Which Market is the leader?

Well, personally i prefer not to keep track of stocks/markets on a daily basis. I believe in remaining ivested with a company for atleast 2-3 years unless conditions have changed adversely for the company business which makes little sense in holding onto its stock/bonds. Anyway, almost everyday we come across a common news such as "Markets to open following global cues" or "Today market will open taking cues from the yesterdays NASDAQ/DOW closing figures". ..etc. So i believed it is fair to assume for example that the TOPIX or the NIKKEI index in Japan will perform in close co-relation with the previous day close for US indices.

So recently, i have been checking the US market moves/sentiment late Tokyo evening time before going to bed (bad habit!). This way i thought i will get a fair idea of what can be expected of the Tokyo indices the next morning. But last week, i was talking with a colleague from NY who had visited our Tokyo office for business. and he commented "You know we guys (US Market) are very much dependent on the performance of the Tokyo market. Our indices perform based on global cues (Tokyo in his case!)". While until then i was thinking the exact opposite. Apparantely, the colleague checks on NIKKEI index figure before he goes to bed NY time ! Chicken First/Egg first situation..

So who is the Market leader in this case? Tokyo (Early to rise) or NY(Late to Bed)? Well, i think both. Since the end values are affected by the intra-day price movements which depend on economic, political events and other updates during the business hours thereby affecting the markets in the other parts of the Globe (next morning). Also, advances in technology have made information to be available instantly and simultaneously to maket makers all over the globe thereby reducing the 'time-lag' factor. i.e. leaving very little scope for arbitragers to earn any profit !

Fundamental v/s Technical Analysis

The other day i was wondering about the investment strategy followed by well-known and highly successful investors. Take the case of Warren Buffet. The 80 something man has made billions through "correct" investing. There are mainly 2 ways of investment strategy "Fundamental Analysis" and "Technical Analysis" and i believe most of the successful investors (including Buffet) find favor with Technical Analysis even though they keep a close eye on Fundamental values.

Successful Technicians are the people who believe in market inefficiency. They believe they can get an edge by acquiring critical information much ahead of others and they really do ! They also use a Contrarian approach to their Investments. Time and again Buffet has mentioned about doing the exact opposite of what the majority of investors are thinking/doing. i.e. taking a view contrary to that of the market. In other words Buy when others are Selling and Sell when others are Buying. Be Bullish when Market is Bearish and vice-versa. But most of the investors find adopting this strategy extremely tough. The reason? FEAR. But they have no problem in following the herd mentality. The reason? GREED.

On what basis can one decide on the general market view? Well, there are various factors (signals) that can aid in understanding the view of the Market and then taking a contrary approach to the market (either buy or sell decisions). Some of these ratios are available to the general public free of cost. Some of these signals are

1. Mutual Funds Cash Ratio (Liquidity Ratio) : varies from 4% to 14%. higher cash ratio means market view is bearish.
2. Analysts recommendation of sectors/stocks : the most recommended ones (80% or more votes) would tend to be overbought and thereby adjust downwards in future.
3. Yield Spreads of bonds - higher values indicate higher risk taking appitite and thereby bullish market view.
4. Maring balances in demat accounts - Increase in balance indicate market is bullish.
5. put/call ratio : ratio of no of puts/no of calls. data available in news papers. more puts indicate bearish sentiment (remember puts give positive payoffs in case market declines)

Wherease technical analysis focusses on market inefficiencies and data patterns, fundamental analysis focusses heavily on accounting numbers, economic indicators. Which type of analysis best suits/convinces you is up to you to decide and test !

Straddle Strategy

Decisions ! and more Decisions ! We are faced with so many of them in our day-to-day lives. Whether a decision is good or bad depends on some future outcome. Everyone wants to make a "correct" decision. So how to go about making a correct decision NOW?

I believe, the uncertainity in the minds of a common investor about the economic situation world-wide is at its highest level ever since. Should we buy a stock now or wait until Election Results? Is it worth investing in real estate now or wait for further softening of mortgage rates? For an investor in a stock market, i would suggest playing with a "STRADDLE" strategy in these turbulent times.

Simply put, Straddle = Position 1 + Position 2 (opposite of 1) on the same asset. If your Winning Position "Wins" more than the "Loss" on your Loosing Position, you stand to gain irrespective of the direction of the stock market. If you incur a "Loss" , it is surely off-set with some definite positive values of "Win". With this double-sided strategy, your losses are thus quite less.

Consider This : Straddle on Stock Options. which is nothing but a "long put" option position and a "long call" option position. This means you purchase both a call and a put option on the same stock. As most of you would agree, there are only 2 possible outcomes of future value of a stock price : either UP or DOWN from the current price .

1. If Stock price goes up, Call option Wins and Put option Looses
2. If Stock price goes down, Put option Wins and Call option Looses

Remember that "Looses" here means only the option price paid by the investor for buying the option on the stock (which is much less than the stock price itself) thereby limiting the loss.

To sum-up, i believe that a STRADDLE option strategy in volatile markets can bring in good gains irrespective of stock/market movement.

My advice:
NEVER bet on stock price direction. Bet on a fool-proof Investment Strategy to minimize your losses !

My Economic Theory

It feels like the world has suddenly become "strict". These days, the word we hear the most (next to recession) is "regulation". Everyone is asking for more stringent review of every industry, business practice, process, management, people, the list is endless.

Until not a few months ago, everything was OK. Why? Because every company and in-turn its employee was making money. Business was booming, and eye-popping bonuses were the order of the day. Now with the global economy in a down-turn, people are demading more stringent regualtion. Why? because globally jobs alongwith businesses have vanished into thin air and we feel something somewhere has gone wrong. World-wide People are angry and into punishing mood! They want to punish this "something". Why? because we humans, like to play the blame-game.

But whom to punish? Politicians (Govts) want to punish regulators, regualtors want to punish industry, industry wants to punish companies, and companies want to punish Employee (by denying bonuses ;-) who in-turn want to punish the politicians (whom they themselves have elected). So you can see, its a vicious-cycle and the whole world is asking for revenge at this point.

I would like to urge economists to measure a new "index" at this stage; Common Man Angry Index (CMAI) rather than CPI ( Consumer Price Index) or GDP (Gross Domestic Product). The higher the Index, the severe the economic impact. Calculate CMAI Y-O-Y . If it has increased over a period, survey why and then our dear politicians/regualtors/companies need to act accordingly to reduce it!

I believe it is the ordinary people who can make/break an economy and this "bottom-up" approach will help in making this world a better place to live for all of us.