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The Market saw increased volatility, with sharp bouts of buying and selling. This was truly a nightmare for online day trading. Yesterday, on TV, in this blog and my lettr to clients I had suggested staying away from trading during ‘big news events’ like elections. Specilaly when the election cannot be called – there is much uncertainty about the results.
As I write this, NDTV abruptly stopped its poll broadcast, promising to tell all tomorrow. Just a few states were covered. I talk about NDTV because they remain the most respected TV channel for exit polls. (Thier opinions are biased but that is a different issue). Other channels have generally suggested a neck to neck race beween th NDA and the UPA.
Based on the polls, it does appear that a congress govt will not be formed without the left. A weakened congress will have to yield a lot to get into power. Not a bullish scenario!
What goes up, comes down?
For online day trading participants, volatility can make money provided you keep very tight stop losses and understand that market can move sharply and suddenly. Only professional traders wilh well defined futures trading startegies should consider trading in volatile markets.
Now, for the Markets.
The Makets rallied nearly 4%, thanks to rumors that the opposition NDA was winning the elections and a stable Govt may be formed without the Left.
This is wishful thinking. With three days to go before election results come in, there will be more of such rumors to move the market one way or the other. Big News Events cause volatility. I always avoid trading during such periods. On balance, this policy has been successful.
Fools rush in where Angels fear to tread.
So, I will rush in to give my own assessment of the post poll scenario.
The UPA is not going to do well. In 2004, the UPA (with Left) swept eight states – Bihar, Jharkhand, West Bengal, TamilNadu, Andhra, Kerela, Assam and Haryana. Of these, Bihar, West Bengal, TamilNadu and Andhra are key battleground states. (In 2004, the UPA won 148 of the 163 seats in the four states). In 2009, the UPA seems to be losing all of the four battleground states (40 out of 163?). West Bengal is included since the Left is on the opposite side this time, so the UPA can claim only a part of the 42 west bengal seats.
An impression that the UPA is doing well is created by Punjab where anti-incumbency can provide gains to Congress. But, Punjab has only 13 seats, so the numbers will not add up.
The NDA is unlikely to do much better. They have gains in Bihar, Jharkhand, Assam, Gujrat and losses in Karnataka, Punjab, Rajasthan, Orissa, so the net result may be more or less the same as in 2004.
The Left and the Third Front will be major players in Govt Formation. If they do support the Congress, the Left will ensure that its policies are implemented. How will the Congress do this? There is likely to be instability and confusion in the coming months.
What does it mean for the market?
The most optmistic scenario – congress without Left can cause another blockbuster rally in the market. That may well be the final leg of the upmove.
The most likely scenario – congress with left support may cause only a burst of enthusiasm before reality bites. I assume that a correction will start soon.
The most unlikely scenarios are – third front govt or nda govt. Third front should lead to a correction immediately. An NDA govt may follow the same path as the congress without left – blockbuster rally that could be the end of the upmove.
With Implied Volatility on the high side, buying options is expensive. But the correct trade seems to be: buy 3700 calls and puts. Wait for the fun and games to begin.