Welcome to the Weekend Investing daily bite of 20th of March, and March is turning out to be a good month for the markets. After the drubbing of five months, we finally have a month where the markets seem to be cruising well. We’ll talk about this more in the first half of the video.

The Untold Secrets for Stock Market Success

Where is the market headed?

Market Overview

Markets are looking in fine fettle. We’ve crossed the 40-day moving average here, and we’ve crossed the trend line from the top. The question being asked is, are things happening too fast, or are FIIs now feeling a bit left out? Especially as the flow towards the US has ebbed. The dollar index has stopped going up, and further, it is now falling. The US yields are also not going up. It seems like that entire trend of the last couple of months, where the USD was the only target for all funds, seems to be getting over. The focus is shifting back to emerging markets, and India is probably getting its fair share of that flow.

So right now, as of today’s close, we are cruising well. We have come up more than 1200 points from the bottom. I was expecting this trend line to create more resistance to stop here, but today we have broken above it. Maybe another day of confirmation that we will not slam down below it tomorrow, and then, you know, 23800 becomes sort of the next target for the market to reach and contest that.

So, a very, very good development, I think, from a chart point of view. Nifty 50 is up 1.24%.

Nifty Next 50

Nifty Jr is not as lucky but gained 0.57%, nevertheless, no complaints here either. Nifty Jr has come above this January low, which is a good milestone to have.

Nifty Mid and Small Cap

Mid-caps are also up half a percent. It’s a bit iffy at this point as you have multiple resistances right here, but nevertheless, a good half percent gain today. Small caps are also very near the 40-day moving average at 0.78%, consolidating today with a minor gain versus the two big sessions we’ve had in the previous two days.

Nifty Bank Overview

Bank Nifty is up three-quarters of a percent, going up nicely from 47,647,700 to nearly 550,000. So, we’ve gone about 2200 points on this as well. So overall, a very good move. The move comes when nobody is expecting it, and this is exactly that same move that is happening. Whether it will sustain or not is to be seen in the future.

GOLD

Gold is down 0.4% today, but we are very close to 89,000 on the 10-gram basis, and I think that is a good place to be at market breadth.

Advance Decline Ratio

A bit towards green on all market segments, with some profit-taking in some counters. So, you know, versus yesterday or the day before, there is more red than green. But across the board, we have the majority of advances ruling over declines.

Nifty Heatmap

The heat map today tells you that TCS, Reliance, Infosys, Bharti, Titan, Hindustan Unilever, Nestle, HDFC Bank, all these stocks did really well. In the Nifty Next Nifty space, you had some red. You had Chola Finance, ICICI, Hevels on this, cables and wires, new entry of Adani, also there, Siemens, GSW Energy— all these were down but sporadic gains in Vedanta, Indigo, Hal Godrej, CP, and ICICI Brulee. So, these are the heat maps for the day.

Sectoral Overview

Defense is up 1.8%, Oil and gas is up 1.6%, India consumption stocks are up 1.6%, Infra 1.5%, Autos, IT, FMCG services, and metals all up more than 1%. Capital market, along with real estate, is up 1%. So, very nice move today as well. No sector in red, and you had the one-week returns of 10.3% on capital markets and 9.1% on defense. So, these two are the big sectors for this week, and that has changed the entire picture of the week as well as for the month.

Now, for the month, we only have capital markets, IT, and some autos losing ground. Otherwise, we are in the green

Sectors of the Day

Nifty Defence Index

Defense is leading the pack here at plus 14% for the month. Stocks like Garden Reach Ship, Astra Microwave, Paris Defense, Biod Dynamics, Dynamic Tech, and Bharat Electronics are the ones going up. You can see how far ahead this sector is above its 40-day moving average that we are tracking versus the major indices. And this sector is again leading the rally in the current quarter.

Story of the Day : The Untold Secret for Stock Market Success.

So let us assume that you have been following this stock for a long time and decide that you will buy it when it breaks out of this resistance at 80 rupees. We will not disclose the name here and let’s just concentrate on the price chart and how we would behave if we were to be presented with such a price chart. That we had a very long period— since 2008, the stock is falling from 400 rupees down to 2 rupees, and then it has recovered to 60, 70, 80 rupees. This is also a major rally, and over the last 13 years, we have now come to a point where this breakout seems to be an imminent breakout in July 2020.

So in July 2020, the stock goes up 65% just in that month. The breakout happens at 80. Let’s say the momentum strategies confirm the trend and pick it at 100 rupees, right? So by this time, anybody who was watching it at 50, 60, or 70 rupees right here is thinking that, you know, it’s gone up too much, although it has beaten the resistance. But it has gone up suddenly too much—65% in just one month. So, you know, we’re going to wait for this, and, you know, not run after the stock.

