Nifty below its 200 DMA.Should we care?

Nifty is hovering around its 200 DMA of around 5152.

The 200 DMA holds a special attraction for market observers and technicians.

Typically, if the index goes below 200 DMA, it indicates bearish times ahead and if it goes above 200 DMA, it indicates bullish times.

Is this backed by research/empirical data?

The short answer is YES.

Mebane Faber is the co-founder and the Chief Investment Officer of Cambria Investment Management.

He has authored an excellent paper titled “A Quantitative Approach to Tactical Asset Allocation”

This paper is a must read for all market observers.In this, a timing approach is compared with a simple buy and hold approach.

In the buy and hold approach, the investor simply buys the index and holds it thru thick and thin.

In the timing approach, the following simple rules are followed:


Buy when monthly price > 10-month SMA.

Sell and move to cash when monthly price < 10-month SMA.

The paper demonstrates the superiority of the timing approach over the buy and hold approach

The catch is effect of commissions,impact costs etc is ignored while computing the returns.In the long run, I am sure they will make a difference.

But the fact remains that avoiding the markets when they fall below the 200 Day DMA enables one to sit out the worst of the bearish times.


Hot Links: March 29,2012

Some stuff that I am reading this morning:

Bangalore is costlier than Mumbai to live in (ET)

SEBI Watch: Did political pressure play a role in letting off the Tayals? (Firstpost)

India to be the largest economy by 2050 (Financial Express)

Mallya selling stake in United Breweries to Heineken? (Mint)

How to win friends and influence people-a lesson from Rajiv Bajaj (Business Standard)

What do value investors do in turbulent markets? (Advisor One)

Bill Gross on delivering in a delevering world (Pimco)

Gold bumps its head (Bespoke)

Have gold prices peaked? (Big Picture)

Rail Stocks

The Mamata Effect

The fiasco over the rail budget has wrecked the market caps of Rail wagon companies.

Consider the performance of the rail stocks post the rail budget till now:

CIMMCO (down 22%)

Kalindee (down 59%)

Texrail (down 22%)

TWL (down 30%)

None of these stocks are in the F&O segment else they would have been butchered even further.

Considering the poor finances of Indian railways, the under performance should continue till the next Rail budget at least.

A sector to avoid.


Nifty Seasonality

Came across this research paper on the NSE website (see paper here)

The paper studies the effect of seasonality on Nifty and Nifty Junior.

Their conclusion?

The study found that daily and monthly seasonality are present in Nifty and Nifty Junior returns. The analysis of stock market seasonality using daily data, we found Friday Effect in Nifty returns while Nifty Junior returns were statistically significant on Friday, Monday and Wednesday. In case of monthly analysis of returns, the study found that Nifty returns were statistically significant in July,September, December and January. In case of Nifty Junior, June and December months were statistically significant. The results established that the Indian stock market is not efficient and investors can improve their returns by timing their investment.


Hot Links: March 28, 2012

Some stuff I am reading this morning:

L&T Finance buys Fidelity’s mutual fund business in India (ET)

Why market shakes every time the taxman shouts GAAR (Moneycontrol)

FII flows a record so far in 2012 (Mint)

A case for investing in MT Educare ( BusinessLine )

A case for not investing in MT Educare (FirstChoiceIPO)

Found this quite funny-Madrid prostitutes declare war on bankers (RT)