Trying to Predict the UN-predictable – a Don Quixotic Idiosyncrasy

Trying to Predict the UN-predictable – a Don Quixotic Idiosyncrasy

When the Legendary Financier, J P Morgan, was asked what the stock market would do next, he would answer, “It will fluctuate”.

First of all, we need to set two things straight:

-No one can predict the (stock) market

-No one can beat the (stock) market

* There are few exceptions – but exceptions do not make the rule.

These are not my statements – they are popular adages that have been tested over time. So “we (general public)” in the stock market ARE in the WRONG business.

However, we still try to predict and beat the market – probably due to our irrationality (cue – behavioral economics, Dan Ariely).

In this article, I will try to develop a scenario of the way the DSEX (index) “might” be moving in the next few weeks – a futile effort (another example of overconfidence bias from behavioral economics).

Before that, let us go back a few months.

1^st of May – May day (May day) calling!!! The ship (aka stock market) is sinking!!!

2^nd of May – Index broke 4200 major support. All seemed bleak. It was doom and gloom – but rosy for the Contrarian, who was confused with so many things to buy . . . so many items at such low prices! One of the time-tested saying is “Buying on Weakness, Selling into Strength”.

1^st week of May – index reversing with a Bullish Engulfing Candle. From then on, its wave after wave of Higher Highs. Now we are in a Bull run (personally though I do not like it – as the ending is cruel – What goes up must come down & vice versa).

It seems May Day Emergency call was answered!

It is like a train with compartments of different sectors/industries.

Initially, the run was fueled by low cap companies – mainly junk and General Insurance.

Historically, junks fly during the end of a Bull market – but this time they led the attack. The market seems to give endless lessons to the attentive student!

Some junks (Zealbangla, Shyampur Sugar, Renwick, National Tubes, the list is too long, etc) doubled and tripled which might have drawn general people’s interests – who might have been trying to take low (single-digit) interest loans and invest it in a productive business that would be great for them and the economy (rather than paper trading = stock market).

Soon after came the General Insurance (few still continuing) bull which gave at least 50% returns. Good for those stuck for years and great for Contrarians who entered at the trough.

Along came the NBFI bulls – those around or less than Taka 10 nearly doubled and others gave good returns.

With the NBFI’s came the BIG BOYS – BANKS started to rally, albeit slowly. But when Banks move, the Index takes notice.

As the index rises, so does the NAV (and inferring, the profits) of Mutual Funds. Thus, the MF bull arrived … and still to be continued (for some).

Slowly, it was joined by some textiles (mainly Denims – as Jeans is the fashion these days).

All well and good for all investors till now except for some of the fundamentally good companies referred to as “blue chips”, of which, half are still lying languidly.

As mentioned before - What goes up must come down – when many stocks’ bull run ends, the Index will take a nose dive – UNLESS some of the fundamentally good companies start rallying. In principle, with their earnings and “Cash” dividends coming up, there is no reason why some of them will not rise to dampen the Fall. Akin to trump cards – we keep the strongest cards in our hands and try to maximize with the lesser hands!

So let us look at a few such companies, starting with the MNCs:

• Bata Shoe – Huge accumulation from 1^st of March till date (between 1,150 and 1,200).
• BATBC – the Cash King-Dividend guy who is expanding capacity – is price already adjusted?
• Berger at 10 year high – It has very good earnings; around 25% profit growth in last 3 years; growing cash dividend. No idea where it is going!
• GSK: Profit stagnating but increasing Cash dividends.
• Heidelberg: Very good earnings.
• Lafarge: Merger; Expansion story.
• Linde: Plans to double its expansion by 2018. Sold land in Tejgaon. Sitting on a sea of Cash. Expect a reversal sooner than later.
• Marico: Market leader in Hair Oil with abundant cash; Good payout ratio (perfect for people in retirement).
• Reckitt Benckiser: Good earnings and dividends. Has been consolidating from Nov ’15.
• Renata: Around 20% profit growth in last 3 years; good dividends. I am expecting a run soon (to tell the truth, from last 6 months but it has not come yet – a situation faced by quite a few Funda Analysts too).

Some local giants:

• BRAC Bank: Has been rising steadily from June ’14; increasing profit and dividends; what will happen when bKash’s profit is added – or is this being priced in?
• Islami Bank: Bangladesh’s largest private bank.
• Olympic: Growing food company giving good dividends. Trying to reverse. Stop loss if it goes below 277.
• Square Pharma: Market leader in pharma sector; one of the best companies in Bangladesh; has two support levels at 235 and 240. If those hold, then one could say downtrend is over.

These are among the good fundamental stocks – some of which I think are preparing for a run when other stocks start to retrace. So watch out.

