Market Analysis Before New Year

Dear Readers,

Equities rallied last week almost everywhere in the world, almost giving an upside direction for New Year 2010. There are few important things to note though. I will put my views on the possibility of breakout on upside looking at technical indicators.

Dow Jones Industrial Average:

This most followed index did manage to close above 10500 (weekly closing) which was proving a big resistance so far for almost a month. However, volume does not confirm a breakout but I give it benefit of doubt as last week was short in duration and the day it closed above this level, had half day's session. However, the daily closing on Dow Futures does not suggest any breakout as the close and high, both were below previous ones. Unless there is clear direction from both the futures as well as index, we should be careful.

S&P 500:

This is the index I follow most and in my opinion its far better to look at S&P 500 chart than that of Dow Jones Industrial Average. The S&P 500 index managed to close higher both on weekly as well as daily time frame. Volume has not confirmed but again this may be due to the shortened week. The S&P 500 Futures has also closed on new year highs both on daily as well as weekly time frame and as of writing this post, it is trading marginally higher near 1123. I guess there can be more upside in coming days.

Nasdaq:

This index had already given a clear breakout almost on last Monday and had gone up only higher since then for five-six consecutive days.

Indian Markets:

The S&P CNX NIFTY index of India also managed to show a breakout kind of move on last week closing. This is the highest close since April 2008 and came on the clouds of rising inflation and worries that RBI (Indian Central Bank) could take steps like raising interest rates. This week will be acid test for for this breakout.

Now, let me share this interesting thing I observed. For few days and even weeks I saw US Dollar and equities rallying at the same time! So far it was taken for granted that a strong dollar implies weak equities but that has not been holding for some time. Last time this happened was during late Nov and early Dec of 2008 and we know what happened thereafter - there was a decisive change in trend of both equities and US Dollar. Now, this indicates either there is going to be a change in direction of equities OR this rally may be on strong fundamentals! which I doubt. Let us see how things pan out in new year 2010 which will be an important year for all market participants.

CCC - Copenhagen, Climate Change and Climategate

Dear Readers,

Today I am not writing about markets, instead, let me tell how I feel about Climate Change and the infamous Copenhagen Meet. Global Warming is not a fiction but a reality, you don't need to check scientific data, you need to only look at your surroundings with a closer look and you will understand how things are changing in real world (forget 2012, the movie).

The Fact:

The Fact we have today is that our planet is warming. NOBODY is against it as long as I have assessed it following various media - TV, Internet and local people. Almost all know this reality that climate is certainly changing. IPCC scientists gathered data that demonstrates these facts. Al Gore came out with "An Inconvenient Truth", a documentary in which he talks about changing environmental and geological facts.

The Doubt:

There is one community which is hard pressing on proving that all this climate change thing is rubbish. Their efforts have made it a conspiracy theory and their arguments are as valid as that of scientists. They created real drama out of email leaks of IPCC scientists (Climategate) which suggests that data was deliberately presented in a way that proved their logic of climate change and if all data of last thousands of years is present, then this looks like to be only a warming up earth cycle and not anthropogenic global warming. Among the most vocal opponents of climate change being anthropogenic (caused by humans) are Free Market advocates. Here, I feel the punch. I also belong to that group (Free Market) and at the same time I am deeply concerned about climate change. So, do I have split personality disorder? Or I am plain hypocrite?

The above details bring out two points:

1. Climate Change is real and we are definitely witnessing changing weather patterns.
2. The cause of this change is doubtful, it may be anthropogenic and it may be a natural cycle.

The first point is where most agree. We have a changing climate pattern and threats of natural disasters and sustainability of human beings and other life forms is in danger. The second point is where people are divided. Those who believe it is caused by human activities warn of dangerous consequences if we do not reduce our irresponsible actions. While on other side, those who believe this is not anthropogenic, want governments to stay away and let business as usual run its course. Here is one presentation I found on the internet which supports the skeptics views:

You can find the link of presenters at the last slide.

So, which stand do I take? Well, I am doubtful. I doubt both camps is some ways. However, my personal thoughts are in support of IPCC scientists. I can not digest the skeptics' line that human activities don't have to do anything with the changing climate pattern. We humans have grown from a mere 1% of vertebrate biomass 10000 years ago to 98% today! It means we are effectively in control of things much more than natural courses. See for yourself, the breakthroughs in almost every field of life - medicine, technology, mining, energy consumption and food wastage. We are no more a 'competing' species, we are a CONTROLLING species. We have the power to shave mountains, to stop and change course of giant rivers, to dig miles into earth, to produce obscenely high energy wasting machines and so on.... And along with this 'development' we have always succeeded in keeping one trait intact - IRRESPONSIBILITY. But then that's how life works. Life is never responsible, at least for other fellow life elements. Life prospers on consuming other life forms. This is how nature works. But, if this is true then how come life has succeeded in making itself successful? Well, that's because so far (before humans) life was evolving on consuming other lives in a way that basic equilibrium was established. No animal ruled this planet forever, however powerful it had been. But, we humans seem to be the first animal that will rule this planet, forever. We have become efficient but not responsible. We don't think like an intelligent being when it comes to consumption. We consume as if resources are aplenty and will never run out. What can be worse is we had and still have economists who advocated overconsumption as a means to prosperity. The result? We ended up with a world where resources are fast depleting in a long term view. Those who are more developed, consume many times that is required for them. They believe in use-and-throw. They believe this creates better economic opportunity!

So, to say that human action is 'not a factor at all' is a very irresponsible statement.

The Solution:

Here is where I take side with Free Market, Capitalistic society. Whether humans are causing it or not, any forced attempt to stop free markets can not work. Any govt action which threatens free market economy and people's will can not work. In fact, its the free market system that can find the solution. We have found out better and efficient ways to produce energy through course of time without any govt intervention. We developed ways to do things in a better way and most of the developments were without govt action. Whereas, wherever we have govt doing things to 'promote' green energy etc, we see it fail. An example is here in India. Our govt has been 'promoting' alternative energy in the form of solar panels, solar cookers etc with subsidies for a long time, not out of environmental challenges, but out of massive oil import bills and energy security. However, I have not seen those efforts bearing fruits at all. If something is inefficient, then no subsidy can help it.

If we had true free markets, then we would have seen a definite change in energy use. Why does Indian govt subsidize petroleum products? Why are the rates kept artificially low at most times? If we had people paying actual price for consuming these products, they would consume it rationally. Indian govt does this and so do many other govts but the effect is positive only for oil exporters. Likewise, the easy money creation by central banks around the world (US, the leader of course) creates opportunity for misuse of natural resources. The global recession that started last year or so, promised to reduce excesses in consumption but again, the govts and central banks made sure people continue overconsuming and now they call for a control? Complete nonsense. Leave people free and let them decide for themselves, only then we can expect reduction in irresponsible actions.

The Copenhagen Meet has failed as world leaders could not arrive at some concrete solution. In the end, they managed to leave tons of carbon dioxide themselves which was totally unnecessary. It was supposed to fail as developing countries will not agree (I am not taking sides with them) unless the developed ones actually cut their irresponsible behaviour of overconsumption which leads to more greenhouse gases emissions. Whether the greenhouse gases are dangerous or not, our politicians definitely are.

Latest Investment Hotspot: Somalia - Weekend Humour

Dear Readers,
In today's world we all as investors are always in search of the latest and hottest investment candidate and place where it can be found. There are stocks and commodities exchanges all over the world where we can buy and sell assets. One who knows or has better idea of which place and which asset is going to produce best returns, can create wealth for himself. So, I thought why not find out something new and big for myself? Here is what I found out - Somalia.

Yes, Somalia, the land of pirates. Of late we heard and read so many stories of Somalian pirates hijacking merchant ships and 'earning' obscenely good 'returns'. Now, I am not that 'brave' to start my own venture out there and so I need to invest in some 'reputed' pirate companies. How nice it would be if there were a Stock Exchange which listed big pirate firms of the area! What? nonsense? It may be but this dream has meterialized! There IS a sort of Stock Exchange in Somalia and 'investors' are buying 'shares' of 'reputed' pirate firms!

