Caps NH-NL Index

Worked on a new big picture indicator, the Caps NH-NL. It was Dr. Alex Elder’s new development on the existing NH-NL index.

The idea behind this concept was that, when new high’s or lows come in the market, are they coming from big stocks? If they are, then the commitment on the direction of the market is high or low according to the prevailing trend.

For example, when the total market cap of all the stocks that give a new is bigger than the total market cap of stocks that are giving new lows. This means, bigger stocks are contributing to the market on its upward journey.

Large money is chasing the market upwards, we can continue to look for buying opportunities. If it is the opposite, then should sell the market.

There are divergences which are even more powerful signals. When the market is going up, New highs are slowing down and the market cap of those stocks that are coming to high’s are lesser, we get a divergence on the index. It gives us an early signal that, the market is getting weak on the upside.

Need to get cautious on the long position, look for exits and prepare to build short positions.

As I am writing this article, we have a market that is showing multiple divergences on the NH-NL indicators. Primary NH-NL indicators on shorter time frames are having multiple bearish divergences, and along with the Caps NH-NL is also diverging.

When a bunch of market tools show a signal, it is a hard warning for the market participants, to get cautious.

It is my observation as also of other long term players in the market, at the times when there is warning signals coming in the market, that is the time when the whole market is gung-ho about it. Like what we have now, it is getting euphoric. Probably attracting more people to lose.

Here is the index of Caps NH-NL done up to 24th July 2020.

SENSEX at 40K – 2nd time

SENSEX has closed above 40K mark for the second time. Will the uptrend continue?

It doesn’t look like the momentum will continue as we have a slew of negative news hitting the market like the core sector output going down 5.20%. Under utilization of capacities not pushing private capex.

Rumours like new buyer in Yes Bank, fund infusion in Tata Motors, pushed up the indices. Markets also had a broad based rally as laggards did a catch up as the bottom for the market is now established.

What next?

All the big stocks that helped the markets move up have been showing tiredness on their price moves. There has been no big push on their September quarter results. All the profits that are coming in the results are mostly due to tax cuts for manufacturing companies and losses in the banking space again due to the same tax cuts.

Sales growth in the economy is slow. Off the results that are out so far, there is a little less than 5% growth registered. It is not a good sign.

What all of these developments are showing is that, we will have a market that will keep hovering in the range that we have established between July and October. Only if there is a significant buying power will the trend change for good.

At the same time, our markets will not breach the low we have established in the recent months. That assures of no big losses on the investments, while it requires patience to see gains.

As of now, there is no visibility of any sectors taking leadership, which is another concern. If the whole economy is a mixed bag, there will be more confusion than clarity.

So the wait continues…..

64 lakhs turns 1 Crore in 120 days

BravisaTempletree added HDFC AMC to our portfolio of India Top 30 stocks in June 2019, today this investment just crossed 1 Crore mark. In 120 days 64 lakhs goes on to become 1 crore. The gains made in this position gives me the first signs that our market has revived from its bear hug. Feels like the return of good old bull market days of 2014-17. Brings confidence that, the next leg of top performance against all other investment portfolios like we had done in 2017 has begun.

As HDFC AMC leads the pack of gains this season, we are having stocks like Bajaj Finance, Bata, SBI Life, Avaas Financier, KEI kind of stocks supporting with good gains building up in their positions. Both SENSEX and NIFTY are reaching for their all time high levels, now the tide is changing. In the last 2 years a handful of stocks were leading the markets upwards bringing confusion in the minds of investors as to why their investments have not gone up, where as the market is going up.

Now, it is time for the SENSEX and NIFTY to cool off while the broad markets will take a lead. Already in the couple of past sessions we have seen big traction in price moves of Mid & Small cap universe. Even today as I write this small note, NIFTY and SENSEX are down, while both Mid and Small caps are up. Infosys, which was the Gold Standard of India’s corporate world got mired into problems, today a whistle blower letter indication discrepancies in their accounts has tanked the stock 13%.