However, the current story might still continue as the crowd is excited. Following stocks are mainly for break-out traders – HIGH-RISK moderate return! I will try to go through some in alphabetical order:

• Agni: Broke Resistance at 20-21. Now support at 20-21 (stop loss if it goes below 19.4) and next supply zone around 24-25.
• Argon Denim: Broke resistance at 32. However, I personally do not like Argon as Directors off-load shares after good declarations. Let us see if demand can overcome Directors’ supply. If traded, then Stop loss if it goes below 30.
• Beacon Pharma (Z): Broke resistance at 20. Now support at 20 (stop loss if it goes below 19.4) and next two supply zones are – 24 and 30.
• City Bank: Fundamentally good. Broke Resistance around 25.5 (above 3 year high). Next major resistance at 32 (also nice technical formation). (Stop loss if it goes below 25).
• DSSL: Broke Resistance at 16. Don’t know much about the company except that it has been around a long time. Now support at 16 and next major resistance at 21. (Stop loss if it goes below 16).
• GPH Ispat: Has it broken through resistance at 32.5? Now support at 32 and next minor Resistances around 36, 40 . . . till major supply zones at 50-55 (also nice technical formation). Stop loss if it goes below 31.
• PTL (trying to break Resistance at 22.5) – if it can break through 22.5, we might see some fireworks.
• RD Food: Just broke through Resistance at 17.5. Now support at 17 (stop loss if it goes below 17) and no major supply zones before 23.5-25.
• Regent Tex: Broke through resistance at 15. Now support at 15 and no major supply zones before 18-21. (Stop loss if it goes below 15).
• RSRM Steel: Surprisingly, sliced through 55 Resistance!  Next major Resistance around 70. Not for the faint-hearted! There are less risky alternatives.
• Shah Jalal Bank: Broke Resistance around 14 (above 2 year high). Next resistances at 16, 18 and 20. (Stop loss if it goes below 14).

WARNING: All the above stocks are high risk items. It is more preferable to buy low – and lowering one’s risks.

I have been discussing individual stocks – which make up the Index (which is sort of a derived variable). It is the movement of different stocks that will direct the movement of the Index and not vice versa. However, Fundamental Analysts could say that “a” stock’s price is itself a derived variable based on the independent variables of “Derived” Future Cash Flows, Discount Rates, Dividends, Payout Ratio, etc.

Just before taking up the index, let us check a few economic indicators, which seem good, at least for the moment.

•  Inflation quite low
•  Low interest rates
• Remittance falling
• Exports not increasing that much (~3% growth in last quarter)
• Global commodity prices quite low (and falling in some cases)
• Foreign Currency Reserve could meet around 7 months imports
• (+) Imports increasing heavily in last quarter (~17%). As commodity prices are low, we could infer that a major part of this import is capital machinery – indicating that businesses are expanding and/or looking forward to expand (let us hope there is political stability). Still inferring further, increased export and capital machinery import implies increased insurance coverage for the Insurance firms.

Is the rise of the Index and General Insurance firms a sign of the stock market again acting as an early economic indicator?

As I was saying earlier, I tried to paint a picture of how some “individual” stocks “might” move. I tried to depict some of the actors – others not mentioned will also make special appearances! We might see huge runs, retracements, big falls, etc.

Now let us look at the Index itself. It is currently running into supply zone at 4,900 (if it can navigate through it, then 5,000 will be a test). 5 year High is 5,368 (it actually occurred around two years back in October ’14).

Also, it has created strong support around 4,725-4,735, which may act as areas of retracement (to fall back on the onslaught of attack).

4,775 to 4800 is another area of support too. Areas where index retracement might halt.

On a side note, during periods of retracement, one might hear that it is due to "institutions" re-balancing their year-end portfolio. One might even get "tips" that such and such institute is buying "x" share - which will double - buy it as it is "once in a lifetime opportunity". Please tread carefully - best is to do your own research and then invest (also ignore this foolish writer's views).

So we might expect to see some runs coming to an end and some others taking off. Personally, I do not like the current state of the index – it has been giving modest profits for the years gone by . . . It is becoming increasingly difficult to find stocks at low price. New entries expose risk as one has to take entry at a higher price (on the foolish expectation of selling higher).

Better safe than sorry.

Referring again to “Buying on Weakness, Selling into Strength”, it is also an opportunity for many investors who have been stuck in the market for so long – the Market is offering an escape route – to break even or better, taking a profit and leaving the market to pay more attention to one’s profession.

However, a saying on Wall Street is calling the instinct of “greed” – My Friend, the Trend is your Friend.

Now it is a battle between bulls and bears. Who will win? We could find out later . . .

Hope we come out unscathed – take heed of the risks by not exposing oneself to high prices!!! Also have exit plans ready.

Let us not be Fooled by Randomness . . .