Sunday, July 31, 2016

The value investor and technical trader in me both agree for a change......

Note: If you are not interested in the Indian stock market, feel free to directly head to the last paragraph. I think it pretty much applies to all markets and asset classes.

If, like me, you are an investor or trader in the Indian stock market, then you have had a pretty good last three-four months. All dips, and there haven't been many, are being bought and new 52 week highs seem to be pretty much the story of, well, everyday. As someone who is an alumnus of Class of 2008 of Stock Market University, I certainly do appreciate times like these. IPOs getting way oversubscribed, newbies giving advice about trading, pundits looking way into the future. These are magical times. I for one, am certainly not complaining. Normally this means conflicting times for the value/growth investor and technical/momentum investor in me. But not this time. Let's have a look at the NIFTY chart. 

You can see the new highs I talked about. But the MACD indicator is telling a different story as far as the last few weeks is concerned. New highs in the index are being accompanied by lower highs on MACD. Its a pretty decent negative divergence that we see developing. This could mean two things, (a) price consolidation (b) time consolidation. When would this happen? While a couple of years I would have tried to time exactly when this would happen, and you could find plenty of such posts in this blog, now, I don't care about exactly when it would happen. All I am interested in is the probability of it happening, and with each new high, the probability of either of the above two scenarios occurring increases.

What am I doing about it? Well, as a long term believer in India's growth story who has a dream of attaining financial independence, I don't have a choice but to be a long term investor in the equity markets. Most of my net worth is in it. But July was the first month in many years, that I have taken money out from the markets on a net basis. Times like this are a great opportunity for removing the weeds from your portfolio and that's exactly what I am doing. I am not too concerned about the index, if anything, I am enjoying the ride, but I am finding it harder and harder to allocate new money in the markets. So I am not going to force it. Taking some existing money off the table and holding on to the new money till the valuations reach a reasonable level is my strategy for the time being. If the markets continue going up, I am going to enjoy the ride. If the market correct from here, I am going to be ready to try and use the opportunity.

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