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Inflation numbers released today (Thursday) evening are not comforting. The rate of inflation has one up again reaching 11.98%. Worse, food articles have become more expensive, causing discomfort to the poor and the middle class.
From: http://www.drlwilson.com/Articles/INFLATON.htm
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In his classic book, The Economic Consequences of the Peace (1920), John Maynard Keynes observed:
“Lenin (the founder of the former communist Soviet Union) was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”.
Many people do not realize that inflation is with us, and it is an extremely destructive hidden tax, especially on the poor and middle classes. Inflation reduces the buying power of your money.
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Inflation in fact is a transfer of money from the poor and the middle class to the rich. The transfer of wealth comes as savers and fixed-income families lose purchasing power, and big companies benefit from increased government spending and higher finished product prices. Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low- and middle-incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy.
Can the economy prosper in times when the country as represented by the middle class gets poorer ? The answer is NO. Then, higher inflation should slowly translate into lower share prices.
This is the second of today’s blog entries. The first entry is below: titled “Cycles of contraction and expansion”.
Cycles of Contraction and Expansion
The Stock and Futures Markets go through cycles of expanding and contracting volatility. Periods of narrowing volatility suggest uncertainty among market paricipants. Bulls and Bears, both are confused on the direction of the market. This state of indecision does not last long. One of these two groups is likely to get an upper hand. When this happens, volatility expands in the direction of the stronger hand. If the bulls are stronger, they will push the markets up, while if the bears get stronger, the market should see a sharp down move. The narrowing volatilty then is an indicator of an expansion in price range in any one direction. It is a setup where the trader can take a position in anticipation of an increase in volatility and a directional move.
On Thursday, the Nifty remained lock in a narrow range. This was the narrowest range in seven days. Just two days ago, the Nifty had a similar narrow range day. Two days of low volatility tell us that the market is ready for a period of expanding volatility. This should take place soon enough, with the Nifty likely to move sharply in one direction – up or down.
How to trade such cycles of contraction and expansion ? Two ways.
First, Using Options, buy a Call and a Put, then wait patiently for the expected increase in volaatility. When the market gives a clear directional break out, sell the losing leg and continue with the profitable option.
Second, wait for the actual process of expansion to begin. When the market does show its hand, moving decisively in up or down, then take a trading position.
Specifically, the Nifty is in a period of contracting volatility. We can identify 4350 as resistance and 4300 as support. A move beyond these levels will be the first sign that the Index is moving towards a directional move. When this happens, take a position in the direction of the breakdown / breakout.