Numeric rankings: Time to reduce small caps, mid caps and tech stocks
The January 4 yearly outlook carried numeric ranking for 50 Nifty Stocks. The histogram ranked real price performances, pushing the performers to the top and underperformers to the bottom. Sun Pharmaceutical was the top performer, Grasim was the worst and the three technology majors viz. Tata Consultancy Services, Infosys and Wipro were at rank number 6, 7 and 10 respectively. What did the rankings tell us? First; Sun Pharmaceutical being at the top already delivered. And since performance is cyclical, the top performer can’t remain at top for long and will underperform. Second; Grasim was reeling at the bottom of performance in the Nifty 50.
A similar logic of performance can now be extended to the loser. The worst stock cannot remain at the bottom of performance rankings. It is lonely down there. If a stock cannot make an attempt to push up from its worst performance, it has no business being in the index. Third: Since technology leads markets and is a well traded sector, 6, 7 and 10 rankings for the technology trio suggested further space up on relative performance against the Nifty.
After two weeks, this is what happened. Sun did not outperform the Nifty. Both delivered 1 per cent since the end of the year. Grasim the worst ranked stock delivered 15 per cent. Infosys, TCS and Wipro outperformed the Nifty by registering 3 per cent, 5 per cent and 8 per cent respectively. How a simple ranking system knew that Grasim will deliver, technology majors will outperform the Nifty and Sun will not? We tried to answer this question conceptually all of last year through the idea of time fractals. This year we will attempt to identify performers and illustrate cases like above.
Ranking and performance
The fact that technology sector CNXIT was low in rankings at the start of the year was one reason we suggested that there was more upside to come. This is what we said on the January 4 outlook, “We see the market opening positive on January 4 and pushing higher.” Technology is a leading sector, which gives market direction.
Now the respective sector is in the top three performers indicating that the leader is finally taking its preferred slot (see enclosed numeric ranking histogram), getting ready to hoist the topper flag for Indian markets. If we sound biased, look at the small capitalisation sector index ranking. The index is made of the so called “junk stocks”, which lead at market tops. Look at the 2007 top and you will get similar small cap and mid cap leadership in performance. Small cap leadership can’t take us anywhere, but down.
‘Performance cycles’ is a term coined by us at Orpheus. This is another name for time triads, time arbitrage, time fractals but expressed in terms of relative performance. It’s a bounded oscillator that moves in a fixed range say 1-30 (See enclosed performance cycle on TCS). 1 is top relative performance and 30 is the worst performance. The simple idea is that performance is cyclical. A top performer will underperform in future and vice versa. A top relative performer is also the worst value pick and the top relative underperformer is the best value pick. We have carried the quarterly numeric ranking for Nifty 50
Inefficient pairs
On the pair side we have illustrated two pairs long HDFC Bank, short ICICI Bank (October 5 to December 11) and long Grasim, short L&T (December 11 and running). The pairs delivered 14 per cent (69 days – annualised 78 per cent) and 28 per cent (63 days – 163 per cent annualised) respectively. How can performance between sector peers diverge so much? We explained this idea in the inefficient pair (November 23, 2008).
Gainers and losers
Among stocks, the top performers for the week are auto stocks viz. Tata Motors and M&M. Four of the top 14 stocks are metal majors (Tisco, Sterlite, Sail and Jindal Steel). The top ten also includes the tech majors viz. Infosys, TCS and Wipro. All these top ranked stocks are the potential underperformers for the weeks ahead and should be excellent short opportunities, now that we have reinforced our topper scenario for the market. Reliance Infrastructure, Maruti and HDFC are at the bottom of numeric ranking and remain the top potential outperformers in the weeks ahead.
Sectoral calls
On the sector front, markets witnessed a clear rotation in the rankings. CNXIT and mid cap index pushed higher in numeric rankings, while banks and consumer durables pushed lower to the end of the list. It is time to reduce small cap, mid cap and technology.
The author is a Chartered Market Technician and Co-Founder of Orpheus Capitals, a global alternative research company
