Alpha India revisited

Numeric rankings suggest it is time to reduce small cap, mid caps and technology.

The 4 Jan 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% since the end of the year. Grasim the worst ranked stock delivered 15%. Infosys, TCS and Wipro outperformed the Nifty by registering 3%, 5% and 8% respectively. How a simple ranking system knew that Grasim will deliver, tech 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 indentify performers and illustrate cases like above.

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 4 Jan 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 topping flag for Indian markets. If we sound biased, look at the small capitalization 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.

On the pair side we have illustrated two pairs long Hdfc bank, short Icici bank (5 Oct to 11 Dec) and long Grasim, short L&T (11 Dec and running). The pairs delivered 14% (69 days – annualized 78%) and 28% (63 days – 163% annualized) respectively. How can performance between sector peers diverge so much? We explained this idea in the inefficient pair (23 Nov 2008).

Among stocks, the top performers for the week are auto stocks viz. Tata Motors, M&M. Four of the top 14 ranked 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 topping 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. 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.