So which way shall Indian Stock Market head?

Reasons for Bull:

• DII's are constantly putting money in Indian market for more than an year and also managed to keep the market up during large part of 2016 when FIIs were constantly selling. Whats different with DIIs this time is the ever increasing retail money which is flowing in stock markets via Mutual Funds SIP route. Demonetization further helped by routing unused cash to the banking system some of which is further finding its way to the equity market.  
• FII's have finally started putting money in Indian market roughly after 2 years of withdrawal (except a few months in-between).  In Mar 17, they have invested their highest amount in Indian equities since Mar2014.

• Q4 FY16 results have been decent and defied the concerns of demonetization impact on earnings. Q1 FY17 results are expected to be in similar lines which will dilute the high running Nifty PE, giving it a further leg up.
• Indian government is sending all the right signals for market by passing GST, winning in UP etc. The reform related vibes can be easily sensed everywhere.

Reasons for Bear

• Nifty is presently at 23.82 times PE. Previously it has turned south thrice after hitting the 23-24 range (in Oct 10, Mar 15 and Sep 16). If Q1FY17 earnings don't dilute Nifty PE considerably, chances are for it to come down again.

• Given that Nifty is running at high PE, any Domestic/Global adverse news can trigger panic.
• Trump trade in United States took its stock market in a bull spiral and it is showing reversal sign. In case the market gets further signals that Trump's commitments related to tax cuts and increased govt spending might be delayed, there may be a pushback in US stock market which will potentially have cascading effect on Indian Market.  

**My personal view is pretty optimistic about the market.

Interesting Stock Chart - Navin Fluorine

I found below chart interesting. Notice the yellow highlighted area and make your assumptions about what's happening :)

Book Review - The Dhandho Investor

Summary:  

The underlying idea about this book revolves around "low-risk approach to high returns", hence, the author uses the tagline "Heads I win, Tails I don't lose much". It takes examples of Patel and Mittal communities on how they have inherent skills of using the Dhandho Framework (low risk, high return) in business and how they have been grandly successful during last many decades. 

Key Points:

1. Aiming for high returns without thinking about risk is a sure-shot way to go bankrupt.
2. The Mantra "Heads I Win, Tails I don't lose much" has been successfully used by some communities for generations and is a proven approach to riches.
3. Bet rarely but bet big when odds are strongly in your favor. 
4. Size of bets should be in accordance to the probability of winning. Kelly's framework of asset allocation can be used. 
5. Buying existing businesses which are simple to understand and are distressed due to any transient reason is preferred over starting something innovative which inherently has higher risk. Be a copycat rather than an innovator. 
6. Look for arbitrage opportunities. They have guaranteed returns and close to zero risk. 

Conclusion and Recommendations:

A nice read to understand how certain communities continue to do great for decades. The book gives away simple but powerful rules of wealth generation. 

Disclaimer:

Although the book talks about stock market occasionally, it does not particularly talks in detail about how the low risk investment approach can be used in stock market except discussing broad topics like arbitrage etc. 

Interesting perspective about Stop Loss!

I happened to stumble upon this video by a so-called "millionaire forex trader" and I found his perspective about "Stop Losses" very interesting. Here is what he says:

"You should never trade WITH a stop loss. People who tell you otherwise want you to lose money so that they can win. Do you think that Goldman Sachs would take a $5 billion position and think ... oh, I should put a tight stop loss on this trade" :)

He goes on with sharing some other 'lies' of the market and his favorite trading strategy. I personally subscribe to his thoughts only partially but consider his video worth watching, at least once!

Guess you can make money selling options?

"The big fishes in the market make loads of money selling options. It's like being an insurance company which takes premium from a lot of people and pays back only to a handful". 

At the face of it, such statements sound logical for following reasons -

1. The option seller can carefully sell options which are opposite to his market perception i.e. he can sell puts if he is bullish and calls when he is bearish. 
2. He can choose the distance of his sale from the spot price, further reducing his risk. 
3. He can choose from various option strategies depending on market conditions and also hedge his position etc.

There are many options strategies to choose from, but to understand their risk/reward, let's use below example of a "Bull Put Spread" for an Indian equity index, Nifty 50. You can do the risk/reward math for other options strategies but I would insist that they would be similar, if not exactly same.  

Example:

Today's Date - 27 March 2017
Options Strategy - Bull Put Spread (Options Expiry 27 Apr 2017)

Nifty Spot Price = 9045

Sell Nifty Put = 8800

Buy Nifty Put = 8600

Maximum Risk = 8800-8600 = 200

Maximum Gain = Premium received. 

