COVID makes in roads

Amit Shah tests positive, Karnataka Chief Minister tests positive & TN Governor tests positive. As case count moves past 1.70 million in India it is slowly penetrating into the political and elite circles. As these big names come out safe from the infection, they will for sure give their our experience as directions to people about not to worry so much and go about with their works.

We cannot keep locked fearing death for infinite periods. With more than 60% of infected getting recovered along with reduction in fatality rates through out the world.

The fear of COVID will soon diminish and bring back life to normal. Very soon this will happen and there will be a rush of people going to places they missed in the last couple of months. Business is going to boom and for India, it is going to be a joyful journey.

As world shuns China, loads of money pouring into our country from big names across the globe. Along with this the tarnishing that China created to itself with India, which has brought in immense patriotism. Manufacturing is set to boom and absorb all possible jobs throughout the country.

Income will grow, standard of life will improve & life style will experience great change. India will become a very prosperous nation & Indians will be all around the globe spending their earnings, enjoying life.

As the green shoots, capacity expansions are planned by Britannia, ITC, Lever & many other big businesses to cater to the growing demand for packaged products.

Iphone has brought all of their 4 vendor manufacturers to India. Chennai plant has rolled out their production.

We are going to see beautiful days ahead.

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.

Reliance – costliest Oil company

With the run up in price of Reliance stock, which nearly doubled in three months, post the pandemic lockdowns. Reliance has become the costliest Oil company on the planet.

Market cap of Reliance has moved past 12 lakh crores, where the stock PE is at 40. On the business side, both sales and profits are down substantially when compared to last year.

This is not a COVID impact, Reliance business on Oil could have taken a hit as consumption dropped in the lockdown period. Even this for the March 2020 quarter, should not have declined as the lockdown was only for 10 days in the month of March.

Once market became jittery about the debt that Reliance carried, promoters got into fear mode and began selling rampantly. Now, the whole world has a share in the company. Google, Facebook & Microsoft kind of ownership. Also with ARAMCO, now the promoters hands are tied on future dreams.

They will not be allowed to blow money and kill competition. One very good blessing in disguise for the competitors.

With so much cash in their kitty, it cannot be kept idle. After clearing debts the future profits of Reliance, the parent of the telecom venture will get moved to some other activities, not into Oil business for sure.

They are now planning to sell stake in Retail too, looks like, apart from the stakes they will hold in the Oil, Tech & Retail, this company will become a bigger financial services firm which will invest into new technologies through the start-up ecosystem.

The next big challenge is for the PE & Venture capital firms globally, as Reliance will compete in bidding to acquire stakes globally into new businesses.

How good their dictatorship mindset will play in the totally competitive space that they are venturing will get known in a couple of years.

Reliance stock is not a favourite among institutions. All the holdings that Mutual Funds hold in the company are process based. Very few fund managers have a liking to this stock because of all kinds of clueless decisions that the management makes.

All of these views expressed are our beliefs, which can differ largely against others.

RBI policy, market up for 4th day

RBI policy kept rates unchanged, market was a little jittery with expectations that, there can be negative surprise. As nothing changed, interest rates kept at 5.15. It was joy for the markets which moved up for the 4th straight day after the budget day fall.

After a steep drop, getting to big rally is creating confusion in the minds of traders.

 

 

 

 

 

 

 

 

 

 

 

Nifty Daily chart

When there is a big drop and steep recovery, it brings confusion. Histogram on the chart has a deep bottom & now price has moved above the EMA. Price says market is bullish, indicator says there is strength on the bear side. And the chart is trending bearish (red lines on the top – indicate bearish trend)

This confusion should lead the markets to go nowhere. For few days it will hover around the range, find resistance at 12292 levels reached on 24th Jan. From here, going long will be a trade that has very less steam left in it. For a short we need price to close below the EMA, which again will be a trade that is half way through.

So, no trades for few days in Nifty. Even Bank Nifty is the same. If both indices are in confused state, in a market that is having strong bullish strength, where can a trade come through.

In a market that has made a good rally, best trades can come from the shorts. One can find stocks that are showing weakness at the top and short them.

Reliance, Hindalco & VEDL have potential shorts – 

 

 

 

 

 

 

 

 

 

 

 

All three charts having similar pattern. Price is in the zone between 2 EMA’s. Histogram has good depth & chart is trending bearish. Also all 3 have reached value zone( area between both EMA) in 3 to 4 days from their bottom.

Within 5 day’s from the peak or bottom is considered to be hot and more likely to reach back to the bottom.

