Saturday, June 04, 2016

Weekly Review - 06th June, 2016

Dear All,

Volatile - Is not an End :-

Volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile the market is, and vice versa.

The volatility in stock markets is one of the principle reasons why private investors sell out at the wrong time and often fail to benefit from the natural appreciation in stock markets over time.

If you are to save and invest through the stock markets you must accept that volatility in markets is normal, and an understanding of why markets tend to be so volatile can alleviate many of the fears that you might experience when markets enter a volatile phase.

After all, volatility is not the same thing as risk, and if you succumb to volatility by selling out under pressure you may take a permanent loss when all you were experiencing was a temporary decline in values.

The principle causes of volatility are :-

The economy is volatile and experiences periods of contraction as well as expansion.

A contraction in the economy leads to lower revenues for businesses, and with fixed overheads this, in turn, amplifies the reduction in corporate earnings.

Furthermore, stock markets are emotional and over-react relative to the likely change in these underlying business fundamentals.

What Causes Short Term Volatility?

Perceptions and emotions move individual stock prices and the overall market in the near term. If investors feel that good times are ahead for the economy and/or an individual company, the prices of those securities will probably go up until that perception changes. Investors’ perceptions and emotions are heavily influenced by news events. So when the government reports one day that unemployment is dropping, the market could do quite well that day.

But if another report is released the very next day bemoaning the price of energy or an increase in inflation, the market might get spooked and decline. Just as there are quite a few news stories that are released throughout the day there many different forces at work which move the market and stock prices at any given time.

Nobody knows exactly which news item moves the market in any particular day but investors definitely fall victim to the herd mentality. Once a few big players react strongly to a story, everyone piles on. So if something happens that makes people think or feel differently about the market as a whole or an individual company, the prices in question can really move over the short run.

How to Reduce the Affects of Stock Market Volatility

1. Employ Fundamental Value Analysis

The kind of stock market volatility you really want to avoid is downside volatility. All major market tops coincide with high valuations. This makes fundamental value strategies an important part of investing. These tools can guide you away from over priced investments that are prevalent at market tops.

2. Have a Maximum Drawdown Plan

Have a maximum drawdown policy as a part of your risk management plan. A large part of your asset allocation strategy should be based on how you will manage and minimize a portfolio drawdown. It is large portfolio drawdowns that destroy your long term returns.

3. Use a Tactical Asset Allocation Strategy

A fixed or strategic asset allocation makes little sense because we know valuation is the biggest determinant of your long term investment returns. Once you are empowered with the knowledge from fundamental value analysis and have mapped out your risk management plan you can choose an appropriate asset allocation.
With a tactical asset allocation you have the flexibility to make allocation decisions that are based on maximizing your probability of positive outcomes. That means having ability to allocate more aggressively to under valued assets and avoid assets that do not provide a margin of safety.

>>> Nifty Weekly - Posted Last Weekly Review <<<

>>> Click the chart to see on full screen <<<

Last week wrote - Price above 8200 - may test 8250 - an important Resistance as per Weekly Chart.

>>> Nifty Weekly Chart - Happened <<<

>>> Click the chart to see on full screen <<<

Tested 8250. Bulls must cross above this level to confirm its strength.

>>> Nifty Daily Chart <<<

>>> Click the chart to see on full screen <<<

Wave C retraced almost 61.8% of wave A. Above 8268 - Cross above this levels - More rally possible.

>>> Nifty Hourly Chart <<<

>>> Click the chart to see on full screen <<<

Price must cross channel and 61.8% of retrace to confirm the strength of the bull.

>>> Bank Nifty Hourly Chart <<<

>>> Click the chart to see on full screen <<<

Seems like a 1-5 sub wave completed and channel acts as a resistance.

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