BQ Edge | Atul Suri Sees These Signs As A Precursor To Rally

Atul Suri’s Presentation

Election is a big event. But I ask myself what is my competence? Am I a political analyst? Do I understand what will happen? Do I know the outcome? Then the answer is no. We have views, perception, biases which are all personal. But who knows the outcome? The whole question is will Mr. Modi come in or not. But does even Modi know with certainty as he will come or not? So, who are we to do it?

I decided to look beyond. Even if we know the political outcome, what is the impact it has on the market? Two years back I told you, when Hillary Clinton and Donald trump were fighting, that Donald Trump will come. People could have said that U.S. will be finished as he is a crazy guy. But what you had after that was the most amazing bull markets in the U.S. Even if I know the political outcome whether Modi will come back or not, the impact it will have in the markets is a different scenario. So, I said let me put this in the cold storage for some time and look at the market itself. Ultimately, we are animals of the market and let me listen to what the market is telling me.

Elections will be there, and things can move around but where are we geared up as far as market goes? That will answer the question of election and individual portfolios or trades.

One of the ways to listen to markets is through technical analysis. The moment I say technical analysis, everyone starts cringing. Those guys who give Rs 5 target, Rs 2 top losses—that’s the perception everyone has. Unfortunately, that is the reality.

I am a fossil and have been in the market for more than 20 years. When I came, technical analysis had just started but there was no software. So, the charts which I first saw were drawn on graph paper. We never had an intraday, three-five-minute chart. In those days, we had a two-hour ring. By the time, you call broker and gave your order and by the time he reached counter and got his list, it could take him more than 30 minutes. So, there was no way to do such charts and be bullish in first hour and then bearish later. My foundation of technical analysis is graph paper, rulers and pencil. There was no RSI, stochastics. So, I like to look at things in simplicity. I will share it with you, and it will not require any computer to do it.

Technicals study crowd behavior. The two emotions which drives crowd is greed and fear. Sectors will change, computer models will change, fund managers and investors will change but greed and fear remain in human beings. Artificial intelligence or whatever comes but greed and fear will remain for years. Technicals study how human beings behave in these moments of greed and fear. Since those moments change, these patterns will keep repeating. Until greed and fear don’t go away from humanity, technicals will work. When greed and fear go away then markets will stop functioning. So, technicals was not 3-5-minute chart, but it is how crowds behave.

One of the most simplistic way is Dow theory. In modern technical analysis, it was one of the first formalised attempts. It happened in 1900 by a guy called Charles Dow. He put things very simply and they hold true even today. We have to ask: Are we in a bull market? Whether your time frame is a day or one to 10 years, we have to ask are we in sideways consolidation or bear market. That is all which is required. Am I going to buy, sell or do nothing? Buy or sell or hold. These are the three trends in the market.

What is an uptrend or bull market? An uptrend is when the stock prices keep going higher. Prices rise, they correct, but they don’t go back to the previous low. They make a higher high. Trends are required in everything in this market. That is how you make money. Even if you look at fundamentals, you will realize that what you are looking for in stocks are stocks with trending earnings. If you see similar patterns in earnings, you will see that there is a bull market happening in stocks. When earnings go sideways, you will find that even the price behavior is like this. When companies start having negative growth rates, you will see that a downtrend starts. This will be true of earnings and prices. I am speaking of longer-term trends.

Assume I blindfolded you and took you to a 10-storeyed building. I put you on the fifth floor. You don’t know where you are going, I turn you around and move you. You realise that is one step higher. Your mind will say that you are going higher. So, it is an uptrend as every step is higher. When you reach the sixth floor, there is a landing. However, I turn you around I send you to the fifth floor from the sixth floor, so it is a downtrend and it is markets. That is how prices and earnings move. Those are the three basic things and simplistic ways of looking at things.