These are for intra day trades.

Coming to trades for the next day, that is Friday 07-02-2020.

Balakrishna Ind – Stock is getting weak at the top, can have a short trade once the daily histogram ticks down. There was a false break out yesterday, which also adds to bearish strength.

Havells, is getting closer to its weekly value zone. A tick down on the daily will give a short signal. Target can be at 576.

Mindtree had a high rejected & ready for short below 898.

 

Top 30 losers of 2018-19

As markets turned down from bull to bear after the 2018 budgets, along with good stocks that gave up in price to adjust for extended valuations, there were some big names that have collapsed in price.

Here is the list of top 30 wealth destroyers of 2018-19.

It is sad to see that stocks have lost about 67 to 98% of their price in just 1 year. Among them here are some very poor quality names that had shady or unethical promoters like the Reliance Adag group, DHFL, McLeod Etc. Promoters who took advantage of their corporate presence to grow personal wealth. In some places greed made them use liquid assets to own illiquid assets, which turned out a nightmare to them when they had the need to repay the borrowings that they created pledging shares of their companies.

DHFL, Yes Bank CG Power, Coffee Day, McLeod, most of them bet their greed on real estate and lost badly. Poor corporate governance got added to their greed. We have some very prominent names like Yes Bank losing almost 85%.

It is said in the markets that, when a stock loses 20% in a very short span, chances of the stock getting back to normal is bleak. Here we have stocks giving away more than 65%, which means all of these stocks have kind of completed their life cycle.

Among the above names we did have exposure to some of them in their hay days like Graphite, HEG, IBull Ventures and even DHFL. In all of these exposures we have booked minimum 100 to 300% profits.

On hindsight, when we look back, it is the process that helped us get the best out of any stock that we invested. For example, DHFL, we picked it at 340 levels when the company was giving out good results. Trend continued pushing the stock to 680 levels from where it turned down. When this down side happens, results had kind of showed slowdown in growth. DHFL moved out of our ranking tables and triggered exit for us.

We did not exit at the top, while got out at 642 levels, almost pocketing 100% in 10 months.

In Graphite we had an early entry, we picked up at 155 levels, stayed invested for more than 18 months. Graphite has a continuous rally in price without any tiredness.

Earnings too supported with robust growth, by 4th quarter of FY18, it showed tiredness, we had exit signal at 900 levels. At that time SEBI and Exchanges played havoc in the markets. Both re-categorisation and Additional Surveillance Margins killed the stock price. It had continuous down freezes which gave us exit only at 643. Yet we made a little more than 300% in this stock, while had the opportunity to book 500%.

The learning at that time was, even a good stock can get hammered when regulators step in. Had to accept the gains left for us and not worry about that which is lost.

Now after a year since we had exited most of these positions, there is an even big learning. Come what may, follow your rules, you will be saved always. Today we own none of these stocks. Feels proud when we see the prices, on the hindsight mind thinks, we have made good a big chunk of profits from these stocks which today seems nowhere close to them.

For those who have a strategy, follow it divinely, profits are available in loads.

Budget 2019 – More public ownership of listed companies

In the Budget 2018-19, FM, Nirmala Sitaraman announced a very profound decision. To increase public holdings in listed companies to 35% from the existing 25%. After this announcement, market turned down due to fears that many corporates will now be forced to offload promoter stake to meet the requirements.

Added to the decision was a 20% tax on buy backs, which means that, it is going to be costlier for companies to buy back their own shares.

I would say this to be one of the landmark decisions in the recent past. Market’s reaction though was pessimistic, whereas it was a very good decision. If companies use profits to buy back equity and reduce capital, it is in no way going to be beneficial to the country. If capital is not deployed or put to best use, economic activity slows down, employment takes a hit.

Western world is sinking today because of this reason, most of their companies are not investing to add capacities, they are buying back shares and killing the economy. If we don’t learn from their mistake, we will also face the same condition. At least for them, they have capital, which the governments are investing into other economies and give social security to their citizens.

In our country we are yet to come out of deficit financing to run our economy, where is the possibility of deploying capital in other economies. And we are country with huge population, if employment dwindles economy will die.

In our country we have many promoters who were hell bent, not to bring down their holdings in their company’s even to the previous requirement of 25%. Examples were big names like Uday Kotak of Kotak Bank, RK Damani of DMart, Wipro, TCS, HDFC Life etc. Now they face even more challenge. Markets turned negative after the announcement because there will be more supply of shares in the market which can dampen demand.

