments. For a small investor with the limited resources he has at his disposal, this would be a dream. More importantly, the investors does not have to pour through financial results and analyse the ratios to decide which shares to buy and which debt or money market instruments to invest in. The professionally qualified and experienced fund manager does it for him. Also, after investing, the investor does not have to monitor the share prices and decide which share to sell and when and which one to buy in its place — the fund manager does it for him. “With minimal fund management fees and no entry load now, an investor gets access to well -researched, well managed equity portfolios at hardly a cost unlike direct equity where he would do his own research, brokerage costs etc.,” says Angirish. Explaining the crucial role of fund managers, Joshi says “Mutual fund is one of the best investment tools for one who is unable to track the market and manage his stock investments efficiently. Fund managers of mutual fund schemes are expected to invest in the quality stocks with longer horizon and manage it through the highs and lows of markets to generate reasonable returns while managing various risk attached to it.

MFs have a diversified portfolio of investments spanning across cross section of industries and sectors and, therefore, investing in mutual funds automatically provides the necessary diversification to your investments. Diversification reduces the risk because the stocks in the portfolio of the mutual fund may very rarely decline simultaneously or in the same proportion. “You can invest in asset classes like equities, debt, gold, etc. Apart from diversification in various asset class, it also provides large variety of schemes within asset classes, for e.g. in equity category it has schemes across market caps (large, mid and small cap), themes (e.g. infrastructure), sectors (e.g. banking, power), investment philosophies (value or growth), etc.,” says Joshi.

Investing in Mutual Funds
Now, the question is: how should you decide which scheme is suitable for you? This will primarily depend on the objective of your investment. If you are young and have a specific objective in mind such as buying a house, children’s education, etc. and are looking at getting a lump sum amount after a specific period, the growth schemes are ideal for you as they provide capital appreciation over the long term. However, if you are a retired person looking for regular income, the income schemes are right for you. However, if you are looking for both regular income as well as capital appreciation over the long term, the balanced schemes would be the right choice. If you are looking at investing in mutual fund from the limited purpose of tax planning, you should go for the tax saving schemes, while if you are bullish on a particular sector, you should invest in a sector-specific scheme.

One should also take into consideration one’s risk appetite before investing in mutual funds. “Choice of mutual fund scheme completely depends on your risk profile. For a high risk investor, he can choose an aggressive high beta equity or a specific sector fund. For someone who wishes to invest in equity but with lesser risk, he can choose diversified/large cap or index funds. For someone, who does not prefer risks at all, should look for debt schemes,”
More importantly, the choice should be in line with one’s financials goals. “The starting point for a new investor should be to identife his financial goals, both short-term and long-term ones, as well as his risk profile. A good financial planner will be able to help him with this and will also draw up an asset allocation that is in keeping with the goals and the risk profile. Having these building blocks will itself narrow down the universe of funds that would meet an investor’s risk profile and goals.”

It is also important to check out the performance track record of the fund house. “Retail investors should look at the investment objective of the fund and see whether it fits into their asset allocation. They should look at the historical portfolios and check how the fund is managed and how portfolio looks like. They should look at the background of the fund manager and his previous track record, including some basic checks on the investment team of the fund house. Lastly, they should look at historical track record of the fund. Typically, they should invest in funds which have atleast over 2 years of consistent track record.

“The decision to invest in an equity MF by a retail investor should ideally be driven by aspects like investment objective (tax planning, capital protection, wealth creation etc.), expected returns, risk appetite and investment horizon (short term v/s long term) which are bound to vary. These will be key factors in determining the timing for investment in equity MFs,” sums up Ravi Trivedy, Executive Director — Financial Services, KPMG Advisory Services.

Time To Invest In Mutual Funds :Favourable demographics | Best MF players coming to India

Favourable demographics
India has the advantage of highly favourable demographics which is also conducive for the growth of the financial markets. The highly skilled and cheap labour force provides India the edge to march ahead on the path of development at a brisk pace. Besides, the highly skilled and young labour force is a huge asset for the financial markets, as they tend to invest at a young age and are familiar with the diverse financial instruments available in the market for investment. The rising disposable incomes in the hands of the young work force provides tremendous potential for the growth of the financial markets. This bodes well for the mutual fund industry too. Hence, it is important for retail investors to invest in mutual funds at an early stage to reap the full potential of this growing industry.