Showing that one day like how a bad market can revive to good times, some good also can go down. Being in the market, we should not worry about all these issues. If we have a process and follow it with discipline, we will not be caught in any of these challenges.

In our experience, we have not had any of the bad names of the resent season in our portfolios. DHFL was there with us 3 years back. At that time company was growing we made our share and got out with 100 plus percent gains. INFY, was out of our radar in 2013. Same stories for many stocks that have lost more than 50 to 90% in the recent meltdown in our markets.

HDFC Bank exposure in Mutual Funds

We have had a good correction in stock prices of Mid & Small cap segments in the last 2 years. When Small cap saw 40% drop in prices and Mid cap had a near 30% drop, Large cap segment which kept the markets up in most part of 2018 have not participated in the weakness. Even now, after more than 20 months of broad correction in our markets, Large cap indices like SENSEX and NIFTY have given back only about 4 to 6%, which is not at all a correction in prices of those stocks.

The present patterns in the indices and the stocks that kept them at high’s are showing signs of weakness. When the turn comes, most of the stocks that lead the rally will give way to weakness in prices. This will have a big downside move, on the funds that hold these giant large cap caps.

Stocks like HDFC Bank have maximum exposure in many Mutual Fund Schemes. 14.41% of the Bank’s Equity is held by Mutual Funds present across 395 schemes, most of them holding it to the max permissible limits.

Fundamentally HDFC Bank is one of the biggest contributor to stock market wealth creation in the last 2 decades. Along with its parent, HDFC, which was having a 500 Crores market cap when it was listed in the early 90’s, current value of both these companies along with their subsidiaries have crossed 13 plus lakh crores.

HDFC Bank had been growing at 30% per annum for a very long period, in the recent past for a couple of years its growth has tapered to below 20s. Even the September quarter results is expected to hold the 18 to 20% growth range.

On the technical side, HDFC Bank’s chart seems to be getting close to bearish divergences, which is an indication that it is getting saturated at the top. Post the results, if the price moves are not pretty strong, it will give way to the bears.

Two possible outcomes is likely in this stock.

  1. It succumbs to bear power and goes down, which will become a very good opportunity for long term investors to add this stock to their legacy holdings or
  2. Lose momentum, will hold to the current range to build strength for the next rally.

In the present condition, later is most likely to happen. Though the stock might not see a steep fall, as it has formed a range of 1050-1250 on its prices, this range should hold and then have an up side breakout. When this consolidation plays out, all of the mutual fund schemes that hold this stock will go through the same pattern of consolidation because of the large exposure this stock has in all the portfolios. Today 14.41% of the Bank’s Equity is held by mutual funds, which is present across 395 mutual fund schemes.

Like HDFC Bank we have many such Giant Large Cap stocks which are having similar patterns both on their profit numbers and technical patterns. This raises concern on the near future performance of funds holding exposure into these stocks. This also coincides with the thought of non-participation of large cap in the correction. Now with the developments that are expected, we will see good amount participation, which will mean that we have to brace for another bout of weakness for our markets.

Since it is the big businesses of our country that will go through this change of correcting themselves, it might not be a big drop in values.

After the mid and small cap value correction, now it is time for the big stocks to correct. Since the last 2 years, we have had investors complaining about non-performance of their portfolios where very few of them still had some positive growth in their investments. This was due to the over stretching of the Giant Large Caps in our country. Thanks to the current developments, soon this non-correlation will come to an end.

All of these developments are bringing new opportunities too, since the large cap space is going to correct now. It will be good to take exit from your existing investments, move the funds to liquid and have the same get back into the same large cap scheme in a staggered manner through STP. This will help you book available profits, not take the hit when NAV drops and also get in with an average NAV to participate in the next rally.

