Timing is everything. Investing a quarter too early can influence the annual return on your portfolio. Now that Hindalco is near its 12-month lows, it reminds us of the great buy opportunity of 2009 when the stock was sub-Rs 40. Before we make our case for on whether to invest now in Hindalco or later, let us tell you some basic sentiment rules. Markets don’t give positive news when the stock is at historical lows. Whether it’s slapping of fines or subdued international aluminium prices, don’t expect news and indications to be clear and confirming.
As investors, you should seek insights rather than facts. It is common that if oil prices remain above $100, alternative energy should benefit. It’s like saying aluminium prices have to stay higher for smelters to remain profitable. These are industry facts; where’s the insight?
Fundamentals could give some insight, but there are so many industry variables that just looking at the company’s balance sheet won’t help us time an entry.
So, what we do? One might say, let’s look at technicals. There is a head and shoulder structure and prices are below moving average, etc. Pattern watching might help, but head and shoulders is a poor pattern, more prone to failure than success. Markets, according to Charles Dow and Elliott, were made of highs and lows, which invariably make a juxtaposed maze of head and shoulder patterns. You can do a trade setup, but you need more to capture a secular multi-month or year reversal.
Can we make the aluminium analysis more holistic and objective? First, The Orpheus Jiseki is an objective indicator that is designed to move up as performance is positive and vice versa. It’s a simple ranking system, which ranks asset performance among sector or group peers. Hindalco is still suggesting a negative quarterly performance cycle (see chart) and it might be early to get positive on the stock. Second, from an inter-market perspective, it’s just an illusion that Hindalco has fallen more than all its sector peers. Hindalco sector peers are not just other Indian aluminium and metal stocks but also the global aluminium commodity (Dow Aluminium) indices and ETFs.
The stock has outperformed compared to many global sector peers since 2009. But, locally the stock has underperformed SAIL and Hindustan Zinc for the similar duration. Hence, all information about international aluminium prices subduing Hindalco is not totally objective. There is a sizeable divergence between international aluminium spot prices and the Hindalco performance. So, we won’t be surprised if we actually see international aluminium prices rise before the reversal in Hindalco prices. The Jiseki cycle is still in a sell for multi-week period and technically the stock has shown lack of real buying pressure. The price structure still looks weak. If you were long BSE500 and short Hindalco, the last pair trade would have delivered 31 per cent from March 20, 2011 till January 29, 2012. Though the pair is favouring Hindalco now, we are looking for an absolute buy, not a relative buy.
Unlike head and shoulders and other technical patterns, cycles have shown consistency. From 1886, aluminium prices have witnessed a 6.5-year cycle. If you extend the 1886 low by 19 cycles of 6.5 years, you reach 2009. Strange coincidence that we had a historical low in aluminium prices there. Aluminium prices have already hit bottom and your first investment idea might be to look at investing in aluminium before you eye Hindalco.
The author is CMT, and Co-Founder, Orpheus CAPITALS, a global alternative research firm