Don't believe me? OK, read following lines:

"In Somalia's main pirate lair of Haradheere, the sea gangs have set up a cooperative to fund their hijackings offshore, a sort of stock exchange meets criminal syndicate."

This is not something I conceived, this is a piece of 'news article' from Reuters. To read it in detail click here.

Well, on weekends I am in funny mood and stories like this 'inspire' me to share them with my readers.

Have a nice Weekend and Sunday.....

Dubai Drama and Continuing Psychology

Dear Readers,
Last week there was a scary selloff in both equities and commodities when news broke out that Dubai World, a Dubai firm which has expossure in real estate companies investing in Dubai property market, asked for delay of debt repayment till May 2010. The total debts amounted to around USD 60 billiion!

According to mainstream media, this news created panic in 'investors' who rushed to sell whatever they had, equities, commodities etc. as this raised and renewd fears of 'bigger than what looks superficially' crisis. Well, my friend Abhijit told me one thing - "this should be real buying opportunity". He was right. It was definitely the kind of fall a bullish trader needs and those who bought the decline on Friday are in short term profits now and may get even more. However, this is not something new, in fact, this is what we know as 'Buy on Dips Psychology' and works very well during bull markets. Since Mar this year, traders who had this psychology have made very good profits.

So, what should we learn from this incident? A lot. As long as the underlying up trend is intact, traders will continue to benefit from this tendency to buy on selloffs but this is exactly what I think is important when markets change direction and the underlying uptrend breaks. This very tendency is alive even after a major reversal and traders buy initial 'dips' , then they buy bigger selloffs. Then, this tendency becomes the driving force behind reinforcing the 'reversal' as all those stuck traders sell their 'assets' on a bounce. This psychology does not disappear in early stages of that changed direction and traders gradually shift to 'sell on rallies' from 'buy on dips'.

Traders are not driven by news but its the embedded psychology that drives their decision. News is only a very small factor and does not have big effect on price but it is definitely something which savvy traders can use to look for opportunities. Those traders who take decision solely based on news suffer most.

A Clarification

Dear Readers,

In my last posts I've mentioned US Dollar and its correlation with equities and commodities and the ongoing price action. Today, I received a phone call from a friend who did not want to put this issue in the coments section and so chose to directly ask me. Here is the conversation we had:

He: Do you really think dollar plays actual role in dollar based asset prices?
I : I did not write it anywhere, did I?
He: Your posts suggest as if US Dollar is driving the prices of assets like equities and commodities?
I : Well, it does, but, this correlation is not suggested in my posts.
He : So you mean it 'does exist' but not 'shown' in your posts?
I : Yes it does exist. But, we can not calculate or even guess the future direction of assets prices based solely on looking at US Dollar index.
Well, we need to understnad the US Dollar index first. before that, we need to look at currencies and how they are traded. A currency of nation A does not have a price unless it is put against that of some other nation, say B. So US Dollar in itself can be evaluated on comparing it with the currency of some other nation like UK. This doesn't give us complete information about USD as it may be strong there but week against Japanese Yen. So, there is the US Dollar index, which is actually an index of USD against a BASKET of currencies. Its actually five currencies against which it is meassured. These are following:

1. Euro (EUR)
2. Yen (JPY
3. Cable (GBP)
4. Loonie (CAD)
5. Kronas (SEK)
6. Francs (CHF)
   

What it means is we have an index which is meassured against only five currencies of the world. So, the US Dollar index can not give us actual data for this reason:

We may have all these six currencies going down and USD index may show stability. It may happen in times like today when every central banker wants a lower valued currency so that their country can stay afloat in crisis.

Then, we have also to take into account one important feature - carry trade. In currency trading, its not only the outlook of economy that matters. In fact, traders often find out a currency that has low interest rate and 'carry trade' with it with a currency that has high interest rate. For example, Japanese Yen (JPY) had been used as currency of carry trade because of Japanese Central Bank keeping interest rates near zero. What happens when traders chose a particular currency for carry trade is that currency keeps low against other currencies (against which it is traded, e.g., GBP/JPY). One of the reasons why US Dollar is for a good time losing its value is that most probably it has been started as a currency of carry trade, perhaps mostly for EURUSD pair (Euro / US Dollar). What is more important here is that traders use a heavy leverage in trading currencies - near 1:100. Some brokers offer even 1:400 leverage! So, the thing to consider here is the importance of any change in tide - a trader is subject to high risk if his position goes beyond the interest differential paid by the currncy pair. This can lead to overnight turnover in the direction of currency pair price. This all means one thing - US Dollar index can turn any side swiftly if there is a good enough catalyst.

This might be the reason why Gold is rising and making all time highs despite USD at 'only' 15 month lows. Otherwise, US Dollar index should also be at all time low if the correlation was that simple.

This should explain why the value of US Dollar index alone can't tell real picture and so, we must keep in mind that falling value of USD does mean bad for assets but we should not be limited to US Dollar Index. However, as we don't have better indicators, its better to use US Dollar index for our important decisions but only after we take into account many other things.

The other things we talked were not important to post here. I know many readers are well aware of the fundas behind US Dollar and currency trade in general, but I felt compelled to post these details for those dear readers who may be new to currency trading and might have been thinking like how this friend did.

Gold, US Dollar and Equities

Dear Readers,

You must be aware of how gold price is going up almost every day. The reserver currency of world - US Dollar has been going down but not making new lows. Instead, it threatened to start a rally in last two weeks. The mainstream media suggests gold is going up because dollar is going down. I disagree. Gold is not 'reacting' to US Dollar in the sense media suggests. If you don't believe my words then look at these charts from stockcharts.com:


As we can clearly see for last week candles that US Dollar Index chart shows dollar is moving up and comparing to gold chart, both were up last week! Which, according to media and pundits, can not happen. Why at the same time we see gold going up and US Dollar NOT going down?

There can be only few possibilities:

1. Speculators are betting on hyperinflation in near future.
2. Supply of Gold is limited and the way China and India showed their intention of buying gold implies a rise in demand.
3. No reason, it might be just a coinincidence.

The third one can not be considered as if it were true, then you would not be reading this post. There is definitely a reason and out of the first two, my bet is on 2. Gold real demand might have outdone its current and future supply in a manner that everyone is looking to acquire as much of it as he can.

On 15 Aug I recommended buying gold and a lot of it. Those readers who followed my advice must be happy today, but, I don't reccomend buying gold at this point of time. Its certainly not the right time to accumulate gold as in my opinion it has gone up substantially and so, investors should look at some good correction to buy gold.

The Dollar Index (US Dollar) shows its willing to move up after a big fall in last few months. But, looking at the chart, it should first break that downtrend line and rise above 50 SMA (on daily chart). If it does manage to stage a rally then we can see it retesting 80-81 level.

Equity markets did not show any directions last week and looked like mostly following US Dollar which kept going up and down but not meaningfully. Indian NSE Nifty shows a Reversal Day (looking at Friday's candle) and there is good possibilities that Indian equities markets may rally next week.

Free Live Charts of Dow Jones, Currency Pairs

Dear Readers,

I have added Free Live Charts of Dow Jones index and Currency Pairs like EUR/USD on the top right side of this page. These charts are easily customizable and you can even detach them. I am thankful to DUKASCOPY for providing this useful resource to my dear readers.

For Nifty Futures traders, the Ascending Triangle pattern has failed when it broke 5030 (the trendline support). Those who were long on this pattern should have been in profit as this pattern gave breakout at 4750. Not a bad trade of 270 points of profit!

