nifty | Portfolio Yoga

Blood on the Streets?

Today was a record breaking day in many aspects. The opening gap down for instance, we last saw something bigger way back in 2007. The net change for the day was a 3.5 standard deviation of daily returns, something we last saw in 2008. Not a single Nifty stock ended in positive territory, not even defensive stocks which got hit (though compared to the battering many other stocks got, this was more of a slap on the wrist).

We can slice and dice data in many ways, but what it won’t tell us is whether the fall is a sign of a long term bottom being formed (panic bottoms are generally ones that aren’t easily broken) or this is just the start on what could be a long journey into the dark world of bears.

To being with, lets look at two fundamental based charts. PE charts of Nifty and CNX 500. The key reason for looking at these charts is to understand where are in relation to the past.

Lets first start off with the broader CNX 500 PE chart. While today’s fall has meant it broke down below the 2nd Standard Deviation, the fact is that even today, CNX 500 is very expensive. While there maybe pockets of value, on the whole though, market seem to be on the expensive side and since there is vast amount of evidence that buying a stock when its expensive is as bad as buying a bad stock, its tough to lay out whether we should jump in after today’s fall.

Since the PE ratio also accounts for results of the June quarter, the next trigger can only be in September if companies come up with splendid numbers. But with GDP growth slowing down, its a question as to whether companies can actually match market expectations.

On the other hand, while Nifty going by its PE is not as expensive as CNX 500, its not in the area of cheapness either and this creates a dichotomy in a way. Can mid caps correct without there being a impact on the large caps? While Nifty PE moved below the 1 Standard Deviation thanks to today’s fall, its not exactly in a area of cheapness.

After the Modi victory, markets realigned themselves with the hope that with strong growth, even if a company is over valued in today’s terms, they shall get back to normal by way of better earnings. Unfortunately, anyone who has kept a eye on earnings has been disappointed by the lack of growth in majority of companies.

In bull markets,, all kinds of reasons of why a company is not growing gets accepted without much damage to the price, but once markets starts hitting a trough, every company gets its growth put under a microscope to determine whether there is really stuff out there. We are currently at one such stage.

Today’s fall has created a lot of interest as to whether we are seeing a situation similar to what we saw in 2008. While one can only be sure in hindsight, I am pretty confident and shall stick out my neck to say that this ain’t 2008 repeat. But then again, while we remember 20058 thanks to recency bias, what worries me is whether this is a action replay of what happened in 1997 Asean Crisis.

While Indian markets were not as exposed to the world events in 1997 as it is today, by the time the bottom was made, Sensex was 31% below its 52 Week high. Even accounting for today’s fall, we are just 13.6% from our 52 Week high.

Just like in 1997 when most countries were not sure of what was happening in the Asean countries, similar is the situation today with respect to China. The opaqueness of the situation creates a scare that is larger than what may actually be the true picture.

Sensex hit a 52 week low today and while that may seem damming, its a good thing since historically, the first low after a series of highs has never continued without there being a strong bounce back to scare off even the strongest bears.

While FII’s sold heavily in the market and hence maybe in a way accelerating the decline, purely based on how the Rupee has behaved against the Dollar, I believe that India is still relatively unscathed with depreciation not amounting to much (which in other words suggests that while FII’s maybe selling, they aren’t taking out money from India).

But having said all that, I continue to believe that there is no reason to be aggressively long in this market. My own Assset Allocation meter suggests just 55% exposure to equities. As a saying goes, while the early bird gets the worm, the second rat gets the cheese. Regardless of today’s fall, I continue to believe that Risk Reward wise, we aren’t in a stage where markets are a blind buy.

Yes, Analysts may talk about how selective stocks / sectors are performing better, but unless you believe that you can identify them in advance, the best thing to do will be stay on the sidelines with cash ready to deploy.

They say, Patience is a virtue and for a investor, its important to be aligned correctly since the short term (1 – 3 year) returns are dictated by when you enter. At today’s PE, the 1 year forward growth is still an average 5% but at 19, this moves to 11% which given the circumstances will be a very good return if that gets achieved.

The following table should provide you with perspective on what to expect (based on historical averages) if you were to buy at X times earnings on Nifty

To conclude, if your allocation to equities is below 50%, now is the time to enhance upto a max of 60%. If you are already there, it could be profitable to wait for the dust to settle before diving in.

CNX Nifty – First day of the month

One of the rational behind trading systems is to ensure that we are able to capture as much of the return as possible without having to go through a draw-down similar to what a Buy & Hold strategy would entail. This is achieved by being exposed to the market for as less a duration as possible.