What does the stock do? The stock moves up fiercely above that point and within just one month goes to 270 rupees—170%. And of course, you bought it here based on your momentum strategy. And, you know, you are up 170% in just one month. And you are, of course, delighted. And then what happens? A small correction happens in the stock, and you basically lose 24% in a very short while. You started at 100, went to 270, then you lose 24% to come back to near 200.

So, you are a bit disappointed, and mind games have started. The phase of regret has started that, “I should have booked at 270.” 170% gain was there. It’s too late now. It is not too late now. I’m still up 100%. From 100 to 200, let me book now and exit. Those kinds of, you know, queries will come to your mind because you have not planned when you are going to exit. You are taking one day at a time and seeing what is happening in the market, what is happening in the stock.

And then one fine day, you are taking a decision based on something. And that something could be, you know, either a proper exit plan or it could be that, you know, everything was coming down in those three, four months, and, you know, there was an atmosphere of fear. If that atmosphere or environment of fear was not there, you would have not exited. But everybody around you was making you fearful, so you exited. “Let’s take my profit and get out of it. Who knows, you know, whether this is going to go up or not.”

Now, the stock goes up 10x in the next one year, 1.25 years. It goes from 200 rupees to 2000 rupees. This is a log scale, so you can’t see the impact of the rally, but it goes 10x from there. And that momentary weakness that you had of exiting that stock, based on no other reason but just fear of losing profit, you did not have a strategy that you’re going to sell, you know, 20% lower. But just for whatever reason, you got out of it and never got in again.

Because when it started to move again, in your mind, you said, “You know, I’m not buying this stock now. I just sold it at 200 rupees. Now, it is back again at 300. I can’t be buying this.” But from that point, it went to nearly 2000 in 1.25 years.

Now, the second mind game is happening. You are now regretting that, “Why did I ever sell this stock? I had this fantastic position at 80-100 rupees. Yes, I got double of that money and I got out of 200, but I missed this entire rally and I made a huge blunder. This was a beautiful company and this is going to make me rich in the future also.”

So, you decide to wait for an opportunity for re-entry. And by the time you decide, you are already seeing 2,000 rupees on that stock. And out of FOMO, you are buying in January 2022 that, “Yes, this stock is going to 10,000, and it was a mistake to sell at 200, but now I have rectified my mistake and now the stock is going to go extremely well.”

Now, what happens after your re-entry? This time, the stock starts to fall. It has crashed 75% from there, and you’re down 75%. Now you are virtually back at where you had last time sold the stock. But this time you bought it at the top. And you are right here. The pivots are breaking, and your thesis about the fundamental thesis about this stock is also shaken up because it was never about the fundamentals. It was all about the price rise. But you were justifying it based on fundamentals or whatever hearsay you had on this stock.

So, massive pain and regret on entering without proper rules, without a proper exit plan, and just out of focus. And this is a story of every second or third portfolio in the markets. Now you are anchored at that price of 2000 rupees. You are saying, “I am not going to exit this stock now if it does not come to my price. I will not lose capital on this stock, come what may.” And you hold the stock. You hold the stock, and this is 2022. And for the next three years, it does not give you any opportunity of going back to the high price.

So, what exactly has happened in both these cases? This is a phenomenon where investors sell winners too early to lock in profits but refuse to sell losing stocks, hoping for a reversal. Can you see the investor behavior at the two points? In the first case, the profit was bothering him that, “You know, I should not lose my profit.” And in the second case, the loss is not bothering him that, “I want my capital back.”

And in both cases, you are witnessing what is called the disposition effect.

Now, how does a momentum strategy solve this? Let’s say momentum was riding the stock. Four strong rules of momentum: what to buy, when to buy, how much to buy, and when to sell. At all points of time, these rules have to be clear. And how do these rules help with the disposition trouble? You will be able to sell your losers very early. You will have many small losers, many, many losers. But most of them will be small losers. Because it is just like you are trying out all stocks that are showing promise. Some of them will not fulfill that promise. So you’ll get out with small losses, but some will continue to rise, and you will ride that winner. So there will be few big winners. And winners are allowed to run till the momentum fades away.

The untold secret here for sustained success is that not every trade needs to have a positive outcome. This accuracy business that is there in your mind, that whatever transaction I do should result in a positive outcome, is a wrong hypothesis. To start with, you can win very handsomely. Even if half of your trades do very well, half of your trades go wrong, you can still do very well. That is the untold secret.

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