Invest Without Emotions
A lot of thick blue squares mean that positive correlations are high. Red squares mean negative correlations are high. Whites are the doldrums.
You should not treat opening prices before and after October 18, 2010 the same.
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.
Nifty opening gaps since 2000:
Notice the shift in the median before and after the auction was introduced (all figures in %):
Before:
After:
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.
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?
Here’s how going long above 50-DMA and short below 50-DMA on the CNX 100 since 2001 compares:
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.
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:
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.
NIFTY returns since 2001:
And the same for the BANK NIFTY since 2006:
NIFTY and BANKNIFTY since 2011:
NIFTY and BANKNIFTY since 2013:
Long-Short Combo (black), Long-Only Combo (red), Long-Only Tactical (green) and Buy & Hold (blue)
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.
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.
The spread between 10yr US Treasuries and Indian Gilts have widened over the last couple of months…
… 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.
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.
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.
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.
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.