TIMING IS IMPORTANT >>>>>

Should investors wait for the mind-numbing madness in the stock market to pass, or just rush for the fire exit? Shakti Shankar Patra takes a look at technical charts to seek an answer to a question, which is becoming more tough with each passing day
IN THE unforgiving, yet fascinating world of equities, Warren Buffet is the epitome of success. From high-flying fund managers to Ivy league management students, from the Ferrari-driving Wall Street broker to the pan-chewing punter on Dalal Street, most will vouch that in the world of investments, their idol is none other than the Oracle of Omaha.
More reams of paper must have been dedicated to his abilities and wisdom than probably all other successful investors put together.
Even his random statements have become a part of financial folklore and investors blindly pick up stocks which he buys, the sole reason and justification being, 'Warren Buffet is buying it.'
Although questioning the investment acumen of the world's most successful investor will be crazy, there definitely seems to be a case for scrutinising some of his most glorified statements ' particularly in times such as these, where forget stocks, entire indices are collapsing 10% a day.
In 1988, in a letter to Berkshire Hathaway shareholders, Mr Buffet wrote, 'Our favourite holding period is forever.'
Not even trying to analyse the context in which the statement was made, the cliché-hungry financial media in general and investment advisors in particular lapped up the statement, with both hands.
What they actually did was further strengthen two of the biggest misconceptions prevalent in the world of equities ' a simple 'buy and hold' strategy will give great returns in the long run and trying to time the market is a futile exercise.
In reality, nothing can be further from the truth. Firstly, there have been numerous decade-long spells, where equities have given negative returns.
For example, if you had bought Nasdaq stocks about a decade ago, you would now be sitting with very hefty losses, notwithstanding whether
those stocks were blue-chips like Microsoft or Yahoo or some, now extinct, dot-com hotties, and that too, despite the fact that you held on to them for a full decade!
The Nasdaq bubble was not a one-off thing. It happened during the Great Depression, with Japanese stocks in the 1990s and closer home, even with a large number of Sensex constituents of the 1990s, who are today languishing way off the highs seen during their heydays.
Remember Mukand Iron? In fact, between 1992 and '03, the Sensex persistently gave negative returns.
And if you thought this happens only when an investor is caught in a bubble, there are numerous examples to the contrary, when investors have lost money even though they have managed to enter at absolute lows. Their only fault is that they did not sell out, when prices went up, but decided to hold on forever.
For example, the Dow Jones Industrial Average started rallying after hitting a multi-year low around 530 in 1962.
Over the next decade, it went on to hit multiple highs around 1,000 in 1966, 1968 and 1972, but then crashed all the way back to the 500s in 1974.
So, an investor who had managed to get in even at the absolute bottom in 1962, would have actually lost money after 12 years, if he had just held on instead of booking profits, when they were there.
The story was the same during the Great Depression, when the Dow rose six-fold from just 64 in 1921 to about 380 in 1929. But then the big crack emerged and by the time it found its bottom in 1932 ' at around 41 ' it had given up all the gains of the eight-year bull run and some more.
Needless to say, this is happening all over again as the Dow Jones Industrial Average has given up all the gains of the five-year bull run that started in '03.
In fact, investing can be compared to growing a mango tree. You have to pluck the mangoes when they are there, instead of just letting them rot.
A few decades before Buffet advocated investing for the long run, an equally brilliant, if not better, John Maynard Keynes had famously said, 'In the long run, we are all dead.'
And taking the risk of inviting the ire of all Buffet fans, Keynes makes more sense than Buffet.
As for the second big misconception, it's a fact that very few people can time the market, but then, making money in the market is a very difficult job and every Tom, Dick, Harry and Ram doesn't succeed in it.
Of course, it's next to impossible to catch the absolute top and the bottom, but even if you can catch the trend and skim a reasonable amount between the top and the bottom, you have achieved your objective. Isn't it'
At the same time, Buffet once said, 'I realised technical analysis didn't work when I turned the charts upside down and didn't get a different answer.' Although it's difficult to believe that he really meant what he said, if your faith in 'buy and hold' is waning and you are ready to time the market, let's take a look at the following technical charts to understand what exactly they're trying to tell us'
FABULOUS FIBONACCIS

This Nifty chart was being carried with the Derivatives Diary column of ET Investor's Guide for the past few weeks. As written last week, the pillar (the trendline from the lows made on May 17, '04, when the Nifty had crashed because of the NDA's rout in the general elections) on which the five-year bull run was built was busted in the first week of October '08. What followed next was worse than the worst nightmare of an equity investor. In order to find the support levels from hereon, let's take the help of Fiobonacci numbers, which are giving some mind-blowing conclusions.
If we deduct the top of 6357.10 made on January 8, '08 from the bottom of 1292.20 made on the May 17, '04, we get 5064.9. A 38.2% fibonacci retracement of the entire bull move gives us about 4420. This was roughly the level that came to our rescue, when intermediate bottoms were made on January 22 and March 18. This support held on for a while, but then gave way and the Nifty fell like a stone to form the next intermediate bottom on July 16 at the 50% retracement of the entire bull move, which roughly gives us levels of 3820. This coincided with the trendline and if the bull run was to survive, this bottom needed to hold on.
However, once that was gone, the next support is the 61.8% fibonacci retracement of the entire bull move, which gives us a figure of 3227. While this was breached on Friday, it is still holding up on a closing basis. So, if this is not broken today, expect a sharp bounce till 3800, which will then decide if we have just had a massive bull market correction, or the bull run has indeed become history and we go on to test the June '06 lows of about 2600.
MSCI WORLD EQUITY INDEX

