Author: shyam

Gaps and the Pre-Open Call Auction

shyam May 1, 2015

tl;dr

You should not treat opening prices before and after October 18, 2010 the same.

Call Auction in the pre-open session

If you don’t know how the pre-open session works, here’s a good explainer from BSE:

When you run back-tests that use the opening price, this change will most likely trip you up.

Before and after

Nifty opening gaps since 2000:

CNX NIFTY.gap

Notice the shift in the median before and after the auction was introduced (all figures in %):
gap summary

Before:
CNX NIFTY.hist.2

CNX NIFTY.hist.3

After:

CNX NIFTY.hist.4

Conclusion

One way to make the opening prices comparable is to take tick-level data and compute a synthetic opening price yourself, just like how the closing price in computed. And you can use this synthetic open across your entire data set.

Otherwise, you will have to take you back-test results with a healthy dose of skepticism and make sure that there is enough room in your analysis to account for this.

Categories Investing Insight, Your Money Tags quant

Long-Short Trend Following

shyam April 30, 2015

Prior Work

We had discussed the SMA On/Off Switch and its ability to escape the worst days. Based on this finding, we setup a Tactical Theme that would go long NIFTYBEES and JUNIORBEES if the CNX 100 index is trading above its 50-day SMA and move into LIQUIDBEES otherwise.

What if, we could go long and short?

Naive Long-Short

Here’s how going long above 50-DMA and short below 50-DMA on the CNX 100 since 2001 compares:

CNX 100.02-Jan-2007.28-Apr-2015.long.short
Long-Short SMA (black), Long-Only SMA (red) and Buy & Hold (green)

It looks like going both long and short is not significantly better than a long-only tactical strategy.

Long-Short with Volatility

But what if, we add a volatility metric into the mix? The logic here is that corrections are preceded by a bout of volatility. So if you go short if either or the volatility signal or the 50-DMA indicates a negative bias and long otherwise:

CNX 100.02-Jan-2007.28-Apr-2015.long.short.volatility
Long-Short SMA w/ Volatility (black), Long-Only SMA w/ Volatility (red), Long-Only SMA (green) and Buy & Hold (blue)

It looks like there is significant alpha in the combination approach.

Long-Short NIFTY and BANKNIFTY

NIFTY returns since 2001:
CNX NIFTY.01-Jan-2001.28-Apr-2015.long.short.volatility

And the same for the BANK NIFTY since 2006:

CNX BANK.12-Jan-2006.28-Apr-2015.long.short.volatility

NIFTY and BANKNIFTY since 2011:

CNX NIFTY.03-Jan-2011.28-Apr-2015.long.short.volatility

CNX BANK.03-Jan-2011.28-Apr-2015.long.short.volatility

NIFTY and BANKNIFTY since 2013:

CNX NIFTY.01-Jan-2013.28-Apr-2015.long.short.volatility

CNX BANK.01-Jan-2013.28-Apr-2015.long.short.volatility
Long-Short Combo (black), Long-Only Combo (red), Long-Only Tactical (green) and Buy & Hold (blue)

Conclusion

It appears that there is long-term alpha in using a combination of volatility and 50-DMA to implement a long-short strategy. To put this to test using real-time data, we have created a theme to make it easy for you to follow along: Trend Long-Short.

Categories Investing Insight, Your Money Tags BANKNIFTY, NIFTY, quant, theme

Analyzing the Analysts

shyam April 29, 2015

When we analyzed the price targets of various research analysts for last year, this is what we found:

Most ‘BUY’ ratings were on stocks that had already gone up significantly. The previous 100-day returns before a ‘BUY’ was announced were +23.29% (mean) and +21.49% (median). The next 100-day returns of the same set of stocks were +18.24% (mean) / +17.98% (median.)

For stocks rated ‘SELL’, the previous 100-day returns were +16.93%/+18.47% (mean/median). And they ended up under-performing the ‘BUY’ pool of stocks: +12.50%/+14.14%. But only a brave soul would have gone short in 2014. Even the next 5-day returns for ‘SELL’ rated stocks were +1.22%/0.77%.

One can be excused for thinking that analysts were just chasing momentum, given the above summaries.

BUY’s did not seem to have a dominant short-term effect:
5-day : +0.97%/+0.76%
20-day: +3.78%/+2.90%
50-day: +11.03%/+11.40%

On an average, they did out-perform the CNX 100 index. Next 100-day CNX 100 returns:
BUYs: +12.33%/+11.67%
SELLs: +13.23%/+12.04%

Out of the 718 ratings we analyzed for the year 2014, 565 (~79%) were BUYs and 12.25% were SELLs.

It will be interesting to see how they do this year.

You can download the data here.