Those of you who have exposure to schemes which are in the large cap space, which has completed their exist load period. Mainly having stocks that are likely to turn negative can take this unique opportunity to add more returns to your investments.

Bajaj Finance – a long term story

Bajaj Finance stock crossed ₹ 4000 on 26th Sept 2019. This stock has been the darling of stock markets for quite some time, what is so big about it crossing ₹4000 per share.

It was a remembrance to me as I bought this stock way back in 2015 for 4K. Now, the same stock after 1:1 bonus and 1 to 5 split has again crossed 4000. This means, the ₹4000 investment in Bajaj Finace in Jan 2015 is today worth ₹40,000. Yes it is ₹40,000,  growth 1000% in about 4 years.

At a time when NBFC’s are getting masacred by the markets following thier poor handling for their businesses, followed by a crunch in support from banks which crippled their businesses. Most of the NBFC’s failed because of their exposure to real estate through builders funding as well as their own greed to acquire real estate assets using short term funds.

Bajaj Finance’s business is more focused on consumer lending. Bajaj Finance did not see a slowdown in it’s business. Even when economic slowdown was much talked about and felt in the economy, this company has been growing at 40%. Their NPA’s are at 0.75%. In a period where there is no funding available for other NBFC’s, Bajaj has been getting overseas funding at a fairly cheap cost. Along with this it has been mobilising large corpus through the Corporate FD markets.

It is growing its fund base alogn with business growth. Where can the stock go from here. Currently Bajaj Fiannce is trading at 60 times its earnings. That means, for every rupee of earnings that the company is generating, market is paying ₹60. It is too pricey, that is the price quality and consistency commands. Bajaj Finance’s latest earnings is at 72 per share and is grown at 42% in the June 2019 quarter. In the last 12 quarters it has an average of 21.55% growth on its TTM earnings. There was a dip in earnings when the company gave bonus shares.

In general market condition when a company gives bonus shares, its capital gets bigger and from there on because it has to service a higher capital, growth slows down. In the case of Bajaj, it slowed down only for 4 quarters, inspite of having 1:1 bonus, which increased the capital to double of what it had earlier. Growth momentum continued at a robust pace. This in itself was a very big achievement because getting back to 30% growth rates just after 1 year from bonus means very robust business growth.

Coming to future prospects, if the company grows at 21% & has a PE of 60, the stoock price will be 7800. Even at a 25% lesser valuation which the stock mostly has after the annoucnement of every quarterly results, the stock price should be at 3750.

Is it good to buy now? Absolutely not. Bajaj Finance stock is very highly priced. With today’s earnings Bajaj finance is attractive only if the price comes down to 2550, which is not a possibility when markets go bullish.

One can have this stock in mind to take entry when there is a crash in the market and price gets to a level it trades at less that 50% of current valuation.

On dividend yeild, this stock is a poor performer, it gives out very less as dividend which is a good move for companies that grow at a faster pace. Berkshire Hathway, one of the world’s highest priced stock, never has given bonus or dividend. Thier philosophy is that, instead of you investing the dividend and growing it, which normally is less than what I grow the company. I will retain the earnings and help you have the best growth for your money.

For those who have already invested in Bajaj Finance, it is one of the goldmine stocks, which can be held for some more years, till it shows signs of weakness in its growth.

Above 50 EMA Index

This blog post talks about one of the big picture features available on our website, the Above 50 EMA Index.

What is the use of the Index and how to interpret its signals?

This index tracks the number of stocks that are trading above their 50 Day Exponential Moving Average.

Why 50 days and not more or less?

50 days represents 10 weeks of market activity, which forms almost 20% of the year. It is a shorter term strength guidance for a stock. So, if a stock is trading above 50EMA it is termed to be bullish and below the EMA the stock is termed to be bearish.

How to use this Index?

When the index moves above 75 market is likely to turn down and when the same goes below 25, the market is likely to turn up. When such instances come up, traders can look to identify stocks that have made a base at the bottom for going long or stocks that are forming weakness at the overvalued zone to go short.