One of the strategies which I stumble quite often is the strategy of the First day. The concept here is simple enough – Buy at close on the last day of the month and sell on close on the first day of the month (both trading days and not calendar).

I tested that idea for CNX Nifty (Spot) and while we are exposed just 1 day (out of average 20 trading in a month), we are able to capture 26% of the total move that happened in the interim period. For a strategy that has no major rationale behind it, this number is pretty awesome.

The testing period was between 1st Jan 1996 to 1st April 2015. The expectancy of the system comes in at 8.62. The system has 141 Winners and 90 losers. Average win is 38.04 points vs a Average loss of 37.39 points

A interesting point to note is the fact that not all months are the same in terms of profit potential (or at least, that has been the case historically speaking). June, March and July are the best months for the strategy while December, August and February turn out to be pretty bad months.

To get a better understanding, here is the chart showcasing month-wise break up of the return.

If one were to ignore months that were not in our favor, the odds increase even further. But then again, unless we have a clue as to why some months are better than the others, treating all months as the same would be the best way to trade strategies such as these.

The Equity Curve (points) generated by the system shows no major hiccups other than in 2008 when it saw quite a bit of volatility.

To get a better sense of the risk, here is the chart of the draw-down it would have faced.

The period between 2003 and 2007 was when it had the best performance with the equity more or less hitting a new peak every month or so. 2000 and 2008 were times when even the most disciplined trader who traded this strategy would have been shaken off by the incessant losses. Post 2009, while markets have been on a consistent rise, the strategy has had quite a few setbacks with one seeing multiple instances of 5% draw-downs.

The fact that this strategy has generated just 282 points from September 2011 till date shows that maybe, just maybe the strategy is getting out of favor with the rewards not worth the risk it entails.

But before we dump this strategy, lets run a Bootsrap on the returns to see whether the returns out here are due to pure luck or is there something more.

The p-value one gets is 0.55. For anyone who was not put off by the high draw-down one saw earlier, this should definitely be a deal breaker. Then again, the lack of any substantial profit over the last 43 months in itself says that the markets may have changed and this strategy no longer works as it did in a earlier time.

On a side note, it seems that this strategy has been under-performing since 2011 even on $SPY. Food for thought I think on how global markets may have become.

Comparing PE Ratio of Sensex & Nifty

For a long time, we looked at only one Index when it came to the Indian Markets and that was the Sensex. Even years after Nifty had come into the picture, Sensex reigned supreme. While Bombay Stock Exchange is the oldest exchange in Asia, when it came to the Sensex, the whole concept is fairly recent having been first compiled in 1986, more than 110 years after it was founded.

But with derivative trading in Nifty taking precedence, Nifty is the key Index most participants look at. While we have seen Sensex too becoming available for trade, the first mover advantage has meant that Nifty has virtually steam rolled over it.

When it comes to analyzing how expensive or cheap the markets have been, I have most of the time stuck to Nifty since NSE has made the download free and easy. But today I decided to update my Sensex PE and the variation was very interesting to say the least.

First out, here is the updated Nifty Price Earnings (trailing 4 Quarters, Standalone) chart with long term average and standard deviations

NSE provides data from 1999 and the calculation suggests that we are closing on to the peak valuation of 2010.

Theoretically speaking, the Sensex PE should show a similar number despite the fact that it has lower number of stocks compared to Nifty. But Sensex Price Earnings number seems to suggest that the market is not all that expensive. A caveat here, While I downloaded the Sensex Price Earnings number from its website, I could not gather as to whether the same is based on Consolidated numbers or Standalone and that in itself can make a difference.

What is interesting is that sector weights aren’t too different from each other. Below is the sector weight charts for both Nifty and Sensex.

As you can see, the difference in weights is not so much as to impact the net valuation on a big time.

To better understand the moves of Sensex PE Ratio and Nifty PE Ratio, here is the chart of them combined (Relative Comparison)

One of the things that is straight away visible is that while they have more or less moved in sync in the past, this time around, Nifty PE Ratio has shot up more substantially than that of Sensex.

And here is a Relative Comparison chart of Nifty & Sensex

And finally, a ratio chart where I divide Sensex with CNX Nifty

What the above chart shows is the points Sensex moves for every point on Nifty. Since 2001, this has been in a broad range.

Personally, I would stick with the NSE Price Earnings Ratio but it would be interesting to know why we are seeing this sudden difference in the Price Earnings of Sensex vs Nifty. The difference lies in a few company results, but it would be interesting to know which of them have actually caused this action.

Interpreting the Nifty Candle

The big reaction we saw on Friday in the markets has provided us some interesting candlestick formations on multiple time frames. Since such convergence is rare, I felt that this could be a good way of explaining the importance and the interpretation of such candlestick patterns.

