Category: Your Money

Index Update 02.05.2015

MOMENTUM

We run our proprietary momentum scoring algorithm on indices just like we do on stocks. You can use the momentum scores of sub-indices to get a sense for which sectors have the wind on their backs and those that are facing headwinds.

Traders can pick their longs in sectors with high short-term momentum and their shorts in sectors with low momentum. Investors can use the longer lookback scores to position themselves using our re-factored index Themes.

You can see how the momentum algorithm has performed on individual stocks here.

Here are the best and the worst sub-indices:

index momentum best 365 2015-04-30 png

index momentum best 50 2015-04-30 png

index momentum worst 365 2015-04-30 png

index momentum worst 50 2015-04-30 png

Refactored Index Performance

50-day performance, from February 16, 2015 through April 30, 2015:

Equally Weighted Market Cap. Weighted
CNX MNC (EQUAL) -0.40% CNX INFRA (CAP) -1.12%
CNX FMCG (EQUAL) -1.55% CNX MNC (CAP) -2.13%
CNX INFRA (EQUAL) -3.18% CNX PHARMA (CAP) -2.40%
CNX ENERGY (EQUAL) -3.99% LIX15 Midcap (CAP) -3.33%
CNX BANK (EQUAL) -4.18% CNX BANK (CAP) -4.37%
CNX PSE (EQUAL) -4.32% CNX PSE (CAP) -4.71%
CNX AUTO (EQUAL) -4.44% CNX ENERGY (CAP) -5.23%
LIX15 Midcap (EQUAL) -4.90% CNX COMMODITIES (CAP) -5.49%
CNX CONSUMPTION (EQUAL) -5.11% CNX AUTO (CAP) -5.52%
CPSE INDEX (EQUAL) -5.22% CNX FINANCE (CAP) -5.83%
CNX COMMODITIES (EQUAL) -5.72% CNX METAL (CAP) -6.19%
CNX FINANCE (EQUAL) -5.91% CPSE INDEX (CAP) -6.46%
NI15 (EQUAL) -5.94% LIX 15 (CAP) -6.91%
CNX SERVICE (EQUAL) -6.65% NV20 (CAP) -7.02%
NV20 (EQUAL) -6.85% CNX SERVICE (CAP) -7.03%
LIX 15 (EQUAL) -7.11% CNX CONSUMPTION (CAP) -7.74%
CNX PHARMA (EQUAL) -7.32% NI15 (CAP) -9.32%
CNX MEDIA (EQUAL) -8.45% CNX PSU BANK (CAP) -10.44%
CNX IT (EQUAL) -8.75% CNX REALTY (CAP) -10.54%
CNX PSU BANK (EQUAL) -8.96% CNX FMCG (CAP) -10.99%
CNX METAL (EQUAL) -10.05% CNX MEDIA (CAP) -11.67%
CNX REALTY (EQUAL) -10.79% CNX IT (CAP) -11.73%

Trend Model Summary

Index Signal % From Peak Day of Peak
CNX AUTO SHORT
10.02
2015-Jan-27
CNX BANK SHORT
10.79
2015-Jan-27
CNX ENERGY SHORT
30.64
2008-Jan-14
CNX FMCG SHORT
12.49
2015-Feb-25
CNX INFRA SHORT
49.61
2008-Jan-09
CNX IT SHORT
88.48
2000-Feb-21
CNX MEDIA SHORT
30.24
2008-Jan-04
CNX METAL SHORT
56.27
2008-Jan-04
CNX MNC SHORT
6.12
2015-Mar-12
CNX NIFTY SHORT
9.06
2015-Mar-03
CNX PHARMA SHORT
12.82
2015-Apr-08
CNX PSE SHORT
27.16
2008-Jan-04
CNX REALTY SHORT
89.10
2008-Jan-14
MNCs remain an oasis of calm in a desert landscape filled with fallen stars. Every other sector index has experienced double digit drawdowns from this year’s highs. Some indices are yet to recover from their 2008 blow offs. Are we due for a reversal?
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Correlation Update 02.05.2015

Nifty one year daily return correlations

Nifty one year daily return correlations

Nifty one month daily return correlations

Nifty one month daily return correlations

Bank Nifty one year daily return correlations

Bank Nifty one year daily return correlations

Bank Nifty one month daily return correlations

Bank Nifty one month daily return correlations

Midcap one year daily return correlations

Midcap one year daily return correlations

Midcap one month daily return correlations

Midcap one month daily return correlations

A lot of thick blue squares mean that positive correlations are high. Red squares mean negative correlations are high. Whites are the doldrums.

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Gaps and the Pre-Open Call Auction

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.

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Long-Short Trend Following

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.

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Analyzing the Analysts

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.

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