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The Dollar Index is on the verge of a breakout from a consolidation. The current consolidation is a mirror image of a similar process in 2008 which led to a breakout from 77 to 88. See chart below
A rally in the Dollar Index means:
(a) A decline in the value of the Rupee.
(b) A rally in the Dollar Index could mean a rally in IT stocks – Infosys, Wipro, TCS, HCL Tech, also to a lesser extent, the mid cap IT group.
(c) In the short term, FII inflows may decrease because of the adverse exchange environment.
(d) Companies with large US$ borrowings may find their borrowings have gone up in Rupee terms. Bharti Airtel may be one such company.
(e)A rising dollar eventually produces lower commodity prices. Lower commodity prices, in turn, lead to lower input costs for Indian companies. The lower costs will be offset by the costs of the rising dollar. I am not sure what the net effect will be.
Readers are requested to explain what the exact implications of a dollar index rally is. Please share your knowledge.
Thoughts on investing:
Sunday morning is a good time to share philosophical ideas on investing.
As I understand, investing is all about value. We put hard earned money in an asset when we perceive value in the price. There is very little market timing. It is a coincidence that value usually comes about when markets are recovering from bear trends.
Investing decisions can be based on value in the market as a whole, or value in individual stocks. If I think that the market itself has value, then buying an index fund, or even a diversified equity fund would be a good investment idea. I use long term charts to determine if the market has value – currently, to me, the answer is – not yet.
What about individual stocks? Many stocks may offer attarctive prices to the investor, irrespective of market conditions, or because of bear market conditions. Investors willing to put money in these stocks can consider an SIP – systematic investment plan, investing every month on fixed dates.
All investors, whenever they invest should consider these issues:
1. What is your risk tolerance? Investing requires the understanding that stocks can continue going lower. There is also normal market volatility which moves stock prices up or down. You should not pretend to be an investor when what you are doing is actually trading.
2. Selection of stocks. How do you select a stock? You should write down the reasons for selection. If the basis changes then be prepared to exit. Again, make sure that the reasons are not just technical. “I am buying because prices have crossed the 50 day MA ” – this is not an investment idea – it is a trading strategy. An investment idea could be: “Markets can go down another 20%. I will be a buyer in Reliance at 750, understanding that it could touch 600. I will do an SIP in this stock. The basis for buying Reliance is its position as India’s largest private sector company available at half the price as compared to its high. I will review the position after every quarter. If the funds / analysts become negative on Reliance then I will reconsider”.
Since there is a lot of subjectivity in the buying decision as outlined above, I prefer to wait for deep value, as well as a consolidation on long term charts. This often results in missing opportunities. So, for each investor, the process needs to be personalised.
What do readers say?