Setting up a trading system macro events & fundamental analysis (part IV)

Macro News / Event Analysis

The Macro News / Events and its effects on Stock Markets are probably the most critical and tricky aspect in analyzing market trend. The reason is that there is no theoretical guideline for the analysis of news / events and the style and nature of analysis vary on a case to case basis. For example, sometimes you may find that Reliance slips down immediately after delivering very good results or you may find that Nifty moves upward after poor IIP data.

The main principles of analyzing the effect of Macro Data / Event is as given below –

  • Market generally reacts only to unexpected things. It is very important to predict the prediction of the market.
  • Market generally reacts to the future prospect, not to the present data.
  • A market-negative data or event, if remains on the news for a significant time period before actually coming into the picture, gets diluted and does not hurt market sentiment much, except for a very short lived reaction. However, if it comes suddenly without any prior hint, market reaction becomes more visible and prominent.

Let us take an example for further clarity, the event of QE Tapering in US and its effect on global markets. During the period 2012-13, global markets were fully dependent on QE i.e, massive stimulus pushed by US FED and nobody could even imagine that the QE would come to an end at one point of time. However, QE could be tapered off and could come to end – this news remained in news headlines for a long period of time. Market got sufficient time to digest the same and it got used to with the tapering, before it actually started. When first it was announced by the FED Chairman, market showed a knee-jerk reaction but thereafter market stabilized. Further, tapering started and QE came to an end during a span of one year but Market did not show any big negative reaction during this time.

Similarly, the speculation currently buzzing in US is the hike of interest rates and its timing. This has been in the headlines for the last few months. Before every FED Meeting, everybody talks about the rate hike decision but FED is postponing the event at every meeting. During the last few months, markets also have got used to and accepted the fact that rates will be hiked, sooner or later. Most likely, markets will not react very negatively as feared when it will face rate hikes actually, except for some short lived reaction.

Many times you must have seen in the past that any particular stock, after delivering good quarterly results, corrects deeply on the same day. Those who go long on that particular scrip after the result is published and flashed in media may be stunned and caught on the wrong foot. The fact, which the retail clients come to know today, the Institutional Players or smart money had predicted it yesterday, by applying advanced research techniques. If you just look at the prior trend of that particular scrip before results, you will see that the scrip may have been in a secular uptrend before the result and it was rising on the hope of good results and smart money had already bought the scrip. Now, after the results are published, when the crowd jumps to buy the scrip, the smart money players book profits. This has been happening since long in the Stock Markets. However, some times, even if the scrip rallied significantly before results, and if the results are much better than expectations, then the scrip may continue to rally post results too. So, it is always safe to check the prior trend of any scrip before the result, if you go for result oriented trading on the result day.

So, it is all about understanding what has been priced in by the market and what has not. Try to understand the expectation. If the outcome is in line with expectation, effect is limited and if it is beyond expectation, effect will be drastic. Markets do not like to stick to one particular issue for a long period of time, it always look for the next trigger, positive or negative, after few days.

One most simple example being Nifty made a low of 5100 in August 2013 and made a high of 9100 in early 2015 – has the macro economics of India changed significantly? No. But the hope is there that it will change significantly in future. That is why market has shifted into a different orbit.

However, if you are able to analyze and identify such issues or probable events which are yet to be announced in news headlines, there is no doubt that the pay off will be huge, although in practical sense this is very tough for retail participants.

Fundamental Analysis

We have now discussed three components of an Ideal Trading System. There is another and most important component – Fundamental Analysis. This is a very important and vast subject, but you need to have some basic concepts of Fundamental Analysis, which will help you selecting good stocks. Fundamental analysis also plays a prominent role for traders as your aim should be to technically analyze fundamentally good stocks for trading purpose. The in-built filter of your technical software might show a lot of scrips for trading purpose but you should select only fundamentally good stocks, so that even if you fail to put the stop loss in trading (which is quite a natural phenomenon), the stock will not become your liability over the longer term.

However, for investment purpose, you have to be dependent mainly on fundamental analysis. In this case, you must perform a detailed analysis on a stock from all angles before selecting the same but once selected keep confidence on your selection. Try to grab it on every dip and do not check the technical support levels.

While detailed fundamental analysis might not be possible for a retail participant, until and unless he possesses sufficient expertise, it is possible for him to check certain fundamental data which could also protect him to a certain extent. Some of these fundamental data are as follows:

  1. Management background
  2. Product line and its nature
  3. Prospect of the segment as a whole
  4. Shareholding pattern – promoter holding
  5. Institutional holding
  6. Pledge data of promoter holding
  7. Other top shareholders
  8. Equity size
  9. Debt
  10. Sales figure, quarterly and annually
  11. Profits, quarterly and annually
  12. EPS
  13. PE Ratio
  14. Dividend history
  15. Book Value
  16. Industry PE
  17. Position among peer group

All the above information is widely available on the internet including our website – . Alternatively, you may subscribe to various data softwares / magazines which are purely based on fundamental analysis.

And above all, the Psychology or Behavioral Finance

We have discussed four principal components of a Trading System. There are theories and practical aspects of those components. However, apart from any fundamental, technical or data or news analysis, there is one thing – Psychology and market participants mostly are slaves of psychology. It is a known fact that while you deliver a speech before anyone on how to trade or how to put a stop loss, you might not be able to follow the same in your own trading. When you sit before the trading terminal and deploy your own money, your psychology overtakes your theoretical knowledge and your conviction. One, who can overcome this dominance of psychology, at least to some extent, is the ultimate gainer.

Although there are certain concepts of Behavioral Finance which have been discussed in a separate article, but practically there is no such formal guideline on how to control your psychology while trading, you have to learn it on your own. Only experience can teach you the same. The only suggestion would be that try to Think Out of the Box – because markets have a tendency to go against consensus.

I would like to conclude with an advice that you should include few more items in your Trading System – which are some back-end concepts like Margin System in F&O, Security Ban in F&O, Scrips moving to Trade for Trade segment, Norms for IPO Listing, various corporate restructuring and its effects on stock price etc. so that you do not suffer from lack of operational knowledge.

Finally, just keep in mind that you can afford being wrong in a particular trade but you cannot afford a wrong trading system. Just go for developing a good trading system and build your own success story.

Also keep in mind the historical quote of Sir John Templeton –

“Bull markets born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”

The End

Add a Comment

Your email address will not be published.