NIFTY TRADE

10 units NIFTY Futures @ 2650-2675, Stop Loss @ 2590, Initial Target 2840

I expect a gap up opening tomorrow on positive cues; given a bit of weakness after a big gap up yesterday, the gap up is more likely to be up between 1-2% than higher, but we should see a bit of buying and equally importantly a bit of short-covering coming in. We had a lot of short build-up in this market, the options side can just expire their way to death; in terms of shorts on the 2500, but futures sells should be squared, leading to a futures rally and the cash market implications of it.


The markets look to be forming a double-bottom at their mini-test of October lows. Global market cues should continue to be very positive; we're below a 14 day moving average which is a robust long-term trend indicator and we're on the lower edge of medium-term RSI readings. The S&P rally broke an important level on Thursday - 741 was a key level there. The rally looks to have legs in it and positive cues should take us to 2850 sort of levels here; the market is oversold.

The downside to this trade is that we aren't seeing intrinsic strength in the Indian markets and the peculiarities of March mean that there is a lot of scope for book position pressures leading to a bit of squaring off. There would be tax benefits to squaring certain positions now, so in a year where the dip has been so extreme - there could be a bit of intrinsic March weakness that nips the rally in the bud.

Those considerations shouldn't come into play till closer to contract expiry. This is a solid index trade, which deserves a 10 unit allocation here.

For record keeping purposes, I will update the price based on actual market price on Friday morning.

The Dynamics of Asset Allocation

To my mind, every portfolio is split into 100 Units, with each unit representing 1% of the portfolio.The allocation itself in inherently subjective. We currently look at government bonds as the risk-free rate of return; that assumption may in itself be challenged when government debts start to cripple their supposed security. It follows that currency risk will become a theme in the future, and at some point over the next few decades - diversification may well involve as its basis currency diversification. Some may argue that commodities will be all that overcome the intrinsic risk that national debt creates upon currencies - these may all one day become themes that command greater attention, but for now - an awareness of these possibilities is sufficient. With US National Debt at close to US$12 trillion, on a GDP of a similar size - we are in a situation where secular debt-risk will need to come into play, but we are not yet at the point where that risk is of any immediate value.

Investment allocation has never been more exciting; neither has it ever been more challenging. We live in a global world with unlimited opportunity and incredible peril. Portfolio's over the course of the global financial crisis have lost as much as 85% in certain cases. The great push to instant riches have been punished and the true value to staying on the ball and actively managing your investments has played out. This has been a time of great learning, for many.

Now, while setting your own asset allocation, you need to create a timeline of where you are and where you want to be and examine the possibility of where your hopes could realistically take you. If you have a portfolio of $100,000 and you want to double it in 6 years, you can create an allocation that gives you a good chance of doing so. That allocation may be 50 units of debt, 20 units of commodities and 30 units of equities in certain situations, with the allocation to debt or increasing to 80, 90 or even 100 units in certain situations (market bubbles come to mind as a situation where you may want to do so).

The more aggressive investor may initiate shorts in similar situations: the nuances of allocation are complicated and they can only be addressed on an individual basis. What I hope to do on this blog is make recommendations accross asset classes - primarily Equities (including Futures and Options), Commodities to a more limited degree and occasionally something from debt markets.

For the purpose of simplicity, I will sub-divide each allocation into 100 units each. So, every portfolio consiststs of the following asset classes:
1. Debt
2. Long-term Equity
3. Trading (Futures, Options, Margin, Commodity Futures, Exchange Rate Futures, etc.)
4. ETFs/Commdoities

A 10 unit recommendation on NIFTY Futures for instance will mean 10/100 in Trading; so if your allocation to trading is 20 units, we're talking about 2 units of your overall portfolio or 2%.

Money Management and Asset Allocation

One of my focus areas with setting up my own and other portfolios has been to arrive at that beautiful harmony between asset allocation, returns and life objectives. The fact that most Wealth Management services pay little attention to the relative value in asset allocations and sell off stupid-money concepts like SIPs to the investing public at large is what provides the necessary capital for professional traders and a few hedge funds to make huge returns. There is no basis for investing in something with variance periodically. There is also no basis for failing to book losses when your investment has gone pair shaped.

My own asset allocation at this moment in time is about 10% liquid, 35% debt, 15% gold, 20% equity and 20% trading (money market moving over to Futures and Options). Many of those categroies are currently underemployed. My allocation to equity is currently underemployed: I am less than 5% in equity at the moment, but we are now reaching valuations where I will get involved on a few counters.

The underlying factors bethind my equity allocation is to minimize transaction costs (the 1-2% you pay to fund managers can be cut to .10% if you just do it yourself and really help you out over time); leveraging short-term movements (up or down) to provide a provision for the possibility of a hedge to my portfolio as well as using the benefits of leverage (cushioned by not exceeding reasonable exposure beyond these limits and cushioning my positions with money market funds) and using Gold as a provision for safety in the event of inflationary hell! I bought Gold when it was in the late 600s, though - I would probably limit exposure to Gold to about 7.5% if I was getting involved at early 900s.

I don't try to forecast prices on anything; I allow markets to tell me what I should be doing next. Does the notion of analysts trying to tell the market what the market should do not bother you? It should. Our sacred duty as analysts is to interpret demand/supply equations and market movements into actionable advice. We aren't born prophets; we can see levels of danger and set short-term price targets accordingly, but the notion of setting long-term price targets isn't something I understand. So, most price targets you see on here will be pretty short-term.

I always use a stop-loss. The absence of an effective stop-loss is the first small step on the path of arrogance. Markets don't like arrogance. They also don't like indecisiveness - that's one of the many fine balances that all of us can always work on. For every investment you make; there will be a better investment you didn't make.

I have no annual returns targets, I don't try to build my house around the extraordinary returns I will make through my unlimited wisdom. I do use spreadsheets to figure out how much money I do have, though.

The goal of this blog: to illustrate ways in which market analysis can be used to generate long-term returns. To kick off into more commercial forms of money management over time and to ultimately form a hedge fund that invests in a variety of investment classes and isn't afraid to take short positions on many. Happy reading.