Starting the Year with High Spirits...Literally - Views on News from Equitymaster

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The Equitymaster Research Digest

Starting the Year with High Spirits...Literally
Jan 23, 2017

  • Equitymaster Conference 2017
  • My top trading idea for 2017
  • We'll drink to these quick returns

A good beginning is considered to be highly auspicious in our culture. At the start of each year, the Equitymaster team makes it a point to come up with honest and independent views on markets, economics, and politics...but with a twist.

Rather than through their newsletters, they present these views in person at the annual Equitymaster Conference. This year was the fourth year of the conference and nearly two hundred and fifty participants from six countries and 33 cities attended the event.

This was my third year at the conference and each year is better than the last. I along with my colleague Asad Dossani got an opportunity to share our top trading ideas for 2017 at the conference.

My top trading idea for year 2017 is the Nifty. Let me take you through the long-term chart.

The Big Picture
The Big Picture 

Over the last ten years, the Nifty has gone through three bear markets. The first was in 2008 when it dropped 64% in ten months. The second was in 2011 when it dropped 28% in fourteen months. And the most recent was in 2015 when it dropped 25% in twelve months.

This means that the three most recent bear market corrections have lasted anywhere between nine and fourteen months and wiped at least 20% off the index.

Four Year Cycle
Four Year Cycle 

Markets, like the seasons of the year, move through phases - accumulation, uptrend, distribution, and downtrend.

Bottom to bottom, a cycle generally lasts anywhere between three to four years. The most recent bottom was in February 2016. This is marked as the accumulation phase in bold in the above chart.

This means that the next bear market could still be at least two years away. The recent fall in the last four months of 2016, which wiped off 12% from the highs, is just a normal intermediate correction and shouldn't concern anyone with a long-term view.

Stock Participation In Nifty
Stock Participation In Nifty 

In a bull market, most stocks trade above their 200-day moving average (DMA). In a bear market, only a few stocks trade above their 200 DMA . I have plotted the percentage of Nifty stocks trading above their 200 DMA as an indicator in red along with the Nifty price chart. This is a very good indicator of the overall participation in a rally or decline. It also helps us identify key reversal points. Extreme readings in the percentage indicate an exhaustion of the ongoing trend and possibly a reversal. A reading of 20% or lower indicates oversold conditions, while a reading of 80% or higher indicates overbought conditions.

After topping out near 90% in September 2016, this indicator hit a low of 27%, which was just short of oversold. The Nifty then bounced back and resumed its uptrend, just as it has after similar intermediate corrections in the past. This suggests there is still some room for many stocks to play catch up and lead in the next advance.

Most of our indicators suggest the recent fall was just an intermediate correction. Obviously, this does not mean that the Nifty will immediately head northwards. And some indicators, such as fund flows by FII's in the cash market, remain negative and could keep bullish hopes under check. But overall, the long-term trend is intact.

My First Winner of 2017
My First Winner of 2017 

We started the new year with high spirits...quite literally. Recently, subscribers of Swing Trader, my premium short-term stock recommendation service, Generated a solid profit of 13.29% in just twelve days with India's largest spirits maker, United Spirits.

In my recommendation note to subscribers (Subscription Required), I wrote...

  • United Spirits Ltd (previously known as McDowell Ltd) is trending down for the last two years. It topped out at 4,082 on 5 March 2015.

    The stock has sulked lower ever since. Recently it even breached the multi-month support level of 2,200 and hit a fresh low of 1,773 in November 2016. Over the last few weeks the stock has stabilised in the range of 1,800 to 1,950.

    The daily RSI hit a fresh four-year low of 16.95 in November when the stock hit a new low. However, the RSI bounced back from a higher low in December when the stock came close enough to retest the previous lows. This is a sign of bullish divergence.

    All of the above indicate that probability of a pullback towards the level of 2,200 is very likely.

This trade, along with the Equitymaster Conference, made for a great start to the year 2017.

Revealing Rahul's 18-Month Passion Project

We have something exciting coming your way tomorrow.

It's something Research Analyst and Equitymaster Co-Head of Research, Rahul Shah, has been working on for more than eighteen months now.

All I can tell you today is that it's about a potentially very rewarding way to invest in stocks...and that too for the short term.

I'm talking about potentially double and even triple-digit a few months to a year.

That's all I can reveal for now... We'll have full details at exactly 12pm tomorrow.

Look for an email at 12pm tomorrow with the subject line - 'Announcing the Launch of Profit Velocity'.

You'll be glad you did.

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