Now, the Dollar is getting stronger and looking at US Dollar Index, it is trying to break 50 DMA near 76.5. Yesterday it could not close above that but did pierce it in intraday movement. If Dollar continues and gets above this important resistance then we may see it looking at 200 DMA near 81, which means a horrible picture for commodities and equities. However, as long as the downtrendline and 50 DMA holds, one can have the best buying opportunity. Let us see how it behaves in near future. Following chart of US Dollar Index is from stockcharts.com. Here is the link to this chart.

Markets, Politics and The Nobel Prize for Peace

Dear Readers,

In last few days we have seen so many things and that inspired me to add subjects other than markets to this post.

Markets
We saw Global Markets doing nothing significantly except one change - Indian Markets unwilling to go up even when global cues were good. For Nifty Futures, my stand is still for the Ascending Triangle which is intact so far.

Politics and The Messiah
I was not the only one surprised when they annoounced Nobel Prize for Peace to US president Mr. Obama. In fact, he himself was surprised. I have always had good respect for Mr. Obama, except for his economic policies, but in my humble opinion this announcement of awarding Nobel Prize for Peace is actually a big trouble for him. The Nobel Prize Committee has made him officailly Messiah and tied his hands at a time he is really surrounded by problems Iran, Iraq, Afghanistan and Russia.

Iran and its nuclear program is no secret to world and so is the position of US. A nuclear weapon capable Iran is bigger danger to US than what mainstream media discusses. Iran capable of nuclear weapons is direct threat to Israel and surprisingly, the rest of Arab World and they rely on US to counter those fears. I know, many readers are going to argue against this opinion as they have been misled by mainstream media that Arab World is against Israel and they hate US. That is what we have been made to think like, but not true.

Russia, since Putin took charge, has shown its willingness to stand against US, esp when US desire of expanding NATO to states of Europe that Russia has influence on. We do remember Russia's attack on Georgia last year which was a clear symbol of Russia declaring its intentions. Moreover, US needs Russia in order to fight war in Afghanistan and counter Iranian nuclear program. Recent decision to backtrack from deployment of missile defense system in Poland by Mr. Obama was probably his side of concession to Russia which in return would allow supplies to Afghanistan through its territory. Another thing that he would have reslished is Russian support for sanctions against Iran so that a strike on Iraninan nuclear sites could be avoided. But, Russia has not promised that as yet and is not likely to do either. To make things worse there was a 'news' about Israel's Prime Minister visited Russia and showed them a list of Russian scientists involved in Iranian nuclear program. Also, there was this 'leak' that there is a secret nuclear site in Iran being built. The reaction by Iranian president Ahmadinejad was this - President Barack Obama's accusation simply "adds to the list of issues to which the United States owes the Iranian nation an apology over." This is like challenging Mr. Obama to "do what he can". This shows how confidant Iranian president is about Mr. Obama being a weak US president.

The situation is getting worse than what we can imagine as Mr. Obama can either keep quiet or strike. NOW, keeping quiet and letting all this happen may not be the best thing to do for a US president, he can not let the label of 'weak' stick on to him. Then, striking Iran at the time when he is awarded Nobel Peace Prize is equally difficult. This is why I think he is more than surprised about this announcement of Nobel Prize.

One idea that comes to my mind is let the luck factor bear the burden, we can assume Mr. Obama is plain unlucky to have countered these circumstances. In fact, we can even blame his election as bad luck for him given the situation he had when he received presidential vote. Economic situation was bad and there were so many expectations from him. But, this idea fades away when I see how he reacted to those conditions. In fact, he had the greatest opportunity of lifetime! Yes, he could have done the best job by doing one thing - stay away and let the natural forces of Creative Destruction take their course. But, he, like all politicians, chose to intervene. Although this active intervention looks like things are returning to normal, the truth is there is a massive debt unwinding under way and these interventions will only postpone the real crisis.

I like him as a person who has a desire to change the world for good, but, I doubt circumstances will let him swim through troubled waters.

Paul Krugman in another Nobel Prize Ceremony

Dear Readers,

You know about The Nobel Prizes but probably you are not very familier with Ig Nobel Prizes. Each year, close to the time when the real Nobel prizes are awarded, the Ig Nobels are bestowed upon scientists whose work "makes people laugh, and then makes them think," says Ig Nobel Master of Ceremonies Marc Abrahams.

The official theme of this year's Ig Nobels was "risk"--a nod to the recent collapse of global financial markets. The Ig Nobel prize in economics this year went to the leaders of Iceland's major banks, who were widely credited with destroying their country's economy. On stage to bestow that prize was Paul Krugman, a Nobel Prize–winning economist of Princeton. Did you read? Paul Krugman? The economist who once (in 2003) was 'scared' by inflation and high budget deficit, NOW has changed personality entirely!

He was agaisnt Greenspan then, and today, when Bernake is following Greenspan's footsteps, he is happy!!! This article on mises.org tells the truth about the Great Nobel Winner.

If there is God, then I request Him to save us from these 'Intellectuals'.

Nifty Futures Analysis - Ascending Triangle Pattern

Dear Readers,

In my post on Sat, Sept 5, I presented the possibility of a strong Ascending Triangle pattern on Nifty Futures Daily (EOD) Chart. The pattern developed and gave a Breakout on Sept 7 and prudent traders must have taken notice. After the breakout (BO) it was important to watch for a retest of BO level and then we got it as well on Sept 14. Following is the latest chart of Nifty Futures EOD with details:

Notice the nice rising uptrend line TL1 which also acted as support line for the Ascending Triangle. Even if this pattern fails, I will wait for this TL1 to act as support, most likely where it crosses TL2 at about 4770 (see Down Arrow). The resistance line of Ascending Triangle - TL2 was taken out on Sept 7 and then retested on Sept 14 (see UP Arrow). Now, since then, there is another trendline acting as support - TL3. This TL3 should act as first support if the upward momentum continues.

The Doubts:
I was not very excited on the BO of this pattern as volume was not higher that could confirm it. However, if price is running on its own then we can not keep arguing against the trend.

I am sure you dear readers must have taken advantage of this pattern. Don't forget, if this pattern runs its course then the target is 5500 - 5600.

Happy Trading...

The New War Begins Now

Dear Readers,

Today I read one news on yahoo finance and it confirmed my fear of governments resorting to protectionism. Politicians are always like that, no doubt, and it was expected. In addition, I expect a lot more of these meassures by lot more (possibly all) governments around the world.

First, the news - President Barack Obama has imposed new punitive tariffs on all car and light truck tires coming into the U.S. from China.

This is one small step by The Man which will likely be a Giant Stride for Mankind. The great American President has started New War (they are really good at it - New Wars) and sure it is going to result in other nations following suit. Any sane person with a knowledge of economics knows how bad can this protectionism be for any possible global economic recovery, but politicians don't care about that. They want to please masses and masses like such things, even if its not in their favor! To put it simply, who is going to benefit? the consumers (read masses) who will be deprived of free choice of products and will need to pay more OR the inefficient domestic producers who can sell their products at higher prices without competition?

Expectedly, the Chinese are unhappy over it. Read following para from that news :

"China strongly opposes this serious act of trade protectionism by the U.S.," a statement posted on China's Ministry of Commerce Web site said. "This act not only violates the rules of the World Trade Organization but also violates the relevant commitments made by the U.S. government at the G-20 financial summit."

Why did He do it? Well, the culprit is Healthcare Bill. He needs support of unions for the bill. As its put there in that news:

While the White House announcement late Friday is likely to placate union supporters important to the president's health care push at home, it could alienate the strategically important Asian powerhouse and trading partner.

Now this is called Double Jeopardy - First, the bill itself is not the right thing to do if one cares about free markets and long term well-being of people; Second, in order to pass the bill, He has done one of the worst possible things a politician in power could do. But, isn't it that the consequences of this move are well deserved by the masses?

Nifty Futures Analysis on Daily Chart

Dear Readers,
Today I am posing my views on Nifty Futures based on Daily Chart (EOD). This is after a considerably long time when I posted my analysis, partly because I was busy doing other things and partly because I did not find such interesting formation to share.

