Long only, short only & pairs same

The long-only, short-only perspective gives naked signals for individual stocks and indices. Conventionalism talks about loso (long only, short only) and pairs separately. For us at Orpheus, loso is not different from pairs.

Two reasons
First and foremost, every asset is a pair as it is expressed in the local currency (INR, USD, etc). Second, Orpheus Indian numeric rankings are benchmarked to INR and hence the signals generated are pair signals of Nifty components against the INR. Therefore, loso and pairs are the same.

Two differences
First, one (loso) is benchmarked against a currency and other (pairs) may be benchmarked against another stock or asset. Second, loso is about a single trade while pairs need two legs (one on the buy side and the other on sell side).

Time is the same
Both loso and pairs are built around the same time and hence can be used to confirm each other. For example, a positive or bottoming performance cycle for a naked asset (benchmarked against INR), say Tata Power versus the rupee, can be used to confirm performance cycles for a pair, say Nifty versus Tata Power. Tata Power’s underperformance on both suggests Tata Power is ready to weaken against both INR and the Nifty. Reliance–IDEA is another good example. Reliance’s outperformance on both suggests that it is ready to strengthen against both IDEA and INR.

Ranking
Pairs can be ranked in the same way as we rank individual assets. We have illustrated here the ranking of a few stocks according to their 1-year returns. This brings us to defining “top-ranking and the lowest-ranking performance”. Since performance is cyclical, the best asset is the one that outperformed the most over the examined period and is, therefore, the most likely to underperform in the next period of time and vice-a-versa. In our case, Hindalco is the best (best sell) and Suzlon is the worst (best buy). Assuming we all have different risk profiles, a best sell could also mean reduce and a best buy could also mean hold.

Individual assets can be paired
These same individual assets can also be paired to one another with top potential outperformers on the long side paired to the top potential underperformers on the short side. Hence, the top and bottom rankers can be paired in a long Suzlon and short Hindalco pair. Other pairs can also be created: long Jaiprakash and short HDFC Bank, long Reliance and short SBI, etc.

Market, sector outlook
Our overall market perspective remains up but topping as both Nifty and its Rieki (performance cycle) are heading to a top. We consider key 6,300 levels as a potential anticipated turn-resistance level. NIFTYVIX also looks ready to push higher till key 28-30 levels as INR pushed lower towards previous minor lows at 44 levels. The early and mid-economic sectors have falling performance cycles which suggest an ongoing underperformance of the respective sectors, while the late economic cycles are still positive.

The sector Numeric Ranking suggests that consumer durables and BSEBANK are the best sectors to sell (reduce), while BSEOIL and Healthcare are the best sectors to buy (hold), which is also confirmed by Rieki.

Signals
The running loso winner is SBI, which is now up 36 per cent. SBI is followed by NSEBANK and ICICI Bank with 28 per cent and HDFC Bank and Ranbaxy with 22 per cent each. DLF is right behind them with 21 per cent. Now that we saw how loso and pairs are a similar idea, we can understand that the respective returns came against the rupee. The markets are integrated, so why should the strategies be separate? Performance is cyclical owing to time and every asset is a pair.

The author is employed with Orpheus CAPITALS, a global alternative research firm