Goal - Sell options far away from spot price in the direction opposite to market trend with the view that options will most likely expire worthless and seller can keep the premium. 

Now let's look at premium situation - 
(Nifty Option Chain - Expiring 27 April 17 (Today's date - 27 Mar 17))

• Premium for above-mentioned Option Strategy would be: Rs 35.00 - Rs 14.05 = Roughly Rs 20
• Maximum Risk = Rs 200 (8800-8600)
• Risk/Reward Ratio = 200/20 = Risk 10 times higher than reward.
• Minimum Adverse Price movement for Option to enter in the money (ITM) = SPOT Price - Put Sell Price = 9045 - 8800 = 245 (In percentage terms, Nifty has to move 2.7% from Spot Price before the losses start hitting.
• If you move farther from SPOT price, the risk/reward becomes higher and chances of nifty moving that percentage become lower which even things out. e.g. for a put spread of (8700-8500), Nifty will need to adversely move by 3.8% before losses start but the premium would 1/16th of the maximum possible loss.   

Now you may think that I did not consider probability of nifty moving 2.7% while calculating risk/reward ratio. Let's see below

(excerpts from https://en.wikipedia.org/wiki/NIFTY_50)

Nifty Major Falls

1. 11 Nov 2016 --- 229.45 Points (driven by US election results & demonetisation move by the government)
2. 24 June 2016 --- 181.85 Points (driven by the Brexit referendum)^[7]
3. 24 Aug 2015 --- 490.95 Points (driven by meltdown in the Chinese stockmarket)^[8]
4. 06 May 2015 - NSE Nifty slipped below the 8,200-level by falling 179.25 points or 2.15 per cent to 8145.55. Besides, overnight losses in the US markets on worries about surging oil prices, poor trade data and growing tensions over the Greek debt crisis weighed on sentiments.^[11]
5. 16 Aug 2013 --- 234.45 Points(because of rupee depreciation)^[9]
6. 27 Aug 2013 --- 189.05 Points^[10]
7. 03 Sep Aug 2013 --- 209.30 Points
8. In 1991, New Delhi kickstarted the economic reforms process owing mainly to the serious balance of payments crisis it was facing.
9. 1997 Asian Financial Crisis - Investors deserted emerging Asian shares, including an overheated Hong Kong stock market. Crashes occur in Thailand, Indonesia, South Korea, Philippines, and elsewhere, reaching a climax in the October 27, 1997 mini-crash.
10. 21st January 2008 Nifty went down by more than 10% on a single day due to US sub-prime crisis. That was the beginning of a year-long bear market

So, at least in recent times, every year provides us with one or two opportunities when nifty moved at least 3-4% in a day. And remember, this is just the Nifty Major Falls list. Similarly, there would be Nifty Major Highs which may bite you in case you are short on the market. 

Conclusion

In conclusion, as we see, one adverse Nifty movement can eat up your profits of last 10 successful monthly transactions and chances of that event happening are far from remote. Is options selling still a good investment opportunity? Probably 'Yes' for a privileged market operator who keeps changing his market position regularly by constantly monitoring the market, volatility, time et al and using some algos etc. but I don't see how it can make a retail investor rich. Thoughts?

Book Review - Riding the Roller Coaster: Lessons from Financial Market Cycles We Repeatedly Forget.

Summary - The book highlights major boom/bust cycles of global financial markets between the year 1600 and 2008. The author argues that while these events had quite a few differences in terms of their origin, how they unfolded etc., they had striking similarities in terms of how various market conditions were exploited and how people behaved in those circumstances so much so that a recipe for disaster was always present (system exploit/market condition resulting in super high liquidity, mad rush from people, experts with extreme optimism, high participation by first time/mostly informed investors etc.). Though these similarities are mostly forgotten as soon as the cycle turns, their remembrance can help investors in a much fruitful investment experience.

Events Discussed -

1. Tulip bulb mania ; Amsterdam ; 1630s.
2. South Sea Company ; Britain ; 1711-1720 
3. Harshad Metha Episode ; India ; 1992
4. Ketan Parekh Episode - India ; 1999-2001
5. Dotcom Bubble ; Global ; 1995-2001
6. Subprime Mortgage Crisis ; US ; 2008

Interesting Quotes -

"The only thing we learn from history is that we don't learn from history"


Recommendations -  "Highly Recommended" for anyone who is trying to hone his skills to identify "market euphoria" and use it to his/her advantage in investing/trading. A pretty free-flow read.

Seller Link - http://www.amazon.in/Riding-Roller-Coaster-Financial-Repeatedly/dp/9384061336