Best MF players coming to India
India has become a hot investment destination for foreign institutional investors, who are coming in droves and pouring billions of dollars in the stock market. The largest names among FITs and mutual funds are already in India and many more are expected to come in future. Among mutual funds, Fidelity, Franklin Templeton, Morgan Stanley, J P Morgan, Goldman Sachs, Prudential and many other giants have made a successful foray into India. Hence, the financial markets are expected to remain bullish, and with the bullish financial markets, the mutual fund industry will also remain buoyant.

Time To Invest In Mutual Funds :Among Best Asset Classes and Low Penetration

Among Best Asset Classes
Equities as an asset class have outperformed all other asset classes in the long run. Since equity mutual funds invest in equities, these MFs too are among the best performing asset classes. In fact, equity mutual funds most of the time outperform the indices. A look at the returns from equity mutual funds as compared to Sensex reveals that while returns on Sensex were 40.6 per cent during the last six months, average returns provided by all equities mutual funds were much higher at 50.54 per cent. All the more reason to invest in nuitual funds! No wonder, mutual funds are becoming popular avenues of investment and more and more investors are taking the safer MF route to investing in the stock market. This is also evident from the fact that the assets under management with MFs have witnessed a scorching pace of 29 per cent CAGR during 2004-08.

Low Penetration
The mutual fund industry is expected to grow at a break-neck speed in future too because of the fact that mutual funds have not reached beyond metros and Tier-I cities in India yet. As per Invest India and Savings Survey 2007 conducted by IIMS Dataworks, individual wage earners in the age group 18-59, only 1.6 per cent invested in mutual funds. The mutual fund penetration among Indian workforce with annual income less than Rs 90, 000 was a miniscule 0.1 per cent. Also, mutual fund investment in India constituted a meagre 7.7 per cent of the gross household financial savings in FY2008. This gives us an idea of the huge potential for the mutual fund industry in India. Mutual funds too are going in a big way to tap Tier-TI and Tier-Ill cities, which means that more funds would flow into the stock market through the MF route and this will help keep the market buoyant. A buoyant market will ensure that mutual funds would continue to give good returns to the investors.

Time To Invest In Mutual Funds : MFs are for all seasons

Mutual funds are for all seasons and one need not wait for the market to go up to buy mutual funds. Of course, it always helps if the market goes up after one buys equity mutual fund units, because this will result in appreciation of the NAV of the MF units and the investor will stand to gain. Looking at the current market scenario and sentiments, one might expect the market to go up in the near future. The market currently is hovering around 17,000- level and, barring unforeseen circumstances, one can expect the market to again test the 21,000 level in three to six months time and may even cross it. Which means that the market is likely to go up by about 20-25 per cent from the current level in three to six months time. This means investors who buy mutual fund units now are likely to derive good benefit in the near future.

“It is the right time to invest in mutual funds from a long term horizon and with a right mix of funds. One should not worry about the intermediate market fluctuations or the rise in index levels to make investments in mutual funds. Those who are wary can look at investing in a phased manner or through systematic investment plan (SIP) option,” says Hitungshu Debnath, Executive Director — WMS & Distribution, Angel Broking.

However, the buying and selling of mutual funds cannot be timed. “It is always a good time to invest in mutual funds as one cannot time the market. As long as have a 3-5 years view for your investments, it is a good time to invest. MFs are the cheapest way to equity exposure,” says Abhinav Angirish, Managing Director, Abchlor Investment Advisors. Explaining the importance of investing in mutual funds regularly rather than trying to time the market, Ashu Suyash, Managing Director and Country Head — India, Fidelity International, says “At Fidelity, we say that it is time in the market that’s important and not timing the market. And the best way to avoid market timing is through regular investing, or the systematic investment plans. SIPs are attractive because of their affordability as the monthly amounts tend to be low. More importantly, onger-term investors pay an average price for units over time and this helps beat stock market volatility.” Harsh Joshi, VP and Head - Wealth Management, Motilal Oswal Securities, sums up thus: “Equity mutual funds are advisable for investment for a longer duration of three years or more and we would advise against timing thc markets for investments held for longer duration.”

