Index Update 18.07.2015

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 2015-07-17 png

index momentum best 50 2015-07-17 png

index momentum worst 365 2015-07-17 png

index momentum worst 50 2015-07-17 png

Relative Strength Spread

CNX_500 relative-spread-index 50 2015-07-17 png

Refactored Index Performance

50-day performance, from May 11, 2015 through July 17, 2015:

Equally Weighted Market Cap. Weighted
CNX PHARMA (EQUAL) +26.09% CNX PHARMA (CAP) +14.06%
CNX MEDIA (EQUAL) +12.99% CNX MEDIA (CAP) +11.81%
CNX FMCG (EQUAL) +9.28% CNX INFRA (CAP) +7.91%
CNX CONSUMPTION (EQUAL) +8.28% CNX CONSUMPTION (CAP) +6.59%
CPSE INDEX (EQUAL) +7.68% CNX FINANCE (CAP) +5.68%
NI15 (EQUAL) +5.37% CNX ENERGY (CAP) +5.35%
CNX MNC (EQUAL) +5.21% CNX MNC (CAP) +5.10%
CNX FINANCE (EQUAL) +4.98% CNX BANK (CAP) +4.83%
CNX AUTO (EQUAL) +4.72% CNX PSE (CAP) +4.41%
NSE QUALITY 30 (EQUAL) +4.65% CNX FMCG (CAP) +3.69%
CNX PSE (EQUAL) +4.42% CNX SERVICE (CAP) +3.41%
CNX INFRA (EQUAL) +3.40% NI15 (CAP) +3.34%
CNX ENERGY (EQUAL) +2.35% CPSE INDEX (CAP) +3.17%
NV20 (EQUAL) +2.06% NV20 (CAP) +2.91%
CNX SERVICE (EQUAL) +2.05% CNX COMMODITIES (CAP) +2.03%
CNX IT (EQUAL) +1.45% NSE QUALITY 30 (CAP) +1.79%
CNX BANK (EQUAL) +0.97% CNX AUTO (CAP) +0.18%
CNX COMMODITIES (EQUAL) -0.70% CNX IT (CAP) -0.40%
CNX PSU BANK (EQUAL) -5.65% CNX PSU BANK (CAP) -3.22%
LIX 15 (EQUAL) -7.29% LIX 15 (CAP) -6.92%
LIX15 Midcap (EQUAL) -8.01% LIX15 Midcap (CAP) -7.95%
CNX REALTY (EQUAL) -11.29% CNX METAL (CAP) -14.05%
CNX METAL (EQUAL) -12.95% CNX REALTY (CAP) -14.31%

Trend Model Summary

Index Signal % From Peak Day of Peak
CNX AUTO SHORT
6.88
2015-Jan-27
CNX BANK SHORT
7.11
2015-Jan-27
CNX COMMODITIES SHORT
27.00
2008-Jan-04
CNX CONSUMPTION LONG
0.00
2015-Jul-17
CNX ENERGY SHORT
25.49
2008-Jan-14
CNX FMCG SHORT
7.71
2015-Feb-25
CNX INFRA LONG
45.57
2008-Jan-09
CNX IT LONG
88.20
2000-Feb-21
CNX MEDIA LONG
20.59
2008-Jan-04
CNX METAL LONG
59.82
2008-Jan-04
CNX MNC LONG
0.04
2015-Jul-16
CNX PHARMA LONG
5.00
2015-Apr-08
CNX PSE LONG
23.04
2008-Jan-04
CNX PSU BANK SHORT
37.11
2010-Nov-05
CNX REALTY SHORT
90.41
2008-Jan-14
CNX SERVICE LONG
6.13
2015-Mar-03
MNCs and FMCGs have recouped their drawdowns. PHARMA is not far behind. Its the old economy stocks that are still trying to digest their “India Shining” debt binge.
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Correlation Update 18.07.2015

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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Relative Returns of Midcap Funds

midcap mutual fund relative returns

Relative Returns

We wanted to see how different mutual funds compared to the CNX MIDCAP index. We took the annual returns of a dozen funds and subtracted the annual returns of the CNX MIDCAP index. This gives us an idea of how well the fund was managed.

The above result is a bit surprising. Other than the ICICI Prudential Value Discovery Fund, no other fund consistently beat the CNX MIDCAP index. Of course, returns are only half the story, these numbers don’t tell us the risks that were taken to achieve them.

Besides, none of the top funds in a year hold that position over the next (see this.)

Related: Mutual Fund Performance in Bear Markets

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Ten years is a long time

Yearly Nifty and Defty Returns

nifty.vs.defty.returns

When you look at the last 24 years of returns, the NIFTY gave negative returns for 8 years – 1/3rd of the time.

Holding period matters

The most frequent advice given to new equity investors is that they should at least have a 3-year horizon. The problem with this is that there have been 7 periods where cumulative 3-year returns have been negative or single digits. This sort of advice does nothing to mentally prepare the investor to stay disciplined.

nifty.defty.3.yr.returns

In fact, dollar investors (NRIs, etc.) have had it rougher.

nifty.defty.5.yr.returns

It is only when you look at 7-years and beyond that you start seeing the kind of returns that begin to make sense.

nifty.defty.7.yr.returns

nifty.defty.10.yr.returns

Long-term portfolio but short-term horizon

Very often, advisors set up portfolios looking at this:

nifty.defty.15.yr.returns

Whereas the media is feeding the investor this:

CNX NIFTY.2015-07-15

Long-term investing works if you have the discipline to ignore portfolio returns over very long time horizons. But how many of us have the discipline to stay the course over decades?

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Changes in Contract Size of Equity Derivatives

What happened

SEBI, in its infinite wisdom, concluded that retail investors are speculating too much with derivatives because exposures are too low. So they decided to increase the minimum exposure to Rs. 5 lakh per contract. You can read their press release in the appendix below.

Who is affected?

fo exposure

Anybody who trades naked derivatives will see their margin requirements go up. As you can see from the chart above, most of the exposures are below the new Rs. 5 lakh threshold. Lot-sizes of MRF, BOSCHLTD, EICHERMOT and PAGEIND will come down, but that is of little comfort.

What next?

For exposure margin, you can always buy a bond fund and pledge it with your broker. This way, your margin cash will earn something while it is with your broker.

Second, you can always use option strategies to execute the same view. For example, the total margin requirement to enter a trade in NIFTY futures is around Rs. 17,000/- right now. But when the new regulations kick in, it could go up 3x to 51,000/- Suppose you want to express a bullish view on the NIFTY, instead of buying a naked call or futures contract, you can enter a bull spread to lower the margin requirements.

Here are the numbers from the Zerodha SPAN calculator.

Nifty Futures:
nifty fut margin requirement
Nifty 8500/8600 Call Spread:
nifty call spread margin requirement

The bull spread has lower up-front margin requirements than the naked futures contract, with the added benefit of bounded profit and loss – resulting in lower mark-to-market margin requirements. Traders can use the pledge + spread strategy to bring down their net margin requirements.

Net effect

The net effect of the new regulation could be that naked positions in the futures markets may be replaced by strategies in the options market. The total risk in the system remains constant – like a water balloon, if you squeeze it in one place, it will pop out in another.

We expect retail futures trading volumes to drop and options volumes to pick up once these changes go into effect.

Appendix

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