Most people were of the opinion that Black Monday, January 21, 2008, was the bloodiest day in the history of the Sensex. Little did they know that the worst was saved for a Tuesday, the first Black Tuesday in the trading history when the sensex fell by over 2200 points before recouping some of its losses and closing down by 875 points! The last 2 trading sessions have collectively wiped out more than the losses incurred in the last week.. But the billion dollar question is: Is the fall over or will it resume again tomorrow?
The recovery in the European markets seem to suggest that we might be in for a short-term relief before selling pressures mount. However, the U.S. markets are still trading lower despite being off the day's low. I quite appreciate the Fed's decision to cut the federal funds rate by 75 basis points, which in turn led to a reduction of 75 bps in the PLR or the prime lending rate. The rate cut came a week ahead of the Fed's meeting on January 31 and it finally seems that the Fed is waking up to the looming danger of recession and act accordingly! It also shows that despite all that we may claim, the economies across the world remain dependent on the U.S. economy! U just need to take a look at the stock markets falls on Monday, January 21, 2008 to gauge the siituation for your self.
However, moving on to the Indian stock markets, clearly the investors have been shaken! The journey from 15k to 21k took over 3 months but the return journey took only 7 trading sessions! Many people have lost a mountain of money; saying a lot is just putting it very mildly! The Fed rate cut may give a boost to the markets tomorrow, however! Value hunting may begin again and believe me, I'm salivating here when I think of all the stocks which have bitten the dust during this bumpy ride! If they have fallen like an apple, rest assured they will go up like a rocket!
A simple trading strategy for tomorrow would be to buy a Nifty February expiry future and arm yourself by buying both a call and a put option with a similar strike price and expiry in February. This strategy is idle for a volatile market, one stands to receive a payoff if the market moves sharply, either up or down! One's cost is the combined cost for the put and the call option; your maximum loss is capped at the combined cost of the put and the call options! Try it out for any stock future and do get back to me if you find any problem with this approach. This strategy is not advisable for static markets or markets with little movement, however!
Meanwhile, the markets are going to represnt one giant see-saw, avoid any short-term trades! You may look to build positions in a few select stocks; however, stay from the mid- and small-cap till we see clear and visible signs of recovery; this advise applies for those with little or no risk appetite! The best stocks to gain at the moment will be banks followed by financial institutions!
Whatever happens, don't lose your patience, for the SenseXXXational Ride has its scares and moments of thrills!! So keep enjoying and tuning in to this space for more updates!
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