Buying opportunity when stocks hit new lows

When stocks reach for a new low, investors dump it, fearing that the price will reach even lower. And that is what happens in reality. When a stock reaches for a new high, it continues to reach for newer highs till there are no more buyers to push the stock upwards. This condition is a bull market. Same when the stocks reach for new lows and more stocks follow, it is called bear market.  When more stocks follow in the same direction, fear escalates into a bigger sell off.

As the market reaches its extremes, there comes a very good buying opportunity. That is, when a large percentage of stocks reach for a new low,  the whole market slides downwards. Taking along with it even some of the good stocks. These good stocks become attractive and give opportunity to buy for big gains that will come up almost immediately.

How to identify such opportunities?

Plotting the New High – New Low index for the market will help us get the picture of when there is opportunity to buy or sell. This index is the total number of stocks that hit a new high for the day and number of stocks that hit a new low for the day. The total of highs is subtracted with the total of lows, we get the New High – New Low index. Which is also called the NH-NL index. More detailed study on the NH-NL index can be had from Dr. Alex Elder’s book on New High – New Low.

Having the data plotted takes a little effort, we have been plotting the same for about 850 stocks that we track. From the daily values, we sum the values for the last 5 sessions to make it a weekly value and have it plotted.

These values are taken for 3 time periods to get a better understanding. Along with 52 week High low, we also collect data for 90 days and 30 days. This chart here shows all three values as a plot. We can observe that when 30 day NH-NL reaches past 1000 (Orange line in the chart), market gives a reversal. The sections highlights with yellow are the reversals.

An even more powerful buy signal comes when there is a divergence on the NH-NL index. Points marked with Green arrows indicate where there were strong reversals.

When we have the 30 Day NH-NL move past 1000, you can begin checking charts for stocks that show strength on their prices, like having a bullish divergence on the histogram or the MACD lines. Get ready to buy when the down side move is completed. When they reverse their direction in few days they give very good profits.

As we are writing here, there is one such reversal that is in progress. And in the last 1 years we have had 9 such opportunities. Can we expect the same to repeat every year, ideally not. NH-NL nails bear market bottoms, where after a weakness, market recovers for a short period before going down again. Using NH-NL, we can identify such short term reversals and profit from it.

IN a bull market, we can use the divergences to exit our long positions before the markets slide and take away most of our gains. Regions marked in Blue on the chart were conditions where NF-NL had a divergence to the price movement. As price reached for a higher high, NH-NL reached for a lower high, giving us first signs of weakness and alert to tighten stops on long positions.

Therefore, when market reaches for the low and many stocks are giving new lows. It gives a good buying opportunity. We are not doing bottom fishing here, we are identifying strong stocks in a weak market which will help us make some quick gains.

Where can you get NH-NL charts?

We will have it published on our website by mid-march, which will be live on daily data.

Opportunity to double investments in Small Cap Funds

After polarization in the markets which saw only SENSEX going up and investor portfolios only going down. Now the tide has changed, Mid & Small cap funds are likely to have a big growth potential. It is expected that, Small Cap funds will have 100% growth in next 2 years. When a slew of negative news did not bother the markets, like the lower GDP, Corona Virus and even the Budget which was not so very euphoric, while market kept moving up. This is a sign that, there is big gains to be made.

One can look at small cap space for big returns, can add funds from Axis, DSP or Sundaram to take advantage of the profit potential.

Reliance Short 14 2 20

A short trade on the day the AGR order was passed by the supreme court. A trade that had wild moves on both directions. Trade ends up a 1R loser, while it gives immense learning.

Budget 2019 & industry view on it…..

Just back from a meeting with Manish Gunwani, CIO of Reliance Mutual Fund. His views about our markets are that we are at a sweet spot where India markets will perform well. Election outcome if the seats are in the range of 180 to 250 for BJP, markets will not react. Less than 220 seats, will see a new Prime Minister, likely candidate is Nitin Gadkari. It was a little out of the box to hear Modi is not a choice, challenges of a bigger democracy.

We have very less contributors on exports. IT contributes $100B and NRI remittances at $80B. Apart from these 2 there are no big contributors. Pharma was giving some support, now with a lot of regulations, it has gone down. While our imports from Oil which is $100B and Electronics at $40B, almost takes away all of our income.

Oil price should reduce which it eventually will over a few years, due to the advent of electric vehicles and solar panel usage. With #MakeInIndia, as we begin to consume more of electronics made from India, both the big shareholders of our Forex expenses will come down. This shows a very bright future for India.

In the immediate period, 2019, though fund houses and fund managers are saying that we will have 10-15% growth, I don’t see a potential, it might take another year to get a boost for our economy.

The budget shows too much dependence on PSU disinvestments. This year Rs.90K crores to come from PSU disinvestments. Every year if we keep selling what will be left. Already government ownership in many big PSU’s have come to 50-55% levels. As it is, they are poor performers, and would not fetch good price, hence finding buyers will be a challenge.

Among PSU’s some are called Nava-Ratna’s & Mini-Ratna’s or Gems. These Gems got their shine because of government business which was like a light shown on a plain glass. Once they come to the outside world and face competition, they are very poor performers. When the light goes off, it is only plain glass with no value.

Continuous selling is also bringing down prices. Example is Coal India, where the stock was offered for sale at one price, then 5% discount, again at 3% discount and it continues. As the sale keeps happening the stock price is not moving up, thereby not giving any growth for the investor.

Now again government want to sell some more shares, which might not be an achievable target. Due to this the planned deficit of 3.4% will not be achieved. There were talks that, for the last 10 years we have been trying to maintain deficit at 3% and not achieved.

Next big damage in this budget was the bringing of a permanent expense of Rs.75K crores in the form of payments to farmers. These kind of facilities cannot be rolled back, no government will want to bit that bullet of non-popularism.

2019 probably might not be a big winning year for the markets. One very good advantage of this condition is that, if there is 2 consecutive years of no or negative returns next subsequent year will be a super star year.

2019 will set the tone for the blast off in 2020.

Budget 2020

Budget brings a big blow to the perfectly bullish market. A chance for portfolios to do the next churn. The housing sector was showing signs of strength after the Gas industry having leadership in the last 6 months. Changes in taxation, giving the option to do away with exemptions brought a windfall to the Insurance and Housing sector.

Markets overdid the fall as though Indians have bought homes only for tax saving. The correction will be short-lived and markets will bounce. The polarization that came from 2018 is over now. SENSEX will go down or consolidate in the next ride giving space for mid and small business stocks to do their run.

It is a good time to be invested and profit from one of the biggest market rally of its history.