Hot commodities .....

Last friday, CPI number in the US is higher than ever expected. What does this mean?

CPI number is nothing but Commodity Price Index (CPI). This tracks prices of baskets of commodity goods such as Oil, Food, Energy ,Cloths .. used day in and day out by the consumers. Increase in the value of these index means rise in inflation. How does this affect the stock market?

There may be fear that Fed in US stop cutting the rates. This is not good for the stock market. Market expects cheap money. So this might cause significant sell off in already troubled stock market.

As we have seen in the past, commodity prices tend to do counter cyclical with stock market. What am I doing to take an advantage of this rising in commodity prices?

1. In my retirement account (such as 401k), I moved out from stock index fund to commodity ETFs, funds such as Gold (GLD), Crude Oil (USO) etc.
2. Focus on short term trading with Agri futures (such as Corn, Wheat, Soybean) and Metal futures.
3. Focus on buying currencies for commodity rich countries such as Australia, New Zealand and Canada.

I would encourage everyone to read book called Hot Commodities by Jim Rogers.

Mahadevan.L

Portfolio Update - Again

Sold half of my position on Bajaj and move my stop to break even. Screenshot is attached.

Fed decision .....

As everyone knew by now, quarter point cut in interest rate happened yesterday. What does it mean to Indian market. Let us do some simple analysis.

NSE broke new highs with the banks in the BSE were leading yesterday. Two possibilities could happen

1. Easy to borrow money from US and pump it into India and this drives the market up as it did few months back.
2. US market was expecting 50 points cut but fall down on the 25 points cut. Indian market might reflect the same.

Do I get into new position now? Not really. I would like to wait in the sidelines for the market to settle for next few days before I pull the trigger on any new position. Also I will be carefully watching my existing position.

More posts to follow later.

Mahadevan.L

Portfolio Update

Good morning readers. After a break from last weekend, I just wanted to update my 'Mock' portfolio.

I sold half of my position on GAIL. Move my stopover to breakeven. Why did I do? Go back and revisit my rules posted last week. Here my return on investment number.

Purchase price = Rs 480

Number of Shares sold = 33

Sale Price = Rs 519

Profit per shares = Rs 39

Return on investment = 8.13% in 6 days.

Good trading.

Mahadevan.L

New addition - GAIL

I have added GAIL to my portfolio since the stock is breaking out with huge volume. I have added 66 shares of GAIL at the stop loss of Rs 450 (low of yesterday's price). I have updated my excel spreadsheet with this position.

Mock Account

Good morning everyone. My blog is celebrating its first weekly anniversary. Congratulation to "PaisaPortal".

Thinking aloud, I have decided to create a paper account (not the real one) to track what I have proposed in this blog. I have created a excel spreadsheet to track profit, stop loss strategy etc. Here are my basic rules to start with.

1. I do mostly technical analysis.
2. I look for stocks with support bounce or resistance breakout with huge volume
3. My total account value allocated for the stock is Rs 1 lakh.
4. I hold not more than 5 stocks in my account.
5. Maximum loss per stock should not exceed Rs 2000.
6. Profit strategy : I sell 50% of my stock holding when my profit reaches Rs 2000 and move my stop to breakeven (i.e adjust my stop price to original purchase price)

My goal is to take all of you on this investment journey. I am not here to prove that I will be always right and profitable. But what I can guarantee that I can control my loss.

I will be posting an update of my portfolio every week.

Mahadevan.L

GOLD

Good morning to everyone. First time in my blog, I am going to talk about investing. Today I am going to talk about investing in GOLD.

As you have seen, GOLD values have been steadily increasing. The reason I know of the following

1. Since dollar is going down in the values and uncertainties surrounding the sub prime mess , many investor would like to park their investments in the safe place. GOLD is one of the safe and liquid investment.
2. It is edged against currencies. Reserve banks around the world are printing more money to create more liquidity. This creates more supply on the currency and hence devalue the currency value against fixed asset like GOLD. I heard in the news that there are 52 trillion units of currency is floating around the world compare to 2 trillion units of GOLD. You see the demand here.
3. It is difficult to manufacture GOLD as compare to printing more currencies. It takes longer time for mining companies to set up the mining operation. This takes usually 8-10 years. This creates artificial demand. This is true for other commodities like SILVER, PLATINUM and COPPER.
   

My strategy on the GOLD is long term. I will hold it till end of 2009. I would invest GOLD in following ways

1. Buy GOLD future contract. Applicable to US market
2. Buy 'GLD' as ETF ( Exchange Traded Fund) which tracks actual bullion. Applicable to US market.
3. Buy GOLD bullion. Mostly applicable to Indian market. This way investor can make their spouse happy which revealing their underlying motivation.
4. Buy stocks of GOLD mining companies.
   

SILVER another good investment too. I will talk more about later in my blog.

In India, Sundaram and Reliance is planning to float GOLD specific mutual fund. Ping your money manager and ask them more about this.

See you later.

Mahadevan.L

Home work follow up

Well.... It is late in the night. I am going to jump in and take this homework by myself.

To answer the first question, YES, I would buy all of them. I would make sure that number of stocks in my portfolio does not exceed more than five.

To answer rest of the question, let me take an example of HBLPOWER. FYI, it is up by Rs 15 since my last posting.




I need to explain little bit of technical analysis. From the above chart, it is clear that HBLPOWER have made a diagonal support line since middle of August. The price of this stock touches this support line at the point 0,2 and 4.

