Fed, Dow and the Emerging Markets

There has been much skepticism   about the Fed rate hike and the fate of  financial markets , especially the emerging markets. There is  general belief that  higher Fed rate will be bad for the markets. 

This may be true in theory as the assumption is, the  carry trade is likely to be affected,  with investors reverting back to the safe haven of US treasuries. However,   evidence proves   that in the last fifteen years Dow has found a positive correlation  to the Fed rate as seen from the following chart of Dow  and Fed interest rate. 

 

During the period 2001-03 and 2007-09 Dow declined in tandem with the  lowering of Fed rate. While it moved up during 2003-07 when rates were increased by Fed.

While the DOW has performed well during the period Fed rate was at 0% from 2009 till date as Fed unleashed   three rounds of  QE , which bolstered the US economy  and put it on path to recovery. After all, the Fed hikes rates when it is confident the growing economy is able to withstand the increased borrowing costs.

A strong US economy would have positive connotations for the  emerging markets and any outflow from the emerging markets are likely to be minimal or may reverse in due course.  This is particularly true for India,  a strong consumption story  and  riding the wave of low commodity prices. However the same cannot  be said about Russia and Brazil, the net commodity exporters bearing the brunt of the  low commodity cycle.  With China still struggling to maintain its growth rate and most of its infra projects completed, demand pickup is a worry. 

India may find itself in a sweet spot with improved business environment and kick-off of infrastructure projects, any incremental flows post Fed hike are likely to find their way here. The GDP rate differential , 7.5% -8% for India as compared to 2.1% for the US makes the Indian market highly attractive for the investors.   

With Fed increasing the rates from 0.25% to  0.5% , reversing its rate policy for the first time since 2006 indications are there that the future rate hikes are likely to be measured and gradual. 

With the overhang of Fed hike over, markets may chart their course for 2016 on a better note.

Nifty Ready for a Breakout ??

Having reliably predicted a breakout (October 2013 ) and breakdown (March 2015) on the earlier two occasions,   the trigger line on TTO has once again positioned itself  for a breakout as it attempts to cross the zero line.

A crossover  would indicate a change in the long term trend on Nifty monthly charts which would coincide with wave 5 with higher targets in 2016.

The next few days would be critical to  decide the further trend  of Nifty.

Nifty Monthly

Playing Blind in Options and Futures ??

Top stock exchange NSE has increased the market lot sizes of derivatives contracts in 151 stocks including several blue-chip companies. The revised market lots would be applicable  from November expiry contracts.

The move comes after market regulator SEBI's decision in July to hike the minimum investment size for any equity derivative product to Rs 5 Lakh from Rs 2 Lakh. The lot size of all existing Nifty long-term options contracts (having expiry greater than three months and including December 2015 contracts) has  been revised from 50 to 75.

The National Stock Exchange (NSE) has  increased the market lots of derivatives contracts on eight of its indices -- Nifty, Bank Nifty, IT, Infrastructure,  Nifty Midcap 50, Dow Jones Industrial Avg, FTSE 100. The lot size for Nifty Futures and Options contracts has been increased from 25 to 75. Traders will now exposed to greater risk on higher leveraged contracts. The risk associated with trading the most liquid, Nifty derivative contract  has gone up by 200%. In such a scenario, trading with stop losses alone would not be a wise strategy, as every stop loss  trigger itself would increase the cost of trade.

High leveraged trades in Futures & Options can be tricky. Stop losses can be used for risk management but a few stop loss triggers can take away a substantial part of your capital. What is important is the entries are timed precisely and once an entry is made, ride on the position till exit.

Equally important is the stock selection which can give the best trending position. Using Triple Trend Oscillator (TTO) one can analyze the long term trend and take position in a shorter time frame with a precision entry using a minor trend, all this information available on the same  indicator.

An  advanced option trader has highly sophisticated tools to trade in options where each of the factors affecting option pricing  is analyzed.  However, for a trader it boils down to managing the intrinsic and time value of an option.  Hence it is important for an option trader to know the trend force and direction before trading in options. A strong trending move can negate the effect of theta (time value erosion), keeping the option trader in profit, even when close to expiry.

Trading naked options, if timed correctly, can become a relatively risk free, simple  and  high profit strategy . An option trader using TTO will be in a position to judge the tend quality. The position of trend oscillators close to zero indicates sideways moves which can kill an option trader.  The best  trend structures  would be when the trends are placed away from the zero line indicating strong trending move in either direction. Again the position of the intermediate and minor trend would indicate the trend strength and the trigger line could be used to take position in the direction of  the major  trend.

To know more on how to trade Futures and Options using TTO, click here :

http://eqtrend.blogspot.com/2014/04/trading-naked-options.html

http://eqtrend.blogspot.com/2014/04/using-bullish-alignment-for-intraday.html

http://eqtrend.blogspot.com/2015/01/how-nifty-option-traders-made-killing.html

http://eqtrend.blogspot.com/2015/07/stock-selection-and-trade-strategy.html