Understandably, these are difficult times. The NIFTY dropped under its 200 day moving average, a key trend indicator that institutions watch and which could trigger redemptions.
On Friday’s close the NIFTY settled just two points under the psychological barrier of 10k.
Redemptions by institutions – when they come – will drag the NIFTY further, followed by a freeze in domestic SIPs. This is where your worse case scenarios play out and urge you to be the first out the door before the roof comes crashing down.
My knowledge of technical analysis is basic and on TradingView you will see people calling out bearish patterns such as Heads and Shoulders and Rising Wedges.
Volatility is high and momentum indicators show the NIFTY is oversold. I know at least one Technical wizard who is buying based on this logic. But let’s remember that this (oversold with high volatility) was the same scenario in September 2008 and the worse might yet be to come.
In late 2017 after a long wait green shoots have appeared in stock market earnings, giving hope that current high market valuations may finally be sustainable. The bad news is that 2018 brings with it an expectation of an increase in crude and other commodity prices key for Indian Industry.
This is very bad timing for the economy, particularly small industry which is already reeling from demonetization and GST and is very sensitive to raw material prices.
GRAPHIC: India increases import tariffs on 📱📺📹🎥💡 & other goods in a bid to stimulate domestic production.
I am new to Technical Analysis and this post is not a BUY/SELL recommendation.
I recently wrote on how the announcement of the Hosur airport might be an inflection point for TAAL (NSE: TANEJAERO) in way of monetizing its fixed assets.
Taneja is a very speculative scrip because there is not much information from fundamentals (low EPS, slow moving industry), so in this post I delve into some technical charts to see if Price and Volume behavior could give me more information on how the market is reacting to the news.
Here’s a copypasta from Investopedia on how to use the MACD.
The concept behind the MACD is fairly straightforward. Essentially, it calculates the difference between an instrument’s 26-day and 12-day exponential moving averages (EMA). Of the two moving averages that make up the MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower.
Look how the 12-day EMA rises above 26-day EMA after a long subdued period on March 30, 2017. What happened on this day?
March 30 was the day when the Indian Central Government announced routes assigned to 5 regional airlines under the low-cost UDAAN scheme. One of them is TruJet that plans to use the Hosur Airstrip for regional flights to Chennai. For more details read the analysis of this announcement’s significance.
Let’s zoom in a bit.
You can see how the news was priced in after 31st March and the short term trend became Bullish as the blue line (short term Exponential Moving Average) increasingly diverged from the long term Red line.
Stocks react to news all the time. Why is this significant to a fundamental analyst like me, you may ask?
The above is a 5 year chart of weekly volumes in Taneja Aerospace. You will see the highest 5 year weekly volume was during the week of April 10, 2017 after a brief lull period.
It may be safe to assume this unprecedented surge in volumes in response to the news that broke on March 30, 3017 which has significant ramifications for TAAL which operates the Hosur airstrip. Let’s break this week down a bit more to examine what’s been happening under the hood.
You can see above that the surge in price was supported by the largest weekly volume in 5 years, which was followed by a sell-off – which was probably triggered by HNIs “stuck” in Taneja for a long time and who used this rise in price as an opportunity to offload their “stuck” shares.
Remember the last time Taneja went as high as 68 rupees was 1-year ago in January 2016. Since this is a non-profitable company and a speculative grade stock, its price responds mostly to “news” or “noise” and a lot of folks were stuck at those higher levels in early 2016. So the price range of 65-68 serves as a RESISTANCE zone for Taneja Aerospace’s stock price.
This is indicated by the huge volumes and red candlesticks (selling pressure) whenever the stock hits this resistance price range, even if it is preceded by white candles in prior sessions. See the price action for earlier last week (24 July) for the most recent illustration. High volume buying, following by high volume selling when the stock price hits the resistance zone.
So where does it go from here? There were 3 significant candlestick patterns in the recent weekly chart labelled 1, 2, 3 in the image below.
White candle with huge volumes. Like the week of April 11 and June 15 – all surges in price have been accompanied by huge volumes which are usually twice or more than the selling volumes.
Long lower shadow – after selling in the resistance zone, a bullish indicator shows itself on 25th July. Volumes are dropping significantly.
Doji – which shows the fight between bulls and bears is coming to an end. The opening and closing price are nearly the same and the selling pressure has been absorbed.
The stock has been range bound for a long time. In the short term it seems the price is being kept down artificially by traders and short positions. These traders sit it out on days of huge volume as seen by the clean white bullish candlesticks. Weak hands and “stuck” HNIs seem to be almost out of this scrip and we may see significant moves in the future once accumulation/distribution is complete.
This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.
Interesting lecture by Professor Aswath Damodaran on intrinsic valuation, where he breaks down the use of the Discounted Cash Flow assumptions in some detail:
Interesting how the students approach DCF and seem to collectively conclude one of the Professor’s portfolio stocks (Twitter!) is overvalued by 1000%+.
It appears that in his investment decisions the Professor can take a contrarian position vis-a-vis his own field of study – where he is counted as among the best. A lesson for all the excel snobs amongst us. Stay humble.
Perhaps this is also because – as his lecture amply demonstrates – the DCF calculation has a lot of moving parts. When you have a lot of moving parts, the risk of error in each moving part gets multiplied to give you an overall risk of error with valuation using DCF.
So it helps to keep it simple while doing valuations. Here’s why I stick to a conventional, back of the envelope calculations like the Price Multiple Model to begin with. I wrote about how an investor can use the Price Multiple Model as a first step valuation, and combine it with other models.
Apart from the complexity, there are other problems with using the DCF for small caps:
The Small Cap Risk Premium is hard to determine and there is no sure way to know it exists!
Small Caps are subject to cyclical risks, which can lead to wrong factor assumptions in valuation
It is hard to predict steady returns with young companies
Cost of debt can be hard to calculate for Small Caps that are not investment grade or do not have a debt rating assigned to them
In valuing a Small Cap, it helps to understand intangibles first. It is a case-based approach that takes into account promoter quality, market size, competition, input prices, the balance sheet and scuttlebutt among many other factors.
In short – investing in small caps is a little like Venture Capital investing. Numbers are needed for comfort, before you take that leap across the void of permanent Capital Destruction.
This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further
I came across an interesting Accenture study
Artificial Intelligence is expected to drive a new wave of rising productivity, similar to what happened during the Industrial Revolution. In numerous economies, especially developed countries, increases in capital and labor are no longer able to drive decent levels of growth. Artificial Intelligence is seen as a new factor of production that can change the situation by transforming the basis of economic growth.