Categories Investing Insight, Your Money

Macro Update 25.04.2015

shyam April 25, 2015

US Treasuries vs. Gilt Spread

The spread between 10yr US Treasuries and Indian Gilts have widened over the last couple of months…

Institutional Investments

… probably because FPIs were net sellers of debt so far this month. But foreign flows had slowed down in April last year as well, so not sure if this is a seasonal thing.

But Domestic institutional investors are in position to pick up the slack if the April swoon leads to a longer lull.

Oil

Fall in global oil prices were a tail-wind last year. But is the tide about to turn? Oil has been inching up since its January lows.

Gold

The fate of Gold is going to be decided by Janet Yellen. Rising rates are no friends of precious metals.

And Gold in Indian Rupees are back at Jan 2013 levels.

USDINR

If US rates go up, will the Rupee see 64? INR has been steadily losing ground to the dollar over the last year.

The Dollar Index (DXY) has shot up like a rocket this year. One can argue that INR has actually appreciated against other currencies.

Outlook

Rising oil prices and the US dollar, combined with a sense of disappointment on the reforms front could flat-line markets. Poor monsoons could put further pressure on the inflation front, and not to mention the government balance-sheet as it would be forced to provide relief to drought-stricken farmers. Bulls do not have much to go on at this point given that valuations are stretched and the current earnings season has been a disappointment so far.

Categories Your Money Tags macro

Weekly Recap: Paradox of Thrift

shyam April 25, 2015

world.2015-4-17.2015-4-24

Equities

Major
DAX(DEU)	+1.05%
CAC(FRA)	+1.13%
UKX(GBR)	+1.09%
NKY(JPN)	+1.87%
SPX(USA)	+2.18%

MINTs
JCI(IDN)	+0.46%
INMEX(MEX)	+1.18%
NGSEINDX(NGA)	-1.48%
XU030(TUR)	+3.81%

BRICS
IBOV(BRA)	+4.90%
SHCOMP(CHN)	+2.48%
NIFTY(IND)	-3.49%
INDEXCF(RUS)	+1.58%
TOP40(ZAF)	+3.10%

Commodities

Energy
Heating Oil	+2.53%
RBOB Gasoline	+4.33%
Brent Crude Oil	+2.97%
Ethanol	-1.12%
Natural Gas	-4.16%
WTI Crude Oil	+3.44%

Metals
Copper	-1.08%
Palladium	-1.66%
Gold 100oz	-2.15%
Silver 5000oz	-3.07%
Platinum	-3.70%

Currencies

USDEUR:-0.78% USDJPY:+0.13%

MINTs
USDIDR(IDN)	+0.56%
USDMXN(MEX)	+0.16%
USDNGN(NGA)	-0.25%
USDTRY(TUR)	+1.08%

BRICS
USDBRL(BRA)	-3.55%
USDCNY(CHN)	-0.05%
USDINR(IND)	+1.92%
USDRUB(RUS)	-2.42%
USDZAR(ZAF)	+0.35%

Agricultural
Corn	-4.14%
Cotton	+5.64%
Feeder Cattle	+1.27%
Wheat	-1.57%
Soybean Meal	-0.10%
Sugar #11	+0.00%
Coffee (Robusta)	-0.22%
White Sugar	+0.78%
Cattle	+2.17%
Cocoa	+1.29%
Coffee (Arabica)	+1.83%
Lean Hogs	+1.58%
Lumber	+3.72%
Orange Juice	-1.00%
Soybeans	+0.03%

Credit Indices

Index	Change
Markit CDX EM	+0.02%
Markit CDX NA HY	+0.02%
Markit CDX NA IG	+0.08%
Markit iTraxx Asia ex-Japan IG	+0.29%
Markit iTraxx Australia	+2.10%
Markit iTraxx Europe	+2.28%
Markit iTraxx Europe Crossover	-0.19%
Markit iTraxx Japan	-0.15%
Markit iTraxx SovX Western Europe	+2.70%
Markit LCDX (Loan CDS)	+0.00%
Markit MCDX (Municipal CDS)	-1.28%

With the Opposition (Congress, mostly) blocking pretty much every reform measure, the Modi magic is dead by a thousand cuts.
A weak Monsoon could stoke inflation and dampen rate-cut expectations.
Indian equity markets were a aberration in a sea of green…

Nifty Heatmap

Index Returns

For a deeper dive into indices, check out our weekly Index Update.

