In view of certain indicators, including our rankings system, we think it’s time to concentrate on top short ideas. The Nifty is testing key trendline supports (since July 2009) at 5,400-5,450 levels. The bounce-back was weaker than expected. Though we can’t still rule out a few weeks more of choppy and positive action, we would rather be cautious at key supports than otherwise. The old saying that the more we test key supports, the more we are likely to break through these could be valid in the case of Nifty.
This is what seems to be happening. The more time it takes markets to consolidate here, the more likely they are to push to 5,000 before revisiting 5,900-6,000. The markets are entering a seasonally negative period. The Yale Hirsh November to April period is for buying, while the rest is for vacation and negativity. The Dow’s new highs should not positively assist the Sensex, as it was not long back that the Sensex was outperforming the Dow.
Above this, our performance rankings based on price performance over a quarter and half-yearly period suggests NTPC, GMR, Power Grid, Reliance Power, DLF, Punj Lloyd, Reliance Communications and Suzlon as the worst performers and potentially the stocks where things seem too negative. The news is creating extremely depressed valuations and, hence, real accumulation opportunities for the next six to 12-month period.
Barring these eight stocks, which are a part of our ALPHA Hedge portfolio, the rest of the 111 components we track, 43 stocks and indices, are above 70 percentile rankings. This means more than five times the number of long stock ideas are potentially ready to underperform, compared to potential outperformers. Higher rankings mean stocks are topping in performance and because performance is cyclical, the best performers should underperform. Cyclically speaking, the rankings for the top performers topped in November 2010 and have been negative since then.
One of the rules of investment after you make a system is to follow it. The performance cycle system can be applied in three ways. First, it suggests holding the eight worst performers as long-only ideas. The second approach is to reduce and/or close the other 43 best ranking assets that cycles suggest should underperform. The third way is to hedge the long (eight stocks) with the short ideas (43 high-ranked components).
We are listing the early economic sector stock ideas which include banks, financial services and automobile majors. These stocks can be shorted (speculate or hedge), reduced or closed. These being Shriram Transport, PNB, Kotak Mahindra Bank, Adani Enterprises, ICICI Bank, BoB, HDFC Bank, Canara Bank, SBI, Syndicate Bank, IFCI, Mphasis, Tata Motors, LIC Housing, Bajaj Auto, YES Bank, TCS, Axis Bank, Infosys, Federal Bank, Union Bank and M&M. Many of these stocks have already shown a fall, but the performance rankings are still high and suggest continued underperformance.
The author is CMT, and co-founder, Orpheus CAPITALS, a global alternative research firm