Coming to the point straightaway, let me start with trendlines - Following is the Daily Chart of Nifty Future (Linear) and it show a rising uptrend line holding since March lows:

The interesting thing is if we switch to log charts, then this trendline was violated (downwards) in mid-august and since then acted as resistance. However, the resistance was not that strong and my conclusion is this trendline looks not very valid in order to guide us for any meaningful trade.


The Ascending Triangle:
The most important thing that took my attention is the development of an Ascending Triangle pattern on Daily Chart. Let us first have a look:

Now, this pattern is identical on both linear as well as log chart and the implication is - if it manages to get through above 4770 with good volumes and stay there then according to Ascending Triangle pattern 5500 - 5600 is there as target! Falling below 4500 (volume not important) will mean this pattern is failed. Let us see what's in store in near future.

Failing Patterns are in Vogue:
Having written the above views about a possible Ascending Trianlge, I must remind my dear readers that patterns are not fool-proof and can fail. Recently there were two big patterns that failed miserably! First, there was a Head and Shoulders pattern, which, after breaking the neckline failed. Then, there developed an Inverse Head and Shoulders pattern and it too failed well after breaking neckline!!! Please see the following chart:


So, as we can see clearly that in the recent past we witnessed failure of big promising patterns, we must always remember that patterns can fail at times. If this pattern does give a breakout, we should never think that now the target is there for sure. Like what happened with H&S and Inv H&S, it can also show a false breakout, so keep your stops properly.

Happy Trading...

The Recovery? Or The Latest Bubble?

Dear Readers,

When almost everyone is sure about the state of economy world over getting better and many waiting for the good old days of 'sky is the limit' culture, there are signs of worry again.

First of all I must clear it once again that all these fundamental details are not for short to medium term traders as markets are NOT driven by news or events. This post is only a way to express my feelings and thoughts on the way things are shaping in broader economic scene.

October, 2008 was the month when we witnessed bears taking control of almost everything from stocks to commodities to BDI. BDI (Baltic Dry Index) which is a meassure of shipping costs for dry bulk commodities plunged more than 90% then. BDI is a barometer of how well goods are moving around world signalling demand (or lack thereof) for commodities.
Please look at the following log chart of BDI from investmenttools.com :

Please note that the RED trend line is my drawing. When this line broke down in October 2008, it was necessary to have a retest of this line. So we got this recent rally till June 2009. The catalyst required for this up move was not real recovery but the Chinese madness! Yes, the Chinese went on a buying binge courtesy that $587 billion stimulous package. They started importing commodities like there will be no tomorrow and that too despite having their factories being shut down as exports kept falling! This is one great example of how central banks and govt intervention creates non-sense in markets. There was no other use of that forced money and speculators had no choice but to push that money into commodities.

Remember last year's drama of oil going to $147 ? If you recall I had posted about "Oil Vessels just lying idle in high seas paying as high as USD 175,000 per day as charges". We all know what happened after that. When madness reaches its peak we witness some of the funniest things. History reapeats itself? it may not but may do enough to make you feel nostalgic! and this time its yet another nostalgia.

The index plunged once again by as much as 35% so far from June highs indicating the madness may soon be over. The recovery? my foot.

The Story of Bailouts and Stimulus Plans ! Hilarious

Dear Readers,

Today I visited my friend Jules' blog and I kept laughing out loud for almost half an hour :) Well, this is not only funny, this is actually the fact behind the so called bailouts and stimulus and what you have.

Let me put it right here exactly how it is and share with you: (all orange is exactly copied from the site mentioned and black is what I typed)

Stimulus plans

In a small town in the United States, the place looks almost totally deserted. It is a tough time, everybody is in debt and everybody lives on credit.

Suddenly a rich tourist comes to town. He enters the town's only hotel, lays a 100 dollar bill on the reception counter as a deposit and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher.

The butcher takes the 100 dollar bill and runs to pay his debt to the pig farmer.

The pig farmer runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.

The hooker runs to the hotel and pays off her debt with the 100 dollar bill to the hotel proprietor for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything.

At that moment the tourist comes down after inspecting the rooms and takes back his 100 dollar bill, saying that he did not like any of the rooms and leaves town.

No one earned anything.......... however the whole town is now without debt and looks to the future with a lot of optimism.

And that, ladies and gentlemen, is how the United States Government and the State of California are doing business today.

Got the idea? how the Keynesians are trying to CHANGE things???

THINK THINK THINK
What pleases you may not be the elixir, it may be poison in disguise...
Obama may not be real Balm for this headache...
enjoy your weekend and sunday...

'Why I Pay with Two-Dollar Bills'

Dear Readers,

Today I read one interesting piece on mises.org and it impressed me so much that I decided to share it with you. The article is about efforts of Mr. Briggs Armstrong trying to educate people about Central Banks' inflationary monetary policies. The interesting thing is what he does to do that. For complete article please visit :
http://mises.org/story/3584

I hope you will find it interesting enough and talk about it so that more and more people know the facts.

Have a great weekend and Sunday...

World of Brrowers - Will Aliens be Lenders?

Dear Readers,

We all know how markets in India celebrated the return of Manmohan Singh headed UPA in power. FIIs bought like there is no tomorrow and retailers jumped the bandwagon as well. Although there are talks about this fierce up move in stock markets owing to the "announcement" of Sensex 100,000 by some Elliottist on CNBC, the fundamental reason for market up move was linked to the so called "ability" of team Manmohan Singh to restart growth of economy. The investors argued that this new govt has the required power to start reforms as Left Parties were out and silent. What reforms? The reforms in subsidy, FDI and disinvestment in public sector undertakings (PSUs) mostly. The talk on street was UPA will sell PSU stakes and use that money for fiscal stimulus (infrastructure spending). Then came the surprise in Budget 09-10, last week. Pranab Mukherjee, the "experinced" Finance Minister presented the budget with bang surprise! It did have massive fiscal stimulus plans but not funded by disinvestment of PSUs and instead through borrowing. Markets refused to digest the record deficit planned in the budget and crashed.

UPA had the best chance to do the required (although I do not approve of ANY govt intervention in economy). Left parties can't be happier! I have this feeling that if we had Left rule in Center, they would have opted for disinvestment route themselves!!! But, the govt decided to borrow instead of selling stakes in PSUs.

So, now we have a clearer picture of world. US of Socialist A borrowing massively, Europe countries borrowing massively, Japan borrowing massively and so other countries of Aisa and now India borrowing massively! In other words all of world plans to borrow massively!!! Very well and nice! But, if all governments are looking to borrow that heavily then who is going to lend? According to some estimates this amount required by world may be around USD FIVE TRILLIONS!!! Please look at the following pie-chart which I found on internet (source: http://www.investorsinsight.com/)-

As you can see the US wants the biggest and more than half its share :)
where will the money come from? And, that too at a time when the world is in a deflationary Depression!!! When the entire system is deleveraging!!! If we had friends on Mars or some other planet then I'd not be that worried but there ain't any Aliens who'd fund the Earth.

Intersting Times!!! Indeed.

The New Bubble

Dear Readers,

I had been off for sometime and so there was no post. In the meantime you witnessed so many things - rallies fading, investors being in doubt etc etc. Apart from these "not so interesting things" , there are advices coming out from various sources on what could be the "next big thing". Speculators are digging it real hard to find out the next "investment" story as quickly as they can and many have come with interesting conclusions. Some advise buying energy (read crude) as they think its going to be scarce in the future. Some advise buying defensive stocks. Then, some advise buying natural resources like Uranium, some say buy "alternative" energy and some say buy agricultural land. Gold advisers are commonplace (including myself). But, whatever is right investment can be the potential "bubble story" in future. Bubbles are looked at with contempt from common people but speculators shout yum yum if they find one. Today, I tell you what is my take on The Next Big Bubble.

