Whereas the investors have enough good opportunities to invest in markets, the traders are facing many challenges. The biggest challenge is that most trading opportunities are available in the cyclical businesses like commodities and automobile. The price movements in these stocks are sharp and quick on both sides.
Since most of these stocks (metals, sugar,
paper, cement, textile, power, auto etc.) have already gained significantly
from their recent lows and are no longer available at cheap valuations, the
margin of safety in trading these stocks is obviously low. In past couple of
decades, the commodity cycles have been short and deep. If this cycle also turns
out to be a usual cycle, against a super cycle as widely assumed, the
corrections could be quick and deep.
In these circumstances, most of the traders,
especially the smaller ones, are forced to trade with small quantities. The
holding period is much smaller, mostly less than a week. Profits/losses are
booked at much smaller amount. The number of stocks traded is much larger and
the quality of stocks being traded is deteriorating with every rise in the
prices.
Some readers and trader friends have asked for my
views on trading opportunities in the market. I must say, trading in stocks is
certainly not my domain of expertise. This requires completely different skills
and training. Nonetheless, since a question has been put to me, I must try to
answer with whatever knowledge and experience I have. In my view—
·
In past one month the benchmark
indices have been mostly directionless. However, we have witnessed heightened
volatility in this period. Usually, this phenomenon is witnessed close to the
top or bottom of the market cycle. We may not be close to the peak of the
market, but certainly we are not close to the bottom either.
·
The risk reward for the traders
is negative. The market upside may be limited to 5-7%, whereas the downside
could be in the range of 18-20%, even if the indices retrace 35-40% of the up
move from lows of March 2020.
·
The traditional signals for
correction – Market to GDP, yield differential, EBIDTA Margins peaking, distance
from 200EDMA – are clearly visible but being ignored by the market.
·
The rally in commodities is
totally counterintuitive and may be driven more by hopes of continuing supply
constraints. The inventory buildup may in fact hurt both the hoarder and the
financier in mid-term.
·
Most of the IPOs to be launched
in 2021 are new economy businesses. The structure of the market is clearly
shifting away from the conventional cyclical businesses, in line with the
global trends. Tech enables financial services (Fintech), E-Commerce platforms,
ITeS, AI etc are likely to get maximum allocation of new money. Intuitively,
the market activity shall be dominated by the non-cyclical technology driven
businesses. Healthcare and financials may also continue to remain in the
trading arena. But commodities and utilities should logically be waiting on the
sidelines for another decade at least.
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