Candlestick patterns first came to the limelight when Steve Nison wrote the book, Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East in 1991. Candlestick charts are now the main stay of most Technical Analysts due to the simplicity with which one can interpret what has gone through the day without even having to look at the prices.

Just like most other things, a candlestick pattern provides one with a probability of what did happen as the bar was getting created and what can happen based on the reading of that bar.

Friday’s big fall in Nifty has meant that we got some interesting pattern formation for the day (Friday), for the week and for the month (since that day was also the last day of the month).

First, lets look at the day Candle

The Red bar is the candlestick for the price action we saw on Friday. The bar being red in color indicates that the markets opened at the higher level and closed at the lower level. But what interests us is not just that but the fact that this bar was able to engulf the previous bars. The pattern thus is known as Bearish Engulfing pattern.

This pattern has the highest weight when it comes on top of a bull rally and that is what we have seen happen. A simple reading of the bar is that markets opened normally and went up higher on buying, but the buying was not sustained and selling reversed the course of the action. But since markets are at a new high, the selling should have got absorbed and the lack of absorption is suggestive of the fact that everyone who wanted to buy has already bought and there is none left to buy and hence hold up the prices.

Since most candlestick patterns require a confirmation signal, what we shall be looking for on Monday would be a break of the Friday’s low.

Now, lets move to the Weekly Candle

The above pattern is called “Gravestone Doji” and once again, the candlestick pattern has formed at a place with very high significance. The pattern is pretty suggestive of the fact that bulls have not been able to force their hand and the bears after being banged up pretty bad seem to be getting their mojo back.

The high of the weekly bar is now crucial. As long as that is not broken, bears can hope to see some reversal in the offing.

And finally the Monthly

The Monthly file is a reverse of the daily. While on the daily time frame we saw a Bearish Engulfing pattern, on Monthly we are seeing a Bullish Engulfing pattern. But then again, the way to interpret candlestick patterns is based on where they are placed and in that sense, this pattern is not something that adds value.

To conclude, both the daily and the weekly candle seems to be suggestive of a top in the offing. The current high hence becomes the key area. If that is broken and markets closes above that, both the patterns can be treated as invalid and we may see a continuation.

February has generally been a bullish month while January was usually a bearish month. Will we see a reversal in that pattern? What about the Budget Rally? On Feb 3, we have the RBI policy as well, how will that pan out for the markets? Lots of questions with no real answers unless on is a Astrologer 🙂

Chart: Comparing Intra-day Range of Nifty

High volatility is supposed to be indicative of Major tops and Bottoms. With Nifty having seen one of the best rallies since 2009, a lot of bears seem to latch on to the current increased volatility as a sign of a major top in the offing.

But are we seeing higher volatility (or range in the day) than what we saw in 2007? The answer is in the chart below

As they say, a picture says a thousand words :).

The 3 Percent factor

So, with markets going downhill by approximately 3%, there is a lot of noise associated with this incident in the financial world. Since Sensex has crumbled by 850+ points, that should be the big heading for most pink papers tomorrow.

But this is not even its biggest or even 2nd biggest fall (even when measured in point terms which is pretty wrong considering that when Sensex started, we had a value that was less than the fall of today). In fact, today’s fall is the 7th largest when considered in terms of points and 232nd or somewhere around when measured point wise.

There are many interesting things with todays fall which suggests to me that while this is not a start of the fall like one saw in 2008 (which is in the memory of most investors / traders), this fall does not signify a short term bottom either. So, before we jump into the market with most of us being on a Buy on Dip mode, shall we check out the evidence in hand?

While its true that a 3% fall had not occurred for a long time and hence may have come as a surprise, the fact is that through out the bull run between 2003-2008, we had multiple such instances. Its only since the surge in 2009 that we are seeing longer rallies without any corrections.

In fact, as the chart below shows, until 2010, we did not have a year without at least one 3% correction. As you can see, even in strongly bullish years of 2005 / 2006 and 2007, we had multiple instances where market corrected by 3% or more in a day.

On television, I observed a news flash which informed me that the markets had broken the 100 day DMA. That in itself would not make news on any other day, but on big days like, even small factor seems to get blown up. For markets to enter what is known as a bear market, the general measurement is either a 20% fall from the peak or the break of the 200 day DMA.

Currently, the 20% level for Nifty comes to 6901 while the 200 day DMA comes in at 7658. Both are pretty far to make one worry at the current juncture.

Lets now take a look at the Nifty PE (Trailing 4Q, Standalone).

Not much of a change there. While market has fallen, there is nothing to say, that its a cheap market out there, especially considering the rate of growth we are seeing in Nifty companies. It would be interesting to see how the results crop up for Q3 when they get released in this month.