When the index is at 75, investors can use the signal to exit some of their long term holdings which are finding it tough to move up. They can even be good stocks, which are facing resistance in price moves on the short term. By selling and buying back when they get a little cheaper, you get an opportunity to reduce the weakness in your investment portfolio when there is a correction in the markets.

What is the logic behind this thought of 75 & 25?

If the index moves above 75, it means 75% of the stocks in the market are bullish. At the same time, not all of them are at the same levels of bullishness. Some of them would have up even when the market was down while some would been early risers, which were the ones that ticked the index to move up. These old timers and early birds would have completed their journey when the index reaches above 75.

When most of the market is bullish, some early investors and institutions who are holding big positions running for a long period would want to book profits. Some of the stocks that went up due to fundamental strength will begin to slow down on their growth, triggering a downward price move. At the same time some stocks would have run up on expectations of big results where the companies would not have met the expectations and have triggered a selloff.

All of the above happens at the top and thereby qualifies as a selling level when the index moves above 75.

The same happens with buying when the index goes below 25. As more and more stocks turn down, those that began the downward move would have completed their bottom and base formation. After drop in prices, company’s earning would look attractive on the stocks valuation. Turn around will trigger institutional buying. Along with this the common adage,’ when there is fear in the market, go ahead and buy, you will make the biggest gains’.

Many such instances of turn around from the bottom can be seen in the chart. July 2019, Oct 2019, Feb 2019 & Mid-May 2019. Now it is again below 25 on 12thJuly 2019. Exactly 1 year from where it also had a similar pattern.

It is time now to look for stocks that have bottomed on their prices. Stocks having bullish divergence on the MACD or histogram on the daily charts. Stocks that are showing strong bullish patterns in the weekly chart and come down in price to reach value zone. These are stocks that will have big rally on a turnaround.

One can easily find a minimum of 5 stocks with the above qualifies and most of them end up giving above 3 times the risk exposed on the positions.

The Above 50 EMA index chart is published on our website with weekly updates. It has been populated on Weekly updates to have a smoother chart, else it will be more crowded if it is populated with daily data.


Sensex crosses 40,000 for 1st time as Lok Sabha election result trends show BJP+ returning to power

Election euphoria made our benchmarks break into new territory. SENSEX moved past 40K and NIFTY crossed 12K for the first time. Though this happened intraday as BJP gets a clear number which brought clarity that aggressive reforms will continue.

As the election news becomes a non-event very soon after the indices moved into new high’s now it is time to get back to reality. The immediate concern is on the earnings front.

About 50% of companies have declared their March 19 quarter, about 40% of them have registered above 25% earnings growth. On the face of it, this numbers seem to be good. The concern is that, sales numbers are not supporting. Only 12% of companies that have reported results are having good sales growth.

Without sales going up only profits rising, it will hit the ceiling very soon. This gain is possibly from the efficient management of capital and operations. While eventually if sales doesn’t grow, earnings will stop growing too.

The new government has many immediate challenges to address. Jobs, which is a global concern now which is also staring at more & more job losses due to disruption. Rating issues of NBFC’s which has caused a bigger concern on the growth. Lending is slowed down, which will impact growth.

Slowdown in the Auto space, where a lot of disruptions are going to come at a faster pace. Government needs to create space for the transformation to catch pace with our neighbouring countries. Thailand, Malaysia etc are going strong on EV’s, China is the major supplier of vehicles. We have challenges competing with China, need infrastructure to accommodate the change. All of these require immediate address.

Infrastructure, which has been the reason of many big corporate defaults in our country. Corporates have paid the price for their greed, next turn is on the government side. Government decisions were the reason for the infrastructure mess in our country. This needs to be addressed immediately with an aggressive approach.

With a clear mandate, the new government should be addressing the important issues at a faster pace only then markets will continue to rally.