From the lows of 423.14 made in September 1990, the Morgan Stanley Capital International World Equity Index, which includes stocks of 23 developed markets, rallied all the way to 1448.76 by March '00. Over the next two years, it gave up roughly 70% of its gains to hit lows of 696.76 in October '02. From these levels, it rallied all the way to hit a life-time high of 1686.32 (amazingly, this rally was also close to a similar 1,000 points). At close last Thursday, it had shed slightly more than 70% of all its gains since '02. Expect a long and painful consolidation between the horizontal lines. However, in the unlikely scenario of the bottom line breaching, expect nothing less than a repeat of the Great Depression and a New World Order.
MSCI EMERGING MARKET INDEX
The Morgan Stanley Capital International Emerging Markets Equity Index, which includes stocks of 26 developing markets including India, clearly exemplifies why these markets are referred to as 'emerging'. As is evident, the index has basically not been going anywhere, and the sharp upmove since '04 seems nothing, but an aberration. With the world entering a de-leveraged, risk-averse phase, expect some more correction and then a resumption of the sideway move between the two horizontal lines. There is absolutely no way that global liquidity will now hit these emerging shores anytime soon in search of higher returns.
DOLLAR/YEN

LIQUIDITY IS known as the mother's milk of all asset prices. The biggest source of all global liquidity is the cheap yen coming out of Japan (interest rates were zero in '01 and are at 0.5 now). Investors borrow yen at dirt-cheap rates in Japan, convert that into US dollars and buy assets across the world ' popularly called the yen carry trade. A depreciation in the yen means the carry trade is flourishing and vice-versa suggests risk-aversion is rising and the yen is rushing back to Japan. As is reflected in the dollar-yen chart, the yen is consistently making lower tops over the past decade (though it's not as ferocious as in the '90s), with a support around 99-100 (horizontal line). Currently, it's again testing this support, a breach of which will dry up the taps of global financial markets. But one can expect the downward sloping line to be tested again, followed by a decisive break below the support around 100.
NIFTY P/E

IN TERMS of P/E, the Nifty has peaked out ' both during the tech bubble of ''00 and the recent one in January '08 ' at surgically identical levels. At the same time, the trendline from the lows of May '04, which was lending it tremendous support for the past four years, is now busted. An upward sloping P/E trendline meant that in terms of valuations, the Nifty was constantly getting re-rated.
However, those happy days seem to have become history and along with most emerging markets, India is on the path of getting de-rated. This chart also suggests that some kind of bounce is just around the corner and it should ideally go and test resistance at the trendline, which being the previous support, is bound to offer strong resistance. The failure of this attempt will mean that the Nifty would have to finally come back to its long term P/E support of around 10-12.
Nifty Dividend Yield
NIFTY'S DIVIDEND yield chart is nothing, but an absolute mirror image of its price-to-earnings (P/E) multiple chart. As is evident, the downward trend is now reversed and it's ready to test resistance at the upper horizontal line. Expect a fall to the lower horizontal line, which has been a key support quite often. However, the upward movement should resume after this and the Nifty''s dividend yield should not peak out before 2.5-3. The implication of this is that earnings and dividend payout ratios should keep rising and the Nifty should fall a bit more for it to become a compelling buy, even for risk-averse investors.
NIFTY DAILIES (Since Oct 1, 2007)

THIS NIFTY daily chart since October '07 hardly needs any explanation. If ever a chart spoke for itself, this is it. As is evident, the Nifty is in a beautiful downtrend, with clearly demarcated upper and lower limits. These limits were violated for a very short time during the early January greed and the January 22 fear. Since we are back at the lower end of this channel, expect a bounce-back till the upper trend line. However, if the lower line gives way, which will also oincide with the support at 3227 getting breached (please refer to the chart on Page One), the pain will only increase.
THE CLASSICAL HEAD & SHOULDERS

THE CLASSICAL Head & Shoulders pattern has returned to haunt doubters of technical analysis. After making an intermediate bottom on July 16, the Nifty made a classical H&S pattern. Once the neckline was broken on Sept 15, there was no way the Nifty could have not crashed. It made a final attempt to recover, but found the neckline had turned into a stonewall. So, when the neckline was broken again on Sept 22, there was nothing but the apocalypse. If one ignores this pattern, a longer H&S is visible, with the left shoulder around mid-July and the right shoulder around mid-Sept. The breach of this opened up the gates of hell. One can expect a bounce till the lower neckline, which must have already become a stonewall.
NIFTY DAILIES (Since March ''07)

IN ABOUT 25 trading sessions, a set-up consisting of a bullish cross-over of the 20 day moving average (DMA) over the 50 DMA, followed by a bearish crossover of the same 20 DMA below the 50 DMA, was complete in May-June.
Once this was done, the Nifty dropped like a stone and lost about 30% between its May 2 top and the July 18 bottom.
As is evident, the whole process has been repeated once again (this entire set-up was published in the markets section of The Economic Times on September 18 and October 7) and the
Nifty has already lost a similar 30% in double-quick time. So, is there any respite on the anvil?

shakti.patra@timesgroup(dot)com