Let me start with basics. What is the basic requirement of a person? or say a living thing? its FOOD. Yes, we all need food and water for basic survival. Yet, recent industrial growth has made growing food as a non-appealing business. Farmers have been out of fashion for long and its today's high food prices that make many economists and speculators think about growth and earning potential in this field. Rising world population and decreasing arable land has made it even more appealing to start looking at Agriculture as next big investment. I think the logic is very good and we can safely assume that in order to fulfill demand for food there is going to be a big up move in agriculture and related investment.

Bubble? how? Well, I am very convinced that this is going to be next big bubble. Its true that demand for agricultural and farm products will grow with growth in population and prosperity but I have few reservations (doubts). First, I think the demand is nearing its peak (it may take some time for this peak to materialize). Why the peak when population is still growing significantly? My answer is - we may be overestimating future demand. Today we consume food in a way that we waste a lot of resources during processing. We have developed a dustbin culture and waste too much of food as our comfort level dictated. However, if economic conditions continue deteriorating in near future, we may change our eating styles and manners. We may start using lesser ingredients and we may restart "backyard garden" culture once prices of basic food items like vegetables become unaffordable. This is human nature to find ways to make things easier and simple (though we tend to over-complicate them in prosperous times).

I think this is going to happen - we will see a lot of people "trying" their luck at agriculture as demand rises and then when its at the peak, mother nature will be quick to turn things around - how? no one knows for sure but my guess is there may be few potential causes - epidemics that shrink global population, global warming, wars... anything. I don't know what will be the exact cause but I am very sure some or other cause will cause global population to stall or may be reverse!

By saying what I've said in no way means I "want" that. In fact, I think the natural cycle of restoring balance will find some way to contain over growing population. I wish if we could manage to grow for eternity without any obstacle but mother nature may disagree. So, prepare for The Next Big Bubble.

Changing Trends - Changing Fast?

Dear Readers,
I had been maintaining that markets in most part of world are in uptrend and then came May 6 and I posted my WARNING on seeing some interesting developments on charts. The levels for S&P 500 and Nifty Futures (929 and 3730 respectively) I posted that day remained not even touched and unbroken. But, then came Monday, 18 May. There was this BIG DRAMA in Indian Equities markets and a new chapter in history was written - First time ever in Indian history of equities there was a circuit up! The ostensible reason was "central election results in favor of a stable govt". That day what happened took almost everybody by real surprise. All pundits were expecting anything but a clear mandate to Manmohan Singh and Soniya Gandhi led UPA. What was real surprise was that Indian National Congress party had more seats than expected, giving it the power required to do what they want, rather than so many small allies having constant pressure on day to day work of govt. While there was no real fundamental change in economy on that day, the very expectations of stable next five years (read hope or greed) led to that kind of historic day in Indian Markets. If something of that magnitude happens then no chartist can have real explanation...

This unnecessary drama in Indian Markets has washed out all signs of "oversold" conditions on even long term charts and now we see Indian Indexes almost 50% recovered from last year's fall. Remember, the historical upper circuit on Monday could be a dangerous sign - how many times did you see such big moves on the upside during bull market? as my friend Abhijit says - Bull Markets have circuit downs and Bear Markets have big up moves. The historical circuit up only worsens the situation and whatever positive outlook I had in Indian Markets has been washed for the time being. This can be a preface to a long scary story.

On the other hand S&P 500 once again tried to conquer my 929 level last week but it failed again. I have so far been proved right about it and I strongly hope that my advice of "top formation" did help my readers, so far. It also bounced from 870 odd level which my important support and if it managaes to break down below that, then this bear rally will be history.

Now let me take this opportunity to bust the myth of greener pasture that Indian "investors" have. They have jumped to the conclusion that this election result has paved way for Manmohan Singh to kick start economic recovery and worst is definitely over as there are no left parties to threaten development. The above conclusion is not my imagination but a result of conversation with some clients of our brokerage as they started calling me on Sunday the 17th and asking for how they can buy on Monday morning so that they are not left out. I told them there was virtually no possibility of buying on Monday as the Euphoria was expected to hit upper limits. Also, I told them even if they can, they should not. My reason was simple - euphoria don't last long enough to make you any good profit. Those who had gambled on Friday and had open positions did benefit tremendously but you can't praise gambling even if it made you rich.

Coming to the reality, there has changed NOTHING that justifies a possibility of strong growth returning in at least next two years. This crisis in global economy can not be "cured" by an economist Prime Misnister of India alone. If it were a usual cyclic downturn then govt could do few things to manage but this time its truly global with systemic meltdown! The entire economy of world is in danger of being torn apart due to massive leverage and the deleveraging process has only started! This chart from www.investorsinsight.com shows what is the state of Global Trade!


India, however strong, can not post those 9% GDP growth figures in such circumstances.

Then comes the govt plans of massive infrastructure expenditure (fiscal stimulus). Somehow people forget that real money is required for any project even if it is funded by govt and govts anywhere in the world except US can not run deficits beyond certain limits. US exception owes to the reserve currency status of Dollar but even they can not run massive debts forever, at least when the system of "US buying Asian products, paying them dollars and Asians buying US debt with those dollars" is collapsing. China, which is the biggest buyer of US debt is "concerned" and already showing signs of pulling out from this "burden" (buying gold and signing agreement with Brazil on future trade in their currencies instead of US Dollar). Germay, Japan and UK, the big economies are down 14, 15 and 8 % this quarter! How can one imagine India returning to past growth rates ? I will be pleasantly surprised if India can grow even by 6% in next two years at least. And this scenario does not make any case for investing in Indian Equities at such high PE ratios.

Markets try to be rational but the fact is they are not. They are run by emotions more than true fundamentals as people usually think. They try to discount future but exaggerate some times and prove wrong other times. That is the reason we look at charts for trading rather than looking at fundamentals but what this week has done is a good distortion of charts to the extent that we will need at least one more week of stabilization in price pattern so that charts restart functioning properly.

Let us hope the masses do not remain out of sense for long...

Weekend Musings - Will Obama Magic Work?

Dear Readers,
Today I am posting here my thoughts on various "efforts" by govt , esp. Obama, the US President, in response to fighting ongoing Global Depression (some say its only a recession).

The Obama hope came into existence long back when he was campaigning for presidency of US. People (mostly Democrats and their supporters) believed Obama can be the only person who can help them out of this mess of economic downturn and his popularity was always increasing with every campaign round. Let me first outline what was and is being seen as "problem" -

• Decreasing jobs nationwide
• Decreasing housing prices
• Decreasing stock prices and 401(K) value
• Decreasing loan availability (credit crisis)
• Increasing Loan Defaults, particularly in housing
• and many more other things...

Whatever many people think, I just can not agree on these things being problem in the first place. This is simply a reversion to mean after big excesses in credit and asset prices for almost anything. After a breathtaking increase in leverage it was only "normal" to see the kind of deleveraging that is continuing today and will continue for good amount of time in future. Noble Prize winning economist Joseph Schumpeter termed it "Creative Destruction" in which old businesses and economic tradition get destroyed in order to create opportunity for new and relevant ones. If you watch closely, today exactly the same thing is happening - destruction of inefficient and unsustainable businesses in order to pave way for newer ones which would help reallocate capital efficiently.

People abhor nature taking its course and "correcting" the excesses so they turn to the govt - to do "something" that stops the necessary correction. They want something for nothing and pin their hopes on presidents, congress, feds etc etc. This is why Obama became the "man who can do this" as Americans wanted to continue with the excesses they had been doing - buying things NOT Required with money they DID NOT HAVE (all credit!). On seeing their pseudo prosperity disappearing, they shouted - SAVE US OBAMA!

Now let us put the reasoning aside and think on the core issue of this post - Will Obama Do "Something"? As we count various actions and expressed will of Obama, it seems he is really "doing a lot of things" - big stimulus with massive deficit, tax increase, protectionism - all the evils at once. Let us forget what is right or wrong, let us better concentrate on "Will Obama's Efforts Pay Off"?

