Dissecting Nifty's (Indian Stock Market) Internals

In Stock Market, Price is God and Yet, Stock Market is the only place where majority doesn't believe in God unlike in real life....
O Ashuji...

What makes market very interesting is participants most of the time tend to act differently than what they believe in. In other words - Knowledge doesn't equal to behavior. Participants behavior tends to be cyclical because of "extreme brevity of financial memory" (extreme brevity of financial memory was famously quoted by J K Galbriath in his narrative A Short History of Financial Euphoria). This makes it very interesting to study sectoral moves within indices because it tends to reflect participants behavior. 

DISSECTING NIFTY'S INTERNALS....
As discussed in various previous blogs, world markets had very correlated behavior till 2012 end. Since 2013, many emerging markets have started to tumble gradually. In India's case, there was marked difference in behavior within indices and broad market as such. Broad market has broadly collapsed since January 2013 (few blogs in Jan and Feb did warn about the same), while within Nifty performance has become polarized (fashionable term used by financial comedians on CNBC). There has been marked out performance by Defensives (Broadly includes IT, Pharma, FMCG and to certain extent Auto) while Infra, Capital Goods, Metals, etc collapsed.

Based on my understanding of markets I have divided markets in following way...

Market Sectors & Weights (as on July 2013)

Meaningless sectors are those sectors/stocks which have very small weight, those stocks are down 30-40% at least, they swing very wildly,are troubled in form of government policies, high leverage, etc

Price Performance (monthly % moves) of Nifty

Its widely known that capitulation happens with sharp fall in quality/defensive stocks and durable rally can never be led by broken sectors (in our case "meaningless sectors" - Infra, Cap Goods, etc). With above in perspective lets study price performance of Nifty since 2013.

1) Meaningless Sectors have been falling sharply since 2013. Cap Goods, Cement, Metals & Mining are part of Meaningless Sectors. Any bounce driven by these sectors will be Meaningless as it is happening now. Many are reading too much into recent bounce in metal stocks. To put things into perspective stocks like stocks like Tata Steel didn't have single month positive till August 2013 and stock was down 64% till August. Same with other stocks like Jindal Steel & Power, Hindalco. Reading anything into these stocks is absolutely meaningless. Zombies are normally wild and we tend to get feeling that they are alive. 

2) Financials and Defensives held Nifty till June 2013 while broad markets continued to collapse (all my statements can be corroborated from the price performance table). Post June 2013 there was sharp fall in Financials, while Defensives held on. So only pillar for Nifty now was Core Defensives - IT, Pharma and FMCG accounting for 35% of the weight. 

3) However nature of market changed sharply in August 2013, It could be either capitulation of beginning of capitulation. Pharma/FMCG stocks collapsed in August 2013. Stocks like ITC, Sun Pharma, Lupin ,etc had their biggest monthly fall of 2013 in August. IT stocks accounting for 14% of Index weights held on positive and IT Index hit all time high. 

4) IT remains the only index which survived July-August 2013 storm and makes capitulation picture incomplete. I don't know if it will be global correction which will drive it lower or over-crowding into the sector, but last leg of index capitulation will be driven by IT. 

WHY -- The Most Useless Word in MARKETS....

Asking WHY in market is like arguing with wife and hoping to win....

O Ashuji

Emotions drives in market in term (short/medium) that matters and emotions can be beyond understanding of rational mind. The reason why most people lose money in trading is to constantly search for that WHY...Why markets have fallen, Why Finance Minister did that, Why Ben Bernanke was smiling, Why Interest rates rose...Why is the most used word in financial market and according to me the most useless word. Its human arrogance to constantly understand everything and reasoning behind everything that results in 90-95% traders losing money in market. Its those 5% who are humble enough to be ignorant who make money and accepts supreme and only truth...MARKET IS SUPREME (NEVER QUESTION IT). 

In the words of the late Mike Epstein, a NYSE floor trader who went on to become the president of the Market Technicians Association, and then an adjunct professor at MIT:

This is one of the most important points I've had to learn. For me, at least, "why" Is the most expensive and least valuable information. When you get "why" wrong (and act accordingly) you lose lots of money. You only can know "why" for sure after the fact (when it is useless). You gotta learn to live with the reality that there are (and the market knows) things that are beyond the individual(you)'s ken. The search for "why," whether right or wrong, can just as easily lead you to irrelevancies, or, worse yet, to valid data that will not impact on the market. The best analog is arguing with your wife. Being right is often totally valueless if not counterproductive.

 The above lines are as classic as it can get. Its arrogance to be intellectually satisfied and make money is nemesis for many in market. Making money can be dull and that is not accepted by many in market. LOVING UNLOVED THINGS CAN BE DIFFICULT AND DULL BUT DULL IS BEAUTIFUL IN MARKET....