It will only be a small time challenge, in the long run it is actually good. Today our Mutual Fund market has matured. People are moving to financial saving in a big way. Monthly SIP’s are at 8000 plus crores, which means 1 lakh crores of investments are coming into the market every year. What to buy with this money?

Fund managers keep adding the same stocks more and more to their portfolios. We don’t have many listings happening in our country even though India is the heaven of start-ups. Listing issue can be because most of them are yet to earn any revenue and those who are having revenues are not yet profitable.

If supply of good stocks is less, PE expands and then comes valuation issue.

We need more shares in circulation to absorb the funds that are hitting the markets, else we will get into a bubble and burst killing all of them in one go. In our country any thing good is done, it is always welcomed on a bad note. All because of short term thinking. We are more worried about today’s meals not bothered whether we are living tomorrow.

This comes due to poor confidence on our own selves, which is a big topic to discuss.

Why are promoters are willing to dilute? The only reason is ‘selfish’, that they want a big pie of the riches their companies are going to generate. On one side world is talking big giveaways in the name of philanthropy, in our country we are still hoarding.

IN fact we should not encourage these kind of promoters to do business, they get business from the citizens of the country whereas reluctant to share wherever possible.

Buy into these stocks that will liquidate promoter holdings if they are fundamentally strong and have a close watch on them, as there can be other possibilities where these promoters can short change due to their greed.

 

Large, Mid, Small Caps, where to invest?

When it comes to mutual fund investing, Investors are generally confused as to where they should invest their money, some times large caps are doing well, some times Mid-caps are beating large and Small caps giving very high returns.

When you invest in Large cap, Mid & Small caps do well, while you are there, it goes opposite. Then, you decide to have all of them, the whole market goes down.

How to overcome this confusion & where to invest.

If we can get a better understanding of what to expect from each category, that will help us make a wise decision.

Let’s go from large Cap segment.

Large cap consists of big companies of our country, the top 100 by the stock’s market valuation. They are well established in their businesses and have consistent performance. On hearing this, your mind will say, ideally this is where we have to be invested.

Yes, It is a very wise thought. Every investor should have some exposure in large cap, because they form the back bone of the economy. Owning them will help you grow your savings as the economy grows.

AS they are well established and consistent in growth, can I have all my investments in Large cap?

No, you will miss the actual potential of Mutual Fund or stock market investing.

Large business are steady yet slow in growth. So are their stock prices too, they don’t give big returns.

Average growth is at 7-10%

Why large cap stock prices don’t have big gains?

Stock prices go up based on the growth in profits the companies make. These big companies have grown so big that, from wherever they are, having say a 100% growth in a year is not going to be possible.

For example let’s take ITC. It is a company  that is more than a century old now. It’s annual sales is 42K crores and it makes a profit of around 12K crores.

Almost all of us will be consuming at least one product that ITC manufactures, in our daily life, yet what is the possibility that ITC’s profits will double in the next one year. That is from 12K crores to 24K crores in 1 year. It is practically impossible to double in one year, while it has all the possibility to double in 6 -7 years’ time, & so will be the stock price, it will double too in the same period.

Being big makes them trusted names, while their growth will have a slow & gradual increase.

Investors in Large Cap fund can be confident of having 7 to 10% returns and they will deliver.

Now, what is different in Mid & Small caps?

They are fairly small businesses,

Bring in some new innovation,

Can adopt faster to market dynamics with their products

Management is lean, which helps in faster decision making, which is also a disadvantage is the decision backfires. The company will go up in air.

Whereas when everything clicks, their space for growth is phenomenal.

Example: Jockey, how many of us used jockey 10 years back. Not many right? Because it was a luxury those days. As our country grew in income, so did the populations taste for branded products. Today, at least 50% of population know of this brand and there is a large percentage who are using it too. Else the company which had 650 crores sales in 2011 could not have grown to have 3000 crores of sales in 2018. Profits, which was at 85 crores in Mar 11, now grown to  411 crores. Near 5 times growth in 7 years.

Where ITC grew 100% in  7 years, Jockey grew 500% in same period.

What happened to Jokey share?

It grew even faster, 1200% in 7 years.

How do you like it?

Profit growth was fast, stock price grew even faster. That is the power of Mid & Small caps.

Jockey had space to grow and had the product that quenched the thirst of a growing population. Will Jockey repeat the same run in the next 7 years, for sure it will not.