A BIG FLAT NO.
Considering the circumstances and time when Obama took office, we can say he is either extremely unlucky or extremely lucky depending on what line we think. Some say he came at a time when everything was in total mess and so he was unlucky given the situation at hand. Others say he is lucky to enter office at such bad time because he has a chance to "correct" this mess and prove himself. I say he had the great opportunity of being lucky but his actions will prove otherwise. So, how could he possibly "be lucky"? My answer is simple - If he had done nothing! If he had let nature take its course and punish those who speculated on wrong things at wrong time, let the Creative Destruction do its work so that world would have brighter future. If he had stayed away and let the free market do its work, we could have really hit the bottom by now. It would be massive correction but it would be swift and would not get worse than it would owing to all this mess being created by govt.

"But we have already hit THE BOTTOM"! say many mainstream pundits today. They are producing so many evidences - unemployment number, GDP data, housing prices etc which according to them is not "that bad" and so recovery is underway meaning bottom is firmly in place. Even masses believe in these same pundits who had been saying "there is no reason to worry" before this crisis unfolded. One friend from BlogCatalog, a hardcore democrat and Obama fan was so furious when I raised this thing (Will Obama be Effective) and accused me of being a Republican! I never knew republicans were free-market minded people, they may have been just saying those words but their policies don't speak it. Bush left office with massive intervention in the form of short-selling rules to bailouts to stimulus packages - all signs of at least not free market!

Let me come to the data first. The "not so bad" data that is being interpreted as "bottom sign" is misleading. The unemployment number or GDP data are revised many times and if we look at recent past we see a trend of negative revision. Unless this trend is not reversed and revisions do not start in positive, there is no case for recovery. This data is actually irrelevant. The best we can use that data is by looking at "revision trend" and so far its negative.

Now the question is what "steps" Obama has taken or is planning to fundamentally "reform" the economy? Let us analyze one by one:

1. Tax Increase: One of the biggest tool in Obama's hands is increasing tax on profiting businesses so that the budget deficit can be narrowed. This line of thinking is basically flawed - if you tax too much, total tax return is going to suffer in the medium to longer run and in a bad situation of economy when businesses find it hard to generate sustainable profits, it is going to be disastrous. Contrary to popular thinking, its not biggest firms that employ most people, in fact, small businesses are at the core of employment to the masses and today they are the ones who suffer most on credit crunch. You can't do worse than raise taxes on these businesses when they are already reeling under pressure. Increased taxes means increased costs and increased costs means more cost cutting measures and laying off employees that are "not that important" is one way of effective cost cutting. So what is going to be actual effect of this "tax change" thing? Sure its going to deteriorate situation further. Govt whenever tries to play the role of "distributor" of money, it fails.
2. Closing "loopholes" in US Tax Code to close foreign "Tax Havens": US firms have been benefiting and saving good amount of tax by using tax havens in foreign countries (Cayman Islands is more in news) and this is undoubtedly unfair. I do not support this practice as free market theory can not overlook such "out of box" ways to avoid tax. However, the timing of Obama's decision is not good. Today when US businesses are already under pressure for profit and margins, this crackdown will break their back. Consider a firm ABC using this method to save taxes which result in higher profits. If ABC finds it suddenly that it can no more do it, then its already falling profits / increasing losses will be worse as it would need to pay more to produce same thing it was producing yesterday. What will ABC do? what options does it have other than "cutting costs the other way" - firing more people? So, this action is not the demand of time at least and is going to do more harm in the short to medium term.
3. Climate Change policy: Obama's intention on Global Warming and Climate Change is plausible and this is one reason I admire him. He has a plan to curb greenhouse emissions by enforcing "cap and trade". Undoubtedly this is a welcome thing as the biggest danger for life on earth is increasing emission of greenhouse gases. However, once again, the problem is in the circumstances. Obama is bold enough to take this action NOW but this could mean rendering US companies not competitive to that of non-conforming countries like China and India and other developing world. Because its hard time in terms of economic growth, the chances of a global enforcement of such rules is almost non-existent and this brings the bad luck for US firms. Coal-burning firms in China and other developing countries will not stop it for the sake of "responsibility" and US firms will find it better to shift business toward such countries. This may also prove to be detrimental to US recovery. The better option would be a global understanding on the issue but that looks almost impossible. I have a better solution and that is once again - "DO NOTHING". Yes, if Obama stays away from all these "reforms" then Depression will take care of this greenhouse gas emissions issue. Slowing consumption is the best answer and gradually by the time recovery starts, there will be a permanent shift toward "rational consumption" which will be the best thing for earth and its climate.
4. Fiscal Stimulus: Obama has outlined a big fiscal stimulus plan of spending on infrastructure. He says it will create around 3.5 million jobs and will lift economy out of contraction. While I am strongly against fiscal or monetary stimulus of any kind, there are more supporters of this scheme than opposing ones. The line on wall seems good enough to lure us into thinking that such a program will save us from economic downturn but the fact is opposite. Govt turns out to be very bad when it runs businesses and running big infra projects is no exception. Moreover, these kind of measures stop the natural remedy of "reallocating" capital to better businesses through private firms. Then there is an added issue. Even if this program creates 3.5 million jobs, how many of them will accommodate those from retailing, financials, autos etc where there is bigger job loss? Can a Wall Street person help laying out a bridge or highway? This creates a BIG question mark on the efficiency of this program as job provider. However, even if this program does work out to be a good job provider, where will the money come from? the printing press? as there may not be enough lenders left. This brings to my next point - Monetary Stimulus.
5. Monetary Stimulus: Although this is a project by "Helicoptor Bernake" and Obama has limited role in it, the FED is off limits in combating this ongoing crisis and in its last meeting the result was "monetary easing" - a euphemism for "printing money" without any backing. This is effectively being done to stop deflation and start inflating dollar supply so that asset prices can be "reflated". The biggest danger for a central bank is deflation and they do their best to stop it. Today when US is already under big debt and running big deficit, the question is what happens if they really are successful? that is, if they manage to ignite the spark of inflation. So far deflation looks very strong and the rising dollar against euro and falling asset prices are evident of this fact. But if and when they are successful in turning things around, it will be immediately out of control and chances of "that 70's show" of stagflation will be highest. Any recovery has to be stopped because FED will need to "do something" to stop the inflation menace then. What an exam for FED!

Apart from these five above mentioned things, there may be smaller "actions" by Obama to stop this downfall but looking at current situation and analyzing the facts I just can not see how these will work. To make things worse, there are so many other things to look at.

One of the biggest problems in US is Social Security obligations. The US govt published two important reports on budgetry trends this week - both implying that US is on an unsustainable path that will almost certainly result in massively higher taxes. By 2016 US will have to fund Social Security out of general revenues, as the surplus will be gone. And there are no trust funds. They are a myth. It as if I wrote myself a check for $2 trillion and then declared I was worth $2 trillion. The money is just not there. Social Security makes Bernie Madoff look like a small-time crook!

And, then comes Medicare, which is in even worse condition. Bruce Bartletts has this to say - taxes will have to go up by 81% if we are to pay the obligations as they now stand. Sustainable? LOL. That's the abbreviation we use in internet chat for Laughing Out Loud. Now that is unsustainable. It won't happen. And as the saying goes, if something is unsustainable, at some point it will stop. No getting around it. Long before we get there, change you will not like will be forced on the US.

Then, there comes the classic problem of PROTECTIONISM. Head of a govt thinks he can make his country safe if he can close "outer" shell. He can do this in one way - protectionism. He hikes tariff on imported cheap items, devalues currency and urges his citizens to buy products made by local firms. Truly Anti-Globalization. While this looks impeccable at superficial view, the fact is such measures deteriorate free global trade and undermine global growth which in turn directly affects that protectionist country very badly. The very reason behind globalization and free trade efforts were to counter this force. But, in times like these political call of the day is to be protectionists. Masses like it and masses vote. Please read this for how is the latest trend of protectionism.

