BUDGET 2019 – Auto industry to change fast

With the increase in excise duty on petrol and diesel and the GST cut on Electric Vehicles will is going to be a big blow to the Auto sector, which is already reeling under huge pressure of declining sales.

The message is getting out clear that, manufacturers have to speed up with EV launches, else they perish. Tight cash flows in the market due to closing of funding tap of the NBFC’s, has impacted Auto sales to a very large extent.

In the last 3 months, almost all the companies in this space have registered continuous decline in sales numbers. Many of the big names have shut down their facilities for short period to adjust for the inventory build up at the distributor level.

Now the next step will be offering discounts to clear off inventories. It will be a better decision for the manufacturers which will reduce cost of funding these unsold inventory. Buyers will enjoy getting their favorite vehicles at a discount.

Yet, as the message from the government is getting more clear about the fast pace expectation to switch to EV’s. Buyers will prefer to delay their purchases, though not on a big scale, it will impact sales.

The biggest threat will be to Auto anciliary businesses. EV’s don’t require all the parts that are presently used in an automobile. Either they fast pace their production to include products required for EV’s or perish.

Auto stocks are already down to their bottoms, now it will go down even further. If you hold any auto stocks in your portfolio or find exposure to auto in your Mutual Fund portfolio, take exit. It will deteriorate further.

High – Low Index Trend Analysis Statistics

Markets Index are going down, when is it likely to change course? There are some indicators which give investors early signs of the prevailing trend coming to an end. A couple of such indicators like New high New Lows (NH-NL) & Index Trend direction (TD) have some very useful information.

The NH-NL index is the index of leading stocks in the direction of the market in 3 time periods. When a market is down, how many stocks are leading the downside and when it is up how many are leading on the upside. Market tops happen when upside does not match with the price move in the market. Like when the market hits a new high and the NH-NL indicator is not, it is a sign that market is getting tired.

On the down side, the NHNL indicator gives signals for a sharp reversal. The 30 day NH-NL, when it hits -1000, it is time to buy the strongest stocks in the market, the turn around will be very sharp. On the 90 day NH-NL, the indicator should hit -500 and on the 365 days or 52 week NH-NL as it is popularly called should hit -400

NH-NL of each time period can be used for different periods of buy & hold time frames. A signal on the 30 day index will be valid to hold the position for about a week or 2. 90 day signal is valid for a month long holding & the signal on 52 week will hold direction for about a quarter of an year.

NH-NL signals on the buy side are very powerful, price moves will be sharp.

One such opportunity is coming up now. 30 Day NH_NL is about to cross -1000. 90 day is already past -500 & 52 week is close to -400. What all of these are indicating is that, a turn around in the market is around the corner.

It is time to identify stocks that are stronger than the market, whole stock prices have had a significant correction after a good rally. Such stocks are the ones which will be the leaders when the market turns direction.

The Trend Direction (TD) Indicator, shows the number of stocks that are trending bullish, bearish & sideways. Ideally when there are more number of bullish trending stocks, market is euphoric. Also when there are a large number of bearish trending stocks, the reversal will be sharp.

This index is worked on the NSE 500 stocks. Weights are given for bullish, bearish and sideways directions. When the indicator hits -500 or more it is time for a reversal. Now the indicator value is at -345. In just about few days if the correction continues, we will hit the bottom.

Both NH-NL and TD are showing strong reversal signs, it is time to get prepared for identifying stocks that will have big rally.

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.

Inside Our Portfolio – 2

This video talks about positions in Delta Corp, AU Small Finance Bank, Bandhan Bank, Bajaj Finserve, HCL Infosys, Himadri Speciality Chemicals, Sterlite Technologies, L&T Technology Services Going light on this week as there is no commitment to buy stocks, stops on existing positions getting closer to current prices indicates that market will take a breather. Having a little extra transaction cost is better to having weak stocks in the portfolio, getting in and out of stocks benefits in having a smooth equity curve, which brings confidence to invest more in the portfolio.

Inside Our Portfolio – 1

This video talks about stocks that are at advantage in our portfolio from the current result season. Intellect Design Arena, L&T Technologies, Sterline Technologies stocks in big rally mode. Trading positions in Himadri Speciality Chemicals. Top technology growth stocks in our portfolio helps us outperform the SENSEX by more than 3% this week even with 50% exposure.

SBI Result shock & future of Stock Markets for FY18-19

Markets climbing higher got shocked by close to 5000 crore loss declared by SBI, adding to volatility in the markets. Reasons to stay invested, how SIP’s are at advantage when volatility exists. Reliance Tax Saver, the best of high volatile schemes which suits the best for SIP investors.

Why markets will not go down further yet with high volatility and setting pace for the next big bullish ride, pre & post election 2019.