Category: Your Money

Correlation in the NSE

Meet the worst nightmare of stock-pickers and the best friend of technical traders: Correlation.

This year has been unkind to stock-pickers as markets have tended to move in unison, with price moves increasingly driven by the ebb and flow of investors’ fears (risk-on/risk-off) over the economic environment. We setup a correlation matrix between the NIFTY50 stocks and the index itself to see how we faired this year.

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The vertical axis here is the correlation between individual stocks (dots) with the index.

Now lets do a quick gut-check. The top 3 stocks with the highest correlations with the index were:

RELCAPITAL, ICICIBANK and STER. A quick look at their charts show that it is indeed so. The ones that were closer to zero are: GRASIM, SIEMENS and RANBAXY. They may have been highly volatile, but we are only looking at correlation for now.For stocks that went the other way, we have: HEROMOTOCO, BAJAJ-AUTO and HINDUNILVR.

There’s really no actionable information here, except that instead of tracking close to 30 stocks in the index, you are better off just buying the NIFTYBEES and saving yourself a lot of effort.

For the more inquisitive, the data can be found on google docs.

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Sell in December and go away?

Seasonality affects stocks. It’s a fact that a number of pundits have tried to answer the ‘why?’ and the ‘how?’ of it. But first, lets look at the numbers in this handy chart:

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Now carefully look at December and January. Its almost a guaranty that the market melts up in December and goes down in January.

If you are in the market, enjoy the rally till Christmas and get out! If you are not getting paid to be a hero, then why try to be a superman?

In fact, it looks like you can stay out of the market till April, or maybe comeback only in July? Something to think about…

As to the “why” and the “how”? Well, the US markets enjoy a Santa Claus rally (most of the time) and it does have affect other markets. Also, portfolio managers looking to do some window dressing might be tempted to play high-beta emerging market stocks, so India might be benefiting from that. But who cares? With the global market teetering on the European experiment gone bad, why take changes? Book profits instead!

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“I told you so”

“So although we didn’t join the euro…and, frankly, it’s showing to be a bit of a mess, the break-up of it would be very bad for Britain. So I spend a lot of my time putting pressure on other European leaders to come up with a solution that will actually make sure that there is stability and growth in Europe,” – U.K. Prime Minister David Cameron. (WSJ)

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Urbanization is a Good Thing

Peepli Live

Image via Wikipedia

I watched this movie called Peepli Live, produced by Amir Khan. The story revolves around an indebted farmer who, facing a large debt, contemplates suicide. Its an interesting movie. However, right at the end, there’s commentary as to how millions of low-income farmers are being forced to forgo their (small) land-holdings and migrate to the city. Here’s the thing: I don’t see it as a bad thing that needs to be reversed. Rather, the role of the government and society should be to ease the transition.

Urbanization allows efficient allocation of public services. It is easier to serve a city with 10 schools rather than 10 small villages with 1 school. The problem is that by portraying urbanization as bad, subsistence farming as good we are trying to swim against the tide and misallocating capital (like the insanely evil NREGA.) We would be better off focusing on easing the transition that is already taking place by focusing on city planning.

Subsistence farming was never a good idea. Lack of scale and under-capitalization implies that millions of farmers in India lead a hand-to-mouth existence. We should be focusing on providing better options for livelihood generation rather than putting poverty on the pedestal and trying to wish the problem away.

Urbanization is a good thing and it is going to continue being a predominant trend of our times. Deal with it.

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