Can Obama resist the forces of protectionism? I don't think he can. Very soon we are going to read news of US hikes on various imports as well as crackdown on outsourcing.

Although there are a lot more issues I can throw light upon, I think it is already enough for the debate. I am a big admirer of Obama for his pro-science and pro-climate attitude, but the circumstances may not be willing to support him for long. The best thing he can do now is postpone this crisis to beyond next elections. The opportunity he had to let nature run its course of correction is already over.

My BEST WISHES to the man-in-charge.

Markets (S&P 500 and Nifty) Analysis

Dear Readers,
I posted about markets showing a topping signal on May 6 and my concern is still there. If you paid attention to my levels you must remember that since then both S&P 500 future and Nifty Future could not manage to break those big resistance levels -

• S&P 500 Future: 6 May high - 918; 7 May high 928; 8 May high - 927.50 !
• Nifty Future: 6 May high - 3729!
  
• For both index futures price level could be as accurate as it can be - just one point below my resistance levels!

Now, for this week, here are my observations based on Daily, Hourly and Weekly Charts :

• S&P 500 F Support: 887, 871, 860. If it goes below 971 and trades there for few sessions then my fear of topping markets will confirm further.
• Nifty Future Support: 3560, 3500, 3450. If it breaks 3500 on closing basis then 3450 may become weak support. We need to watch that level very carefully.
• Resistance for both these are at the same levels as in my last post, i.e., 929 for S&P 500 and 3730 for Nifty Future. If these resistance levels are broken with supporting volume, then we can see further rally in coming days.
• Of the two markets, Indian Markets look stronger. However, I have not seen such an overbought market since this Bear Market started in January 2008.
  

Happy Trading...

WARNING: Markets in US and INDIA may be topping

Dear Readers,

In my last post about S&P 500 Future I had put resistance at 917 and 929 as important. Today, when I looked at Daily and Weekly Charts of S&P 500 Future I got a topping signal for this Bear Market Rally and so I am posting this as a caution to long traders. If it falls now and goes below 870 odd, then we may see bears pouncing with full force.

Although Indian Markets look better in terms of the strength on upside, Nifty Future may not survive much further upside from here before giving a healthy correction. My advice is not to jump on and start buying. Instead, if it manages to get past 3730, which I think is going to be BIG resistance, with good volumes, only then one should start buying on retracement. If it retraces right from here, then keep a close eye on 3440, which should be buyers' stop loss and if breaches it would be better to go short on retracement.

The DOW and GOLD - Correlation?

Dear Readers,
Today I am posting here an interesting case - the relation between DOW Jones Industrial Average Index (DJIA) and GOLD. Historically, one ounce of gold is enough to buy one set of DOW components, at least when there is a bottom. Today, if we care enough to see, one needs NINE ounces of GOLD to buy DOW Index! This proves that DOW has not hit the bottom yet and there is a long way to go. First, let me put this picture (courtesy Agora Financial):

The above graph shows what has been historical correlation between DOW Index and GOLD. Now, assuming history repeats itself (or as my friend Abhijit says - History may not repeat itself but may do enough to make you feel nostalgic), I have following points to consider:

• Dow goes to 3000 and Gold moves up to $3000. Then One Ounce of GOLD for ONE DOW can be done.
• Dow Goes to 1000 and Gold moves up to ONLY $2000. Then two ounces of GOLD for ONE DOW.
• Dow Goes below (well below) 1000 and GOLD stays where it is today. This will fulfil Deflation expectations and also prove Robert Prechter of EWI fame correct. EWI (Elliott Wave Internatonal) predicts DOW at 400!
• Dow stabilizes here and GOLD shoots up to 8000+. This will be dream come true for those who see HYPERINFLATION in near future.
• Dow moves up as it is doing these days and GOLD stays near this level (sub $1000). This menas majority of economists of today who say BOTTOM IS HERE, prove right (VERY UNLIKELY).

If you ask my opinion, I don't think DOW is the right choice to look at as it is neither a weighted index, nor it is inclusive (it has only 30 big companies and that too change arbitrarily). It would be better if someone could produce GOLD Vs S&P 500 Index.

Depression, Climate Change, Swine Flu and Markets

Dear Readers,
These are interesting times and people have the tendency to develop new theories in such times some of them derived from history and some from recent past. One thing that remains most influencing on the majority of population is short term memory, people are most affected by the events and patterns that happened in recent past. Today I am posting here my views on the bad situation of economy (which I say is Global Depression ) and a potential pandemic - Swine Flu.

Global Depression
When I use the word "depression" I get immediate negative reaction and disapproval from most of the people. They say this is not a depression as there are no food lines, no social unrest, no major shift in people's habits etc. like that was during The Great Depression of 1930s. They say its only a "deep recession" and only a matter of time before we "get out" of this downtrend and see those good old days again.

But, I insist. This is a Depression. There are no food lines, no social unrest...... of the kind of 1930s but still this is Depression and that too a Global Depression. Why? Well, you need to know few things before comparing today with 1930s time.

The situation today is quite different and the base (from where it started) is very different in both situations. Today there are more people with more wealth to withstand the early part of this Depression. Comparing to 1930s, there are many more households that fall in upper middle class category and they have enough money to stand in food lines easily (I wish no one has to do that). In fact, there may be no food lines at all even when this Depression is in full force and deepest point! However, what do you say about the unemployed having "Unemployment Benefits" by govt? Isn't that similar to food lines?
The dynamics are different today and so comparing the two times exactly is not fair. Instead, we should think on the line that people are changing habits very quickly. Their perception of life is no more the same it used to be before 2008. They are suspicious of "investments" in assets ranging from stocks to houses to even art! They are not spending like there is no tomorrow, even if they have money.
And, this is only first year of this Depression. In 1930s, there were several occasions when there were strong and powerful rallies in markets that made people believe "worst is over" and they were disappointed every time for at least three years!
Why do I think this is going to be worse? Let me put the actual situation in simple words - people in US and other developed world spent too much on things they did not need with the money the did not have resulting in excess inflation in asset prices of stocks, houses etc. Credit was available to anyone who was willing to take risk and spend no matter what his / her capacity to pay back was. Too much of credit and too much of spending could not sustain and finally when it hit the wall, the leverage factor which was multiplying profits changed direction. Now, we are still at the beginning of this massive unwinding of the excesses that were created in the boom time and all the govt can do is merely postpone the recovery that would happen if it were left to the market itself to correct. That's why I call those bailout plans "Crisis Postponement Plan". Please read these posts here and here for my detailed views on this.

In the first paragraph I told about people's short term memory and its effect on their thinking. Today so many people are optimistic because they still remember the recent past (recent recessions and how things improved) and don't want to believe that things are very different this time. They still think that govt can "correct things". By this I don't mean there will never be a recovery, what I mean is this time there is a lot to happen before we start rising again. We are just in the first phase of a big Depression and there are a lot of things waiting down the road.

Climate Change
Global Warming is definitely making its presence felt as there are evidences of big changes in Arctic ice sheet, rainfall patterns, mountain glaciers and temperature patterns across the globe. Freshwater sources are depleting fast, revers are drying up or flooding - going to extremes faster than usual. However, still majority of people are in no mood to accept these facts. They deny it. The deniers are also affected by short term memory which makes them think that these "small" changes are not going to do big damage and so they don't need to care at all.

We as a species have been growing too fast for some time in terms of our number of heads. The total population of world was 1.65 Billion in 1900 and today there are 6.77 Billion of us!!! We added SIX BILLION MORE of us in a century! or to say in other words, we MULTIPLIED FIVE TIMES in 108 years!!! More people means requirement of more resources. Mother earth has plenty of resources - almost everything from fresh water to natural resources of all kind to sustain even this growth BUT then we have the DEVELOPED WORLD. Thanks to their outrageous lifestyle of over consuming and wasting which has put huge pressure on resources. The culture of "long drive for pleasure", wasting food, wasting water (private swimming pools, lawn sprinklers and what you have) was the main driving force behind the prosperity of past 50 years but this over consumption was unsustainable both economically as well as environmentally and SO WE ARRIVED AT PEAK OF BOTH.