The breadth indicators generally give a indication of the current market situation. I had tweeted about how the number of companies that were trading above the 10 day EMA was lowest in years on 17/12/2014 and the markets promptly went up from there. As on date, of the companies listed and traded on NSE, 65% of them were above the 200 day, 46.5% were above its 60 day EMA and 36.8% were above its 10 day EMA. No sign of a large scale selling pressure.

In fact, if you were to check the performance of stocks in F&O, no stocks had a fall >10%. Since de-leveraging starts first in FNO stocks, this is something to note. On days when there is total capitulation, you can see stocks closing with losses or 20% or even more. Not today though.

In fact, the number of stocks that advanced to a new 52 Week high were greater than the number of stocks that hit its 52 Week low. While small cap index too fell by 3%, it seem that a lot of stocks not only escaped the fall unscathed but logged gains as well.

All in all, while markets did fall pretty hard today, the facts above seem to indicate that this is not the end or we are not even close in that regard. There is no reason that we should see a crash similar to 2008 unless there is total world capitulation, but we need to fall even more before we rush to buy the dip.

Markets are in a long term bull market and there will be several opportunities where fresh money can be invested to take advantage of the same. But if one is not careful in choosing when to deploy those funds, it may in the short term actually cause grief due to one being too early.

While I am not a great believer in many a pattern, we do seem to be seeing a slanted Head & Shoulder pattern form on the Nifty chart. Going by this chart, if we were to break the 8000 barrier, we may get to see 7400 (which incidentally is a pretty nice support as well).

January has had once of the worst records amongst all other months and this time seems to be no different though we do have quite a number of days to go before we conclude that January has behaved as per its historical standards.

Trade Well, Be Safe 🙂

Review of the markets in 2014

And so comes to a close the year 2014 which will be remembered for the fact that after 3 decades, India saw a party come to power in the Center with a majority on its own. Markets welcomed the move by breaking out of its mutli-year high and closing the year with one of the best gains since 2009.

But the returns of CNX Nifty / Sensex which came in at 31.4% / 29.9% hides the fact that this year, stocks outperformed the broader indices in a major way.

On the NSE, we saw 62.5% of stocks beating CNX Nifty returns with as many as 40% of stocks recording 100%+ returns.

Here is a snapshot of the same

Just 16% of NSE listed stocks closed the year in negative. So, if your portfolio ended in negative returns by any chance, you have around 245 stocks to blame for the damage.

Among NSE Sector / Thematic Indices, CNX PSU Bank Index representing Public Sector Banks bounced back strongly in the year. With rising bad loans and the economy slowing down, PSU Banks had borne the brunt in 2013. But even after this year tremendous rally, the Index is still 21% from its 2008 high. The fact that Bank Nifty where the Index has private sector banks as well among its constituents is up 74% from the 2008 tells its own story.

Though CNX Metal Index closed on a positive note, this along with sectors such as CNX Energy, CNX Infra and CNX Realty have a long way to go before investors start seeing any money on investments made before the 2008 crash.

Gold continued to drop for the Second year in succession and this drop would have been even more severe if not for the saving grace of Rupee depreciation. After falling more than 20% from the peaks, Gold is now into bearish territory and unless the world sees a sudden spike in volatility, it may remain so for the foreseeable future.

Mid and Small cap mutual funds were the flavor of the season and registered strong gains with many doubling through the year. Global funds though did not have that luck with most of them ending at the bottom of the heap.

A list of the Best and Worst 10 stocks on NSE based on their returns. No major names in the winners though Bhushan makes it to the losing list having lost more than 80% of its value during the year

CNX Nifty Price Earnings ratio was around the long term average when we closed for business in 2013. This year, its testing its 1 Standard Deviation. As history shows, this is expensive, but not bubble region.

While among International Indices, we rank Number 3 in terms of Returns for the year, India has been the flavor of the season among Internatonal funds which inturn has been reflected by strong inflows from FII’s even as commodity exporters like Brazil and Russia crumbled.

This year was the second time (first being in 2012) we did not see a one day fall of 3% or more through the year. Its been 324 days and counting since the last such fall. Markets are not a one way street and we should be ready to see some amount of volatility as we go into 2015.

A histogram chart of Sensex returns by the year

This year saw the lowest intra-year draw-down ever seen in Nifty. Purely based on reversion to the mean, we should see a higher number going forward unless we get hit by a white swan 🙂

The forthcoming budget will be the first big test both for the markets and the government. But either way, opportunities are there for those prepared.

Wishing you all a happy, healthy and prosperous New Year. Thanks for reading.

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