Funds having this stock in their portfolio have to ideally reduce exposure to the stock and look for the next similar stock for their portfolio.

Now the next question that will ring in our mind.

If Mid & Small cap funds can give such high growth, why should we invest into any other segment and have lesser growth, why not invest only in Mid & Small caps?

You can do, only that, you need immense patience and tonnes of belief on the fund manager because, when the funds go through bad phase, you should still stay invested, only then you will be able to reap such big gains. When the tide turns valuations just trip and prices fall like 9 pins. It will get back and run again, which can take good long time. This is the period where investors lose patience and take wrong decisions.

So, ideally having a mix of both is the best choice and for that we have the Multicap funds which have all the segments in their holdings.

These are funds which invest into a mix of all the segments, helping investors get a better return than Large cap yet safe as the spread is mixed.

Now the next question will be, here is a fund which has all the qualities, one can invest and just be with it, money will have best growth. Yet, why are people still not making big gains?

Large cap funds give 10%, Mid & Small caps give 20%, Multi caps give 15%. When you hear this mind will fork out a question, where did I have such returns? All these are only numbers, just spoken, doesn’t come in reality.

True, I agree on your thought. Not all investors get to have these growth numbers which we saw here. That is because of concerns that people have in their minds. They don’t stay invested for a long period. The moment they see a small dip in their account, the next thought is how to stop it and first action is to withdraw and keep money safe before big damage happens.

Almost all of us would have known about the 2008 fall. SENSEX was at 21K, dropped to 9K. Today it is joyfully nearing 40K. In 10 years index has doubled. This price move did not happen in a smooth slope. It had 2 instances of 2 year long steep drops in price and 3 years of doing nothing. Impatient investors would have moved out and ended up having made nothing.

This is the reason why very few make big gains from the stock market investments.

Now coming to the question of where to invest?

Have a mix of all three large, Mid & Small, along with a multicap. Follow these 5 steps –

  1. Select the best fund, which has history of consistency.
  2. Be committed to stay invested for a long period
  3. Don’t watch news, it will force you to react.
  4. Have a goal with a period and target only for that, nothing else.
  5. Once a year review the investment to check if it is doing better than the markets. If not move out to a better fund, while have a discipline, not to withdraw funds in the thought to get back later. It almost always never happens.

One small tip to make a little extra profit

When Small caps index drops more than 30%, add a little more money  into your small cap allocation.

You can reduce large cap exposure and increase in Small cap.

Don’t invest in one go, use STP for a 6 or 9 month period.

In the next rally, your investment will be right at the spot to gain big & help you reach your goal earlier.

 

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.

Shifting of Crude Oil pain

In early October this year the emerging economies predominantly India was worried about crude
increasing rapidly on its price. Many of analyst expectations that it will not go beyond $63 went wrong, it moved past $80 and there were pessimists in the forefront talking that it will soon cross $100 and will bring big challenges for India on its CAD, the government on its elections, inflation etc. Oil going up continuously even defying its own weakness on technical made many who thought that pain of oil price to the world is behind us were also made to believe that it will have some more damage done to the growth of developing economies.

For the Oil producing countries, there seemed that they were the lords of the world, dictating terms
on price front threatening of production cuts to jack up price. At times it felt like they were enjoying
the pain that the emerging world was undergoing.

Within 40 days the story turned upside down. On 5th October, oil was at $84, it is overvalued on the
charts. On 21st November, it was $63, going straight to undervalued zone. Now the talks of the global media also have changed. So far, it was a concern that the emerging world is at pain. Now, thoughts of global slowdown has come.

Mercy thoughts are flowing in support of the oil producers. Saudi wants price to be above $73, to meet its budget plans. Russia says $70 is ok for us and we cannot stop our companies from producing as it will bring pressure to their capital. US says even $68 is ok for them.

Emerging countries are in party mood. In India, pressure on the Government to bring down taxes on
oil when price kept moving higher has now brought double benefits to the users. Oil price is down
and along with that lower taxes, it is big savings for the consumers and in a election year, there will
be no increase of taxes so, it is time now to enjoy lower pump prices.

So much in just 2 months. What took more than a year for the bulls to move up oil prices only took
40 days for the bears to damage. This is why it is said that, Bulls climb by the stairs and Bears jump
out of window.

In a couple of years from now the importance to Crude Oil as a product will be history. For immediate periods, Crude will try to move up in price, while it will find resistance on every upside rally and bears will bring prices down. At least 2 such events of lower price penetration will be there before we have any significant upward movement in prices of Oil.