Friday, June 15, 2018

Sector rotation a trading opportunity



"The innocent are so few that two of them seldom meet - when they do meet, their victims lie strewn all round."
—Elizabeth Bowen (Irish, 1899-1973)
Word for the day
Semaphore (n)
An apparatus for conveying information by means of visual signals, as a light whose position may be changed.
Malice towards none
To a common man, who grows with stories of the valor of James Bond (more recently Tiger) and strongly believes in infallibility of MI6, CIA, KGB, Mossad, RAW etc., the recent news flow regarding Nirav Modi comes as an unpleasant shock.
 
First random thought this morning
Like in Greek mythology, all Indian politicians are Demigods. They never make mistakes. All their decisions and actions are totally dedicated to the welfare of common people and they are incapable of doing anything wrong or something that is prejudicial to the public interest.
At least I have not seen anyone admitting to, or apologizing for, a wrong decision or deed that may have hurt people. Arvind Kejriwal once admitted that his resignation from CM office in 2014 was a mistake. But he was perhaps referring to the interests of his party and not common people.
And then we have the audacity to claim ourselves followers of Mahatma Gandhi, or critics of Mahatma Gandhi, who had enough courage to admit even his most personal failings and weaknesses publicly.

Sector rotation a trading opportunity

Considering that the subject is attracting too many arguments and becoming too time consuming, I would like to close the discussion with the following final comments.
1.    I believe that the market cycle that started on 28 August 2013 (Nifty closing 5285) has already peaked on 29 January 2018 (Nifty closing 11130). The process of bottoming of the cycle has started, and may last many months. In this process, Nifty may or may not record a level higher than 11130. The bottom however shall occur in the 8250-8500 range.
2.    The mid and small cap indices may fall 20-25% more than Nifty in the process, thus erasing most of their outperformance in past five years.
3.    We may see massive rotation of sectors and size in the bottoming process, e.g., from over owned financials & commodities towards under owned Pharma, and from mid and small caps towards large cap etc. But this rotation might not be indicative of the leadership for the next market cycle. The rotation in that sense might only be a trading or defensive strategy.
4.    I shall inter alia keep a close watch on the following data points for tracking the progress of the bottoming process:
(a)   RBI panicking – watch for couple of unscheduled announcement.
(b)   Collapse in G-Sec yields below 7%. This could be preceded by a sharp spike in yields and major unexpected spike in NPA provisioning.
(c)    Crude prices falling sharply.
(d)   Nifty trading 5% or more below 200EDMA for a week.
(e)    Nobody talks about stocks at social gatherings you attend, and you get a strong urge to sell the stock you have been holding for more than 5years.
(f)    There are few large daily moves, ideally over 2% on closing basis, in Nifty.
(g)    S&P500 in USA falls below 2500 and US 10yr yields breach 2.5%.
(h)   USDINR trades above Rs70 for a week.
(i)    BJP losses both Rajasthan and MP assembly elections.
(j)    The Nifty earnings revision ration falls below 0.7.
(k)   INVIX trades above 30 for a week or so.
(l)    Advance Decline ratio falls below 0.65 for two consecutive months.
(m)  Domestic MF net flows are less than Rs5000cr for two consecutive months.

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