Time To Invest In Mutual Funds

It is time in the market that’s important and not timing the market. And the best way to avoid market timing is through regular investing, or the systematic investment plans.

A fret the brisk raliy since March 2009, the stock market currently appears to be in a consolidation phase hovering in the 16,000-17,000 range. Investors are now waiting in the sidelines, hoping to join the party once the market makes its next upmove. The marker in turn is waiting for the next trigger to start on its upward journey. However, no one knows when the rally will happen, but everybody expects the rally to happen sooner rather than later.

But most of these investors may not know which stocks to invest in and, once the rally starts, they may jump on to the bandwagon and invest in some stocks which they feel will be next multibaggers. Their expectation may be on the basis of mere hearsay or their own gut feeling. They may neither have the expertise in selection of quality stocks, nor the time or the inclination to engage in painstaking research for picking up good stocks. Result: most of them end up with losses and dud stocks in their hands at the end of the rally.

So, what’s the way out for these investors? The answer is simple: buy equity mutual funds. If you don’t understand equities market, buying equity mutual funds is probably much better than buying equities themselves. This is because equity MFs mirror the stock market and when the market is going up, the NAVs of the equity MFs also go up. This appreciation in capital comes without any hassles and much lower risk as compared to investing directly in stock market. There are other reasons too why one should go for mutual funds at this point of time. Let’s look at these reasons to understand the rationale of mutual fund investing.

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Stocks: Buy SAIL

 

SAIL bottomed out by posting an intra-week low of Rs. 091.50 during the week ended 09th March 2007, staged a smart rally but ran into resistance from the 116 level during the week ended 30th March 2007. The scrip couldn’t sustain these levels for long, but recovered smartly, and peaked by posting an intra-week high of Rs. 167.10 during the week ended 20th July 2007. SAIL declined from here, struggled a bit, entered a medium term uptrend, appreciated to peak at an intra-week high of Rs. 292.50 during the week ended 14th December 2007. The scrip declined rather sharply from here, received support from the 055 level to bottom out by posting an intra-week low of Rs. 055.25 during the week ended 21st November 2008 only to stage a smart recovery. Currently Sail Limited is
in the process of commencing its medium term uptrend after a corrective movement on the weekly chart and with the mechanical indicators looking positive, a further upside from these levels cannot be ruled out.

Stochastic-Buy ROC-Buy RSI-Buy Resistance: 196, 210 55 Week EMA: 167.03
Trading Pointers:
Indicators : MACIl-Sell RMI-SeU
Support: 173, 155
BSE Code —500113

Stocks: Buy Financial Tech

Financial Tech, bottomed out by posting an intra-week low of Rs. 988.05 during the week ended 16th June 2006, took support on the 999 level, commenced a short term uptrend, rallied to peak at an intraweek high of Rs. 2225.00 during the week ended 01st December 2006. The scrip couldn’t sustain these levels for long, almost took support on the 1641 level to actually bottom out by posting an intra-week low of Rs. 1641.35 during the week ended 09th March 2007. Financial Tech. moved sideways for the next few weeks — recovered to peak at an intraweek high of Rs. 3048.00 during the week ended 29th June 2007 only to decline from here. Currently the scrip seems to be on the verge of forming a higher top, higher bottom formation on the daily chart due to significant support at lower levels, could commence a medium term uptrend and with the weekly mechanical indicators also looking better, indicating the possibility of a further upside from these levels.

Trading Pointers:
Indicators: MACD-Sel RMI-SeII Stochastic-Buy ROIl-Buy RSI-Buy
Support: 1366, 1257 Resistance:1467, 1519
BSE Code —526881 55 Week EMA:121 2.57