Is too much of a good thing Bad?

Markets opened this Monday with a ferocious fall and one that see med to proclaim – the end is near. The reason for the fall – rising Covid cases and anticipation of a lockdown in certain parts of the country. By the end of the week, the situation has actually worsened with news of rising deaths and infections, lockdowns in place in Mumbai with weekend lockdown in Delhi and yet markets are higher than where they were at the start of the week. 

India has stumbled and stumbled badly when it comes to vaccinations. Today we are well behind the curve with the only hope being the virus will burn itself out before we are able to reach out and vaccinate the vast majority of citizens.

In March when India went for a total lockdown (in hindsight a pretty bad move, Pakistan is an example of what an alternative could have been), there were hardly any cases. Despite a strong lockdown across the country, the case count rose rapidly to the extent that I cannot remember a country which opened a lockdown when the number of cases were in such an accent.

Somewhere in mid September, the number of new cases started tapering and then started to fall. By February of this year, the vaccination drive had started (limited to healthcare and frontline workers but at least there was hope) and the number of new cases had dropped to what we had seen way back in June 2020. Life was supposed to get back to Normalcy.

The virus though had other plans. Markets on the other hand for now seem to have brushed off any negativity arising out of the lockdowns / rise in case loads. While they aren’t at their highs, they have kind of tapered off and are around where they were in mid January of this year. Time based corrections are relatively better off than price since it rarely induces panic from the investors point of view.

The broader markets continue to remain strongly bullish. Here are some charts and a short analysis of the same. First, a set of charts which are bullish in nature

% of stocks in positive momentum.

The chart contains two indicators. Stocks that are having positive momentum with a lookback of 1 year and Stocks that are having positive momentum with a lookback of 6 months. Both are extremely positive indicating that the broader trend is still very much bullish

Volume Demand & Supply

This indicator is a sum of total buy volume vs total sell volume over the last 10 days and has been oscillating since Nifty hit its peak in January. For now, this continues to be bullish. Since this indicator has a lag, key is to use this in conjunction with other indicators

% of stocks outperforming Nifty over the last one year return

 65% of stocks listed on the NSE have in the past year delivered returns that are greater than Nifty 50 returns for the same period. As the chart indicates, this can remain elevated through and through the duration of a bull market and isn’t very volatile. 

All the above charts showcase that the trend is still very much bullish and it pays to remain long for now. But then there are these charts which seem to suggest caution going forward

% of Stocks trading above the 200 day EMA

On the face of it, this looks good standing tall at 73% currently. But historically once a peak is done, we have seen even in a bull market this ratio steadily decline. What this suggests is that while in the first leg of the bull market literally everyone is a winner, as the bull market proceeds, the number of stocks that continue to move higher will steadily reduce. While this has low implications for Momentum directly since we are always with the top quartile, it does suggest that churn would be higher and returns below par in the coming months (years?)

No of Days Index was positive in last 1 Year

This is a rolling number that keeps track of how many days of the past 260 days has the Stock or Index closed in positive territory. Currently at 160, we are close to the peaks that have been achieved in the past. Expect more negative volatility in the days to come

Sensex One Year Returns

Another rolling chart that plots 1 year return. We have had one of the best one year returns since 2010. The one year post such high returns in the past – meh.

Conclusion

While I am no way close to becoming skeptical about this rally let alone become bearish, I think that one needs to start tapering our expectations. In addition, I feel that this is the time when you should take a hard look at the portfolio stocks (excluding stocks bought due to strategies such as Momentum) and clean out the weak stocks which hopefully will also help build a small war chest.