Advance Decline

advance.decline.line2.2015-4-17.2015-4-24

Market Cap Decile Performance

Decile	Mkt. Cap.	Adv/Decl
1 (micro)	-3.87%	70/63
2	-2.51%	63/70
3	-2.25%	60/73
4	-3.61%	58/74
5	-3.80%	61/72
6	-3.02%	58/75
7	-3.28%	58/74
8	-3.48%	58/75
9	-3.61%	62/71
10 (mega)	-3.65%	65/68

A clean vertical slice…

Top Winners and Losers

GLENMARK	+3.61%
M&MFIN	+5.70%
TATASTEEL	+7.08%
BOSCHLTD	-14.14%
MCDOWELL-N	-11.16%
WIPRO	-10.85%

Who would’ve thunk that Bosch can collapse like a mid-cap momentum stock?

ETF Performance

GOLDBEES	+0.65%
INFRABEES	-0.93%
BANKBEES	-1.95%
JUNIORBEES	-2.00%
CPSEETF	-3.58%
NIFTYBEES	-3.87%
PSUBNKBEES	-5.98%

Gold held steady because the rupee collapsed…

Yield Curve

Bond Indices

Sub Index	Change in YTM	Total Return(%)
GSEC TB	+0.08	+0.12%
GSEC SUB 1-3	-0.07	+0.03%
GSEC SUB 3-8	+0.02	-0.02%
GSEC SUB 8	+0.03	+0.05%

The curve barely budged…

Investment Theme Performance

Tactical CNX 100	+0.00%
Balance Sheet Strength	-3.09%
Textile, Metals, Chemicals, Paper and Energy Quality to Price	-3.15%
CNX 100 Enterprise Yield	-4.33%
High Beta	-4.49%
Magic Formula	-4.97%
Auto and Consumer Goods Quality to Price	-4.98%
Media, Health, IT, Telecom, Services, Pharma Quality To Price	-5.33%
ASK Life	-5.89%
ADAG stocks	-6.12%
Momentum	-6.36%
Quality to Price	-6.62%
Low Volatility	-7.41%
Next Trillion	-7.53%
Financial Strength Value	-8.44%
PPFAS Long Term Value	-11.60%

The only investment strategy that did well was the one that went into cash last week…

Equity Mutual Funds

Best
Religare Invesco Pan European Equity Fund – Regular Plan – Growth Option	+3.89%
Franklin India Feeder – Franklin U.S. Opportunities Fund – Growth	+3.88%
Reliance Japan Equity Fund- Growth Plan- Growth Option	+3.22%
Principal Global Opportunities Fund-Growth Option	+2.95%
Franklin India Feeder – Franklin European Growth Fund – Growth	+2.87%
Religare Invesco Global Equity Income Fund – Regular Plan – Growth	+2.83%
Mirae Asset China Advantage Fund – Regular Plan Growth Option	+2.74%

Worst
DSP BlackRock Small and Mid Cap Fund – Regular Plan – Growth	-5.30%
Birla Sun Life India Opportunities Fund-Plan B (Growth)	-5.45%
Sundaram S.M.I.L.E.Fund-iNST Growth	-5.45%
Sundaram S.M.I.L.E.Fund-Growth	-5.46%
SBI INFRASTRUCTURE FUND – SERIES I – REGULAR PLAN – GROWTH (6/7/2007)	-5.71%
Sundaram Growth Fund-Growth	-6.19%
MOSt Focused Midcap 30-Regular Plan-Growth Option	-6.71%

Bond Mutual Funds

Best
Escorts Income Plan-Growth	+0.28%
Franklin India Dynamic Accrual Fund-Growth	+0.25%
ICICI Prudential Dynamic Bond Fund – Premium Plus Growth	+0.24%
ICICI Prudential Dynamic Bond Fund – Regular Plan – Growth	+0.22%
Franklin India Income Builder Account-Growth	+0.20%
UTI Medium Term Fund – Regular Plan – Growth Option	+0.20%
Edelweiss Gilt Fund – Growth Option	+0.18%

Worst
SUNDARAM GILT FUND (Growth. OPTION)	+0.03%
Baroda Pioneer Dynamic Bond Fund – Plan A – Growth Option	-0.02%
Sundaram Flexible Fund -Flexible Income Plan Regular – Growth	-0.04%
HDFC Inflation Indexed Bond Fund – Regular Growth	-0.12%
DWS Inflation Indexed Bond Fund- Regular Plan- Growth	-0.17%
SBI INFLATION INDEXED BOND FUND – REGULAR PLAN – GROWTH	-0.17%
BARODA PIONEER INCOME FUND – Plan A – Growth Option	-0.39%

Thought for the weekend

When governments introduce austerity measures, they are trying to reduce their net borrowing – in effect, they are raising their savings rate. Such attempts to increase saving actually lead to lower, not higher, investment – and since saving equals investment, actual savings fall. So what we have here is an empirical confirmation of the existence of the paradox of thrift!

Source: Crowding In and the Paradox of Thrift

Categories Your Money Tags weekly