I have been a little jumpy of late in the markets (especially after my calculation of a correction in mid October came true!). The charts do not paint a pretty picture as of now. While I am not blowing the whistle on the upmove, I feel the momentum guys have overstayed their welcome.
The shorts in copper - which I use as a barometer of the economic health of the global markets (or a perception thereof), are a useful medium- long-term indication of market health - indicates problems of a deeper nature than we are made to believe.
Our home grown parameters point to an over bought market that is more stretched than in May 2006. I wish to add to this dimension further:
The implied volatility market wide is 67 per cent - 68 per cent per annum, which translates into 5.50 per cent per month. The cost of retail borrowing (15 per cent per annum) + volatility means a factor of 6.75 per cent per month. Add a cost of carry in the futures segment at 18 per cent per annum. You know that the stratospheric rise cannot last on a perpetual motion basis.
Whenever the bigger players (read that as operators) do not get returns in excess of their costs - currently 8 per cent per month; (or even feel that they will not get this return), they will distribute stock at higher levels to the retail players. History is proof that this phenomena is unbroken and predictable. In May 2006, the volatility was 49 per cent and we though it was "too much".
Now we lap up shares at 68 per cent volatility and ask for more! To me, the recklessness is unwarranted. The daily ranges are not expanding as much or in some cases, not expanding at all. Keeping an ear to the ground, I sense a feeling of foreboding. While there is no urgency or need to press the panic button, I feel any trader who has only thought of bullishness in the markets needs to think of some cool off as a distinct possibility in his / her trading game plan.
Some people are of the opinion that buying will cease and selling will emerge thereafter. That will be a signal for the lay investor / trader to start taking profits. I beg to differ. The big players (operators) will have to sell while there is a demand for the stock! So there will be no warning before the fall.
If you are complacent about your leveraged long positions and feel the rally will never end, you might as well be sitting on the deck chair on the Titanic. The way to go forward is to trade on smaller exposure and wait for bigger price moves, rather than trade large lots and try to get rich quick.
Till then, have a profitable day!