An extraordinary year has come to a close

An extraordinary year has come to a close. The gains for the year is nothing close to the best years and yet, this has been a landmark year for investors. While one remembers years like 2017 or even 2014, this year was way way special.

Look at the following chart for example. It plots the average number of securities that were trading above their 200 day EMA by the year. 2021 beats every year save for 2005. 

Only 2005 comes close to matching it. This is not calculated just at the end of year but basically the average for every day through the year. This isn’t surprising since the number stayed above 90 for quite a while and never went below 80 most of the time. We have ended the year at 67%, so in a way, we have closed at the lowest point for the year.

The chart below plots the number of instances where the Sensex hit a new all time high. 

While at 88, this is lower than in 2014, this is the 5th year we have been in high positive territory. 

When one looks at the maximum drawdown we saw in the year, its reflective of the trend of little volatility we saw during the year.

Since the financial crisis and the Federal Reserve intervention, yearly drawdowns greater than 20% have been rare with only 2011 and 2020 seeing one. 

It’s also showcased in the chart below which plots how many days Nifty 50 spent with a drawdown greater than 5%

Only in 2014 and 2017 have we seen the Index stay close to it’s high of the year. 

Breadth is an important barometer when judging the quality of a bull market. Greater the participation, the better is its ability to hold the line. One way to look at breadth is to measure the % of stocks that have a one year return greater than Nifty 50

In August of this year, this was at the highs – 75% of stocks having delivered One year returns > Nifty 50. Something we last saw in 2005 and later in 2010.

Mutual Fund Inflows have been good but not record breaking. If one removes the contribution of SIP, the actual amount actually goes to negative. 

Do note that 2021 data is only till November 2021

FIIs have been consistent sellers though this data doesn’t include their investments in new issues and hence overstated. 

Purely by absolutes, this is the most selling we have seen since 2008. What is also interesting is that their share in NSE listed universe of stocks is lose to where it was in 2006 / 07/

The biggest change one has seen since Covid both here in India as well as elsewhere is the large participation by Retail Investors. While this data doesn’t go back as much as one would love to look at, it shows quite a spurt compared to the last year markets were exceedingly bullish – 2017

This is also supported by the number of new Demat Accounts that have been opened. The stock price of CDSL shot up 180% reflecting the growth in the year.

Be it Stocks, Real Estate, Commodities, Crypto, NFT or any other asset class, money is being made like in no other time. Much of it of course has to do with the continuous pumping of money by the Federal Reserve and one that is chasing down every rabbit hole.

Look at the data of expansion of Monetary Supply in the US. While one can argue that 2020’s expansion was much required, the fact is that 2021 has seen an expansion that we had not seen since 1972 (2020 being the exception). 

This has also meant strong growth rates.

Which inturn is fuelling inflation world over. 

The bears have for long been fascinated with hyperinflation due to the continuous print of money. While we may not see hyperinflation, the probability of seeing consistently high inflation cannot be easily ruled out.

A high inflation in itself doesn’t cause equities to crash. Between 1972 to 1980, Inflation in the US moved from 3% to 13%. Dow on the other hand continued to trade in the range bound fashion it had been since 1965. 

Relative to history, most markets are seriously expensive but again, markets don’t crash because it’s expensive.  

For whatever reason, I am reminded of this scene from the movie Titanic. 

Everyone is happy. Captain is smiling all around as he orders for the ship to accelerate at full speed. The workers (think of them as the Fed) are relied on to work harder and push more coal to maximize. Even the Dolphins appear to be delightful and happy.

A look back at my Prediction for 2021

In December 2020, I posted a chart which tried to plot how Nifty may move through the year. While not a believer in prediction, I have been working on whether there is some logic to the thought that markets move in cycles and if cycles are repeating, can we know how the future pans out.

My own asset allocation mix is based on my top down analysis of the market and hence this fits my own biases perfectly. 

“People can foresee the future only when it coincides with their own wishes.”

— George Orwell, British writer

The year end predictions for Nifty were 16,155, 16,342 and 22,257. Nifty closed the year at 17,354 – a bit off my mark but till August was actually snaking around one of the prediction lines. Beginners Luck I would say.

For the coming year, I am introducing a 4th Model. I am also plotting a consolidated model. Overall, the insight (which should be taken with a bag of Salt) seems to suggest that markets could continue to rise in the coming year as well, though the odds of a spectacular year are on the lower side.

As long as Nifty doesn’t do the inverse of these charts, I think most of us should be happy. The risk of a deep fall appears low at the moment but given how much our markets mirror the US markets, one needs to observe that market vs ours.

Wishing you a very happy and prosperous year.