Mother nature has big heart but she is equally brutal when we take everything for granted. The bad thing is she does not care who suffers. So is this Depression a manifestation of nature's balancing act? May be. The only way people could cut back on excess consumption could be this economic collapse otherwise nobody would want to stop throttling his SUV and burn fossil fuels for no requirement. Showing off is human nature and people just don't behave themselves. They have to receive a message and they take it the harder way. The rule of pain or gain could have worked as well but that would have taken longer time and the damages by then would be irreversible. So, there is good reason to believe that this Depression is at least coincidentally a balancing act by mother nature in response to human activity.

Swine Flu
Mainstream media has started reporting the outbreak of swine flu as "next big worry after recession". Some say its going to wipe out "the recovery in economy". First, there is no recovery at all. If you say -6.1 than -6.3 is real recovery then you are daydreaming. Second, this flu is not that big a trouble as the worst case scenario, as reported by computer simulation by scientists, is a mere 1700 deaths worldwide and that is when it is handled the worst way. So if you are fearing that this flu may be a real pandemic, you are worrying too much.

History shows that big economic downturns and big epidemics go hand in hand but this flu doesn't look like a big one, at least so far. There may be epidemics but swine flu is more a danger to poor pigs who will get culled, than humans. However, we never know what methods mother nature may have in store to contain growing menace by the so called intelligent species.

Markets
Stock markets the world over are perhaps underway a big bear market rally. Most indices are up 25% or more for last six weeks or so. Opinions are divided. Some say its a new bull markets while others like me say its more a bear market rally. Markets have the tendency to retrace to 50% on an average and as high as even 62% some times and still remain in the primary trend which means we may see this rally to continue further and still we be in secular bear market. Fundamentally also there are no signs of a meaningful recovery (a pause is not recovery and so don't believe the "-6.1 than -6.3 means recovery" guys). There is a long way to go before we hit bottom in the downturn and this Depression will give many more such big bear market rallies before we hit ultimate bottom.

For traders I don't recommend following fundamentals and instead chart patterns represent better outlook and should be looked at for clues. The chart patterns for US markets are not suggesting any change in primary bear market. However, I am not so sure about Indian markets as the chart patterns on Nifty and Sensex suggest a disturbance in primary bear market. But, this does not mean there has started a new bull market. Even if the primary bear market is over, there may be a sideways trend for some good time which will eventually equal a timewise bear market. Its too early to say anything for sure and we need few confirmations before we seriously consider that Indian Markets have bottomed out.

US Markets: S&P 500 Analysis Update

Dear Readers,
I am very keenly watching the developments for few days and things got interesting enough to post my analysis about S&P 500 (Future) of US. But, let me first tell about how far my recent analysis stands:

• On April 21, S&P 500 Future did not break my support level of 823 (it was the low for the day!) which I had posted on April 21, and after that it is trading well above that level.
• Same day, I had put first resistance on 876 and today (at the time of writing this post) it is just above that level, at 882.
  
• I have been insisting on for quite some time that the trend for short term (now medium term) is clearly up and I was surprised on many pundits shouting danger when we saw markets falling on odd days. People have the habit of getting overexcited on rallies and overfearful on declines, both of which must be avoided by serious traders.
  

Now, let me put my views on what is expected in coming days:

• The short to medium trend is up but since the fall of April 20, there is a certain amount of weakness in the rally. However, I expect it to test 895 if the upward momentum continues. 929 remains key level if it can manage to get there.
• As 876 is cleared at least for intraday, I think this level should act as support now.
• Resistance: 896, 917, 929
• Support: 876, 864, 855, 845, 823
  

S&P 500 Future Analysis on 20 April 2009

Dear Readers,

For this week starting today I have following to say about S&P 500 Future based on Daily Chart and Weekly Chart -

• In my last post I put resistance at 876 and it touched 871! The resistance worked and it fell from there. Now, for today we need to see how far it comes down.
• The short term trend is still positive and 929 remains key level to watch out for.
• Resistance - 876, 917, 929
• Support - 845, 823, 804, 774

In all the possibility this is a bear market rally and the main trend remains bearish, however, on Daily Chart 34 EMA has crossed over 55 EMA which is a sign of this trend (up) to hold for medium term. But, you know counter trends are risky, so always keep your positions hedged (for longs, buying VIX is a good idea).

Analysis of Nifty Future

Dear Readers,
Today I am here with my analysis of NSE Nifty Future based on various timeframe charts - Daily Chart, Weekly Chart etc. For some good time Indian markets are in up trend and whenever people think it has been enough, we see new upper levels! The current trend is certainly strong. But, as I have told in my last post, the uptrend is quite steep in rise and such vertical rallies can surprise anytime.

Considering it is a good uptrend going on we should better be waiting for corrections to buy rather than jumping straight away. Following are the points I have arrived at :

• Looking at price action in last two days of this passing week, I think a correction to 3250 odd level is possible next week. If it corrects more then even 3150 is possible.
• 3140 was key resistance level when it went up and it is again key but support level. Breaking 3140 on closing basis will not be good for bulls.
• If 2920 (too far for now) breaks then this entire rally will be over.
• Going upwards, 3750 - 3780 will be key resistance area although there will be other resistance levels before that - 3520, 3580, 3699
  
• Support - 3304, 3264, 3230, 3175, 3140

Remember, trend is your best friend but also remember that your friend can change clothes unexpectedly. So, as long as it is up trend, better look for buying opportunities than be contrarian.

Markets This Week... Changing Trend?

Dear Readers,
Markets world over gained good this week and the present up move has remained in effect so far. I post my views here about S&P 500 Index of US and Nifty Index of India futures. I will share my views about these two indexes based on weekly, daily and hourly charts for short to medium term trends.

S&P 500 Future:
The rally that started in march is continuing so far and S&P 500 future has managed to get past an important resistance at 838. It closed just near the next resistance level (855) I told in my last post here and now following are the points that I feel are important for traders:

• If next week it manages to keep above this level around 855, we can see an important development on Weekly Chart and the possibility of it touching the very important level of 929 as well. If it does go there, it will be an interesting event.
• Looking at the development on charts I feel it can retrace somewhat and behave volatile and then resume the up trend. However, a straight up move if is there, then it is more an overbought situation and bulls need to be cautious.
• Resistance - 855, 876, 917, 929
• Support - 823, 804, 774

My advice is - ride the trend but don't forget that this is a vertical rally. Anyone who says "worst is over" may be living in day dreams. So, be cautious if you are riding this short term up trend.

Nifty Future:
Indian Stocks are rallying harder than the US ones and as I posted earlier, the fact that Nifty Future has managed to cross and remain above 3264 may very well be beginning of end of Main Downtrend Line. It closed below 3366 though, the resistance I posted in last post. There are few important developments we witnessed this week:

• First time since it went below 34 EMA on Weekly Chart, it has closed for the week WELL ABOVE that and also, 5 EMA has crossed over 13 EMA for the first time! Is the trend changing? May be yes. May be no. However, the signs that are emerging do not favour bears and already it has closed three days in a row above the Main Downtrend Line that had mainained all throught this Bear Market so far.
• If we raise the above mentioned trend line to Sept high and extend, then there is a case for bears as it touched that line and close below it.
• On Daily Chart it is first time since the down move started that we see it closing above 200 SMA! Also, its the first time that 34 EMA has crossed above 55 EMA on Daily Chart! These things do point out to strong uptrend and a change in medium term trend as well.
• Resistance - 3366, 3400
• Support - 3264, 3230, 3175, 3129, 3095

Looking at the things right now, there is no doubt that bulls have ruled for past one month or so but the fact remains that this is a vertical rally and so caution is advised.