Make Way for BIIT

Only People who never learn are politicians because their only objective is POWER...
O Ashuji....

BIIT is new BRIC...BIIT Stands for Brazil,India, Indonesia and Turkey. BRIC prospered during 2003-2007 while BIIT is going other way round since 2013. PIIGS was fashionable during 2010-2012, May be its time for BIIT for coming quarters. BIIT countries are having all similar characteristics - collapsing stock market, falling currencies, rising yields. Since acronyms are fashionable, hopefully BIIT will have its share of pie in public debates.

India does Lehman, Asian Crisis and Euro Crisis combined.....

Indian stock market is having its own Lehman moment since Mid-July, while on rupee front its having its Asian Crisis 1997-98 moment. While on yields front spike is begin to replicate what Italy and Spain experienced from late 2010-Mid 2011. I will not go into Data in terms of extent of damage to stock market or Indian rupee. Anyone investing/trading into these markets or watcher of the market would have sense of the same.  

India 10 Year Govt Bond Yield at 9.22% and Greece at 9.5%

NO COMMENTS...

Volatility Genie is out of the bottle....

Market is the greatest teacher...provided we are willing to learn...!!
O Ashuji...

Recent Blogs were stressing quite heavily on coming big move in equities (Nifty and Global) in July/August and we indeed had big move in the market. Nifty fell 4%+ (16 August, 2013), making it as biggest fall since July 2009. Bigger moves have come, VIX has expanded and I believe this is just start of bigger moves since we have had historic compression of volatility (June 2012-Jan 2013).

Blogs Stressing Bigger Moves and expansion of VIX - Best played through options....

1) July or August 2013 - BIG Move in NIFTY...?? (Blog Dated 2nd July, 2013)
http://www.speculationanart.blogspot.in/2013/07/july-or-august-2013-big-move-in-nifty.html

2) August 2013....Setting up for BIG MOVE in Equity Markets...!! (Blog Dated 23rd July, 2013)
 http://www.speculationanart.blogspot.in/2013/07/august-2013setting-up-for-big-move-in.html

3) Is Nifty's Implied Volatility Under Pricing Actual Volatility.....? (Blog Dated 4th July, 2013) Vix has moved from 18.5 to 23.7....
http://www.speculationanart.blogspot.in/2013/07/is-niftys-implied-volatility-under.html


Clustering of Volatility implies moves will be bigger Up & Down....Since moves will be bigger and compressed, trying find reasons for intellectual satisfaction will be futile....

Massive divergence among global equity markets...Sharp Correction Ahead !!!

Stock Markets Always Gives Warning Signs Before Making BIG MOVES....Only Lazy Minds Will Be Surprised...
O Ashuji...


"Markets faith in Bernanke put is strengthened and markets are calm once again. But most global markets are showing big negative divergence with US markets reaching all time highs while most other markets yet to claim their May 2013 highs.".....Blog Dated 23rd July 2013 "August 2013....Setting up for BIG MOVE in Equity Markets...!! "
http://speculationanart.blogspot.in/2013/07/august-2013setting-up-for-big-move-in.html

Recent note by Tom McClellan from McClellan Financial puts across the above point...

U.S. Stocks – One of the Few Markets at “All-time Highs” (2nd August 2013)

The Federal Reserve’s program of buying $85 billion per month of bonds and related debt instruments is assuredly helping to keep the U.S. stock market aloft, and at a time when my longer term models have been saying we are due for a liquidity crunch.  But other countries’ stock markets are not joining in the incremental new highs we have just seen in the DJIA and SP500.  I thought this would be a good time to take a look at what the rest of the world has been doing.

The lead chart above looks at the Japanese and South Korean indices.  Japan saw a big boost to its stock market in sync with the drop in the yen earlier this year, after Prime Minister Abe took office.  But both the Nikkei and the Kospi are now making lower highs.

Elsewhere in Asia, the Taiwan Stock Exchange Weighted Index in Taipei and the Hang Seng Index in Hong Kong are still both below their May 2013 highs.

And Hong Kong is still down below its level in January 2013.

China’s Shanghai B, Singapore’s Strait Times Index, Toronto’s TSX, and Australia’s All Ordinaries Index (not shown) are also below their May highs, and not confirming the show of strength in the U.S.

The same situation exists in the major European markets:

Latin America is no different:

Mexico’s stock market had been looking really strong into its January 2013 top, but has turned really weak since then.  And the Bovespa Index in Brazil made a new 4-year low just a few weeks ago.  It continues to be in a downtrend which dates back to its 2010 top.

So the point is that the rest of the world’s markets are not feeling the benefits of the Fed’s helicopters dropping money every month.  They are suffering from the illiquidity problems which were scheduled for this year, again according to my long term indicators.

The question for U.S. investors is this: Will that $85 billion per month be enough to continue fighting off the swirling vortex of illiquidity that is pulling the rest of the world down?