Here are the general behavior of this stock for the last 4 months

1) From this chart, stock rises from point 0 and goes up to point 1, made Rs 140 gain (Rs 380- Rs 240).

2) Stock dropped back from point 1 to 2 .

3) One more support bounce happens from point 2 and goes up to point 3, made Rs 145 gain (Rs 455- Rs 310).

4) Stock dropped back from point 3 to 4.

5) Stock is again bouncing back from point 4.

With above analysis (sometime paralysis!!!) , this stock normally makes around Rs 145 when it bounce back from the support.

Let us come back to rest of my questions.

Question number 2) What is my stop loss strategy.

Answer : Price below current support. That is Rs 375. Current price of the stock is around Rs 400. (yesterday's price). So my maximum loss is Rs 25 (Rs 400-Rs 375). Since I can loose maximum Rs 2000 on this stock position ( Read my post on Money Management ) , I would buy 80 shares of HBLPOWER (2000 divided by 25).

My next Question

Question no 3) When do I take a profit?

Answer : It is a difficult answer. Some people tend to hold on to this stock as long as this is uptrending and does break this support line). Short term trader will make a conclusion that this stock could go up by Rs 140 from the support line at point 4 and sell their position at Rs 540 and wait for the next support pullback.

If you can hold on to your YAWNING, let me do final risk reward analysis.

Potential loss - Rs 25

Potential profit - Rs 140

Reward/Risk ration - 140/25 = 6

So you are risking Rs 1 to make Rs 6.

Any comments?

Mahadevan.L





Once it touches this support line, price of the stock go up by Rs 140 (from 0 to 1) and touc

Home work for this week.

I hope all of you had a nice weekend. Here I wanted to throw out few chart patterns. I wanted you to analyze them and post me a comment on the following

1) Would you buy this stock at current market price?

2) What is your stop loss strategy?

3) When do you take a profit?

I wanted to make sure that all you are educated to make well informed decision. Somehow, I am against giving random stock picks followed by a suggestion of when to buy and sell.

"When you feed person a fish, you solve his hunger problem for a day, but you teach him how to fish, you solve his hunger problem for his life"

This is my reason for this portal. To educate, to learn and leave a legacy.

Money management principle - Position Sizing

Most of the investors and soon to be a trader have one common goal

" To make money in the stock market"

Well, that is a legitimate goal. But it is not always true. Me being in the stock market for the last few years, I have came across many professional traders. Most of them (with high probability point), follows two rules

• Rule no 1 : Never lose money in the stock market
• Rule no 2 : Do not forget Rule no 1

But it is impossible not to lose money in the stock market but it is possible to control how much we loose per stock in our portfolio. Here comes the are of "Position Sizing".

Normally, investors follows two kinds of methodology when putting their money into the market.

1. Bought no of shares ending with zeros at the end (bought 200 HCC)
2. Invested rupees ending with BIG zeros (Invested 1 lakh rupees in HCC stock)

So far, I never encountered an investor (to my knowledge) who have bought or shorted random no of shares. i.e bought 37 no of HCC.

Well, this may be related to our thinking. Have you heard anyone schedule a meeting at 11:12 am or 1:17 pm? It would be either 11 am or 1:3o pm.

Art of "Position Sizing" helps to rewire our thinking. Here is my approach to position sizing.

1. Allocate not more than 10% of my net worth in the investment or trading account. If your networth is 10 lakh rupees, I would set aside 1 lakh for my stock account
2. Do not hold more than 5 stocks at a time.
3. Limit your losses to 2% of your trading account per stock. With 1 lakh is your trading capitol, this should be around Rs 2000 per position.

Now let us calculate how many no of shares that you need to buy with your working capitol.

You found RPL (Reliance Petroleum) is trading around Rs 220 and heard the news that they are in the process expanding their global presence. You came to the conclusion that RPL would go up in values in future and decided to buy the stock.

Let me add a pinch of technical analysis. Let us assume that you are a long term investor. You found that price of the stock is above 200 day moving average (i.e mvg) and 200 day mvg is around Rs 140 (you can get this values from any financial website like moneycontrol.com, rediff finance etc).

Now you decided to hold this stock till it price drop below 140. That is Rs 80 per share (Rs 220-Rs 140). Maximum allowed money to loose per position is Rs 2000. Now get the number of shares of RPL to purchase. It is simple. It is 2000/80 = 25 shares.

This is something different from buying 100 shares of RPL or investing Rs 1 lakh on RPL.

Good trader or investor always decide about how much money they planned to loose. Amateurs go with how much money they can make. Who wins at the end? You know the answer.

What do you think?

Mahadevan.L

RPL Breaking with Good volume

Looks like RPL is breaking with good volume. Technically looks like a good pattern for the following reason

• Price Closes above 50,21 and 8 EMA.
  
• Average daily volume is more than 100%
• Prices bounces nicely above 50% Fib retracements

Take a look at the chart pattern. Good time to entry. Either I will buy at the market price (Rs 220) Or pull back to 8 EMA price (Rs 210). My stop would be below 50 EMA (Rs 190). Here my rules for number of shares to buy.

1. Assume that I am buying it at market price for Rs 220 and my stop is Rs 190.
2. Assume that my account value is 1 lakh rupees
3. My maximum loss per stock position is 2% of my account size. i.e Rs 2000
4. Maximum loss per share of RPL is Rs 30 (220-190)
5. No of shares of RPL to go for is 2000/30 = 66 shares

Please post your comments on this blog. This will help me to refine my future postings. Happy trading and investing.

- Maha