Surviving the bear

We are now 12 months into a falling market. A market that falls for more than nine months is called a primary BEAR. But, there is an interesting statistic that can be observed now. Assuming all the investors were smart and knew October 2008 was a smart entry, how many investors do you think are still stuck in the market, now that the Nifty has reached June 2009 levels? There were three smart trends.

The first was the one from October 2008 till June 2009 (T1-T3). The second was from March 2009 to June 2009 (T2-T3) and the third from October 2008 till November 2010 (T1-T4). The second trend gave the maximum annualised return, while the third gave the maximum absolute return. Assuming 20 per cent of the investors are smart to get the complete absolute move, only 10-15 per cent could have the shrewdness to capture maximum annualised return and stay out of the market. This leaves a sizeable 55 per cent of investors still stuck with their investments. And, by the way, we assumed 100 per cent of the investing community was invested in October 2008, a wrong assumption.

A correct extrapolation can easily take us to 75 per cent or higher number of market participants still stuck with what they bought in October 2008. Now this is what a non-trending market does. It makes it difficult to survive leading to problems, downsizing, mood lows and murky outlooks.

A chairman of a hedge fund told me in 2009 that they don’t make money when the market goes to sleep. Yesterday, I met another hedge fund executive. He told me that stagnant markets have killed a few more hedge funds. Now, here is where we have a counter-view, a volatile market putting hedge funds out of business and vice-versa. Are markets not doing what they are supposed to do? It’s the investors or traders who need to adapt. According to behavioural finance, investors err both on the optimistic and pessimistic side.

If this was the investor story, the story of traders with leverage is harder. Nifty has tested 5,300 levels for 19 weeks and 4,830 levels for a similar period. The index has moved in a 15-20 per cent range for almost 24 months now. This makes it officially the largest sideways action in this decade. Now, one may say that sideways markets are good for traders, but I have my doubts on how a leveraged trader managed this move, which spiked up and down five per cent randomly. Correctives, as we know are known for their dirty overlapping structures. We have mentioned about sleeping assets, how there are times when assets from certain groups go to sleep. This sleepy Nifty action was rare and required a new approach for investing or trading.

Most traders and investors need systems to identify short and long ideas from such a noisy universe. The Nifty outlook remains negative for us. We continue to look at another last leg lower down to 4,500 levels and potentially lower, after which we see a multi-year bottom on Nifty. A 10-15 per cent down move across sectors does not mean the whole market will be negative. A 10 per cent move on the index can translate into larger moves for the top ranking outperformers like Reliance Industries, Lupin, HDFC, Petronet, Axis Bank, TCS, SUN, BOB, Havells, Bajaj Auto, Mahindra and YES Bank. While the same 10 per cent down move could not really bother the worst rankers, which are already showing buying interest. We will cover the best buy stories next week.

The author is CMT, and Co-Founder, Orpheus CAPITALS, a global alternative research firm