Portfolio Yoga Monthly Newsletter – October 2020

{This post is an edited excerpt of the October 2020 letter to our Subscribers}. Hope it adds Value to you.

Let me begin this letter with a heartfelt thank you for trusting us. Every business has three phases – The Start-up Phase, The Growth Phase and the Mature Phase. While each of them are individually important, the Start-up phase basically lays the foundation for whether or not the business shall be able to move onto the next phase. 

The first few months are always crucial and thanks to your valuable support, I think we shall come out flying. A larger subscription base is not just a morale booster but also provides the capital to invest for launch of new products and services.

A monthly report for Momentum is not easy to write. After all, we have no reasons to provide as to why certain stocks went up or other stocks went down. There is no narrative to assuage that while the returns are sub-standard compared to what you could have achieved in investments elsewhere, our companies are strong, focussed on growth, management quality is…, blah blah blah. You get the drill.

Rather, through these monthly posts, I shall try to throw light on the overall health of the market using breadth and allied indicators that have historically proved to be of value. Many years ago, one of my job functions was to write a report on the markets. As much as I love writing, I am pretty sure there is no real utility to such posts that I see coming even today. An example of this would be, Nifty seems bullishly inclined and may test 12000 but if it breaks below 11620, we can move down to 10780. 

There is nothing wrong with the statement perse – if you were to look at the Nifty 50 chart, you shall see that I have used a Resistance as the target, a Support as a trigger and another support as a point the Index may reach. The problem though is, what is the probability that anything of that sort could happen?

Markets are all about probabilities derived from historical data and one that we try to find a way to position ourselves. If we were to believe that a strong bear market is on the horizon, we reduce our exposures and if we believe that a strong bull market is on the horizon, we would wish to take more exposure.

But probabilities in itself aren’t easy to decipher or even provide the right answers. Let’s take Nate Silver who became a celebrity when he was able to correctly predict the Winner in all 50 States in the US elections of 2012. In the 2008 election, he correctly called 49 out of the 50 and even the miss was by a mere 0.1%. But this happened in 2016

Was Nate absolute wrong? Well, the answer is not so straight forward for he did say Trump had a 28.6% chance of winning. Post the 2012 Election forecast and wins, Nate Silver was featured as a prophet with a Mashable heading reading “Triumph of the Nerds”. Four years later, he was literally burnt at the stake. Nate wrote a series of posts on the issue of being wrong. It’s worth a read (Link). 

Getting back to markets, Valuation based models such as the Portfolio Yoga Asset Allocator has had a tough time in recent years. Markets have never been as stretched as they are and yet, they are staying at the elevated levels longer than they have done in history. The question to be asked is – have the model broken or this time it’s different. 

In the United States, Value Investing has been taken to the cleaners like never before to the extent that well known fund managers are quitting the game.  As Momentum Investors, its easy to make fun of other strategies that are facing tough times, but our own historical data shows the limitations of Momentum and the difficulties we may face in the future. Only in Lake Wobegon is it possible for all the women are strong, all the men are good-looking, and all the children to be above average.

This being the first letter to you as our client, this is not to scare you but to provide you a context and enable you to set the right expectations. We strongly believe that Momentum has better odds of winning than a pure passive strategy, but it’s not 100% and we will have our bad days or months while hopefully not extending to years.

But enough of narrative, let’s focus on what the market is seemingly telling us as we go into the US Elections and one that seems to have registered heightened volatility in recent days.

First of – our Weight of Evidence Indicator. Since this is still a work in progress, we don’t have a write up but suffice to say that it has value even though it doesn’t predict anything. 

The Weight of Evidence currently stands at -1 which is more or less a Neutral Stance with average historical performance over the coming 22 days being slightly positive. The odds of a positive close is 60%. Average win was 3.70% while average loss was  -3.84%. 

Our issues start with the Internals though. On 28th August of this year, Nifty 50 stood at 11,647. The percentage of stocks on that day that were trading above their 200, 50 and 10 day Exponential Moving Averages were 74.50%, 84.70% and 70.75%. Today, Nifty 50 stands at 11,642 and the same scores read at 49.60%, 33.35% and 33.10%. In other words, the market remains flat while stocks have been hammered tremendously. 

In April, one of our trading systems based on the above data went bullish. On the 21st of this month, it turned bearish. While we don’t expect a market meltdown like we saw in March of this year, markets are losing momentum. As on date just 43% of stocks that we monitor are bullish. This was 61% on that day in August.

Volume demand exceeds Volume Supply (10 day average to smoothen out the daily noise). This is positive for now and we shall track any negative crossovers which accompanied by market divergence can have negative bearing.

The biggest positive for the markets currently is that all the broader indices are trading well above their 200 day EMA’s.  As long as reactions are contained well above the 200 day EMA, we feel that we won’t need to change our strategy of rebalancing once a month. The only other reason this could change is if we see very heavy volatility in the coming days. 

There is one change in the Multi Cap Portfolio. We exit Globus Spirits and replace it with Astec Life Sciences. The same is also recorded in the Monthly Rebalance Information Sheet. 

Finally, Novembers have generally been positive. Hope this November is one such November.

PS: Work on our Large Cap Momentum Portfolio is on track and we expect to release the same in November. In addition, we are also working on a Sector Portfolio which is not Systematic but one we believe holds a great deal of promise. More of it later.

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