The MSCI All-Country World Index is like the mothership. When we say global markets, we generally think Dow of the U.S. But the U.S. is not the only market. It is the biggest and may be 50 percent of market caps but that is not the whole world. Let us look at the whole world. This is known as all world index. Let see how global markets are. Our life is just linked to how Dow and Nifty is faring. This index is of 23 developed markets and 24 emerging markets. So, this is sum of 47 global markets. U.S. dominates it because of its size. This has almost 2,757 stocks. So, it is a broad-based market.

We had the financial crisis in 2008 and post that it almost took five years to make a new high and then we had a big bull market. 2018 was a difficult market for us. Small-cap valuations ran up too much, mid-caps valuation was here and, also the Modi factor. But it was not just us; Globally, too, markets were going through a corrective phase. We tend to find reasons which are limited to ourselves. But 2018 has been a difficult year globally. We made a high around January 2018 globally and post that we have corrected. You will notice that though the Nifty made a new high, but most of your portfolio peaked out in January 2018. Post that, thanks to the mid- and small-cap, we would have almost replicated this. Last one-two months have been good. This is the global picture. 2018, was a global corrective rally not just for India.

The MSCI World Index is a sum of 23 developed markets and 24 emerging markets. I have separated the EMs from the developed markets. But the picture is very similar. The amplitude changes. So, the lower one is the world index. The wriggly line is the developed markets. You will see developed markets casting a very big shadow on this. Blue line, which is volatile, is for the EMs which are more volatile. However different the geographies, sizes, and compositions, the patterns remain similar. In 2008, it was at the top and it was a big global rally for all. Correction to 2009, all bottomed out in a one-two months. Again, you had a rally and then many years of consolidation. You will find the picture is almost an overlap.

Do not overestimate the importance of local factors. We tend to get too caught up in the micros. You will find that there is a massive overlap. So, they are loosely correlated. It's not like the Dow or world markets are up then we will also go up. But these markets are loosely correlated. We have elections and budgets. But did you see them in this chart? We have Mahurat trading, new year’s trading. But the broader market direction seems to be very synchronised and moves in a global tandem. So, do not get too stuck up by what is going to happen. Things can move around.

Let’s look at the bigger script and the major components and see how it narrows down to India to the point we are at right now.

Dow is the big guy which makes things move and it had a very good rally. In 2018, the Dow started correcting. However, it has had a very good bull market since December with a sharp reversal. The Dow is interestingly positioned. The Dow has come to a previous high of 26,000 and it is just sub-26,000. My view is that in case the Dow takes this out, you can have a big rally in the U.S. and an almost 15 percent up move. When the largest market with a 50 percent market cap, the earlier chart will automatically change. Do not get too bogged out. The bigger gains are happening here. Is this about North Korea, South Korea or China trade war or Donald trump impeachment? Don’t get into it as they are too many variables and our ability to understand and navigate through those variables is limited. We are in the crux or potential of something very big happening.

This is MSCI emerging markets chart and it concerns us more. India is a subset of this index. 2018 was not just a bad year for India but for all the EMs. Since December, there has been a very good turnaround, thanks to China in the EM index. My view is that this year belongs to EMs. EMs have underperformed and they have a very big catch-up trend yet to happen. We will likely see a very big move in EMs. Since, December-January, this turnaround has happened. Interestingly for India, 2019 can be a very interesting year, thanks to a very big push coming from EMs.

This is important because it is the biggest driver of foreign institutional investor flows. FII flows still matter. For the same period, FII flows were negative. Domestic institutional investors were buyers. In the last 10 days, it is a record. In February, we saw Rs 13,000-14,000 crore of FII flows. Last time we saw a Rs 14,000 crore-plus FII number was in March 2017, when the index had a phenomenal run of 30 percent in the Nifty. I am not predicting that kind of a move, but this trend change in EMs will play out in India in a very big way. When did FII flows start turning positive? If I had told you a month ago that we will have a border problem with Pakistan and there would be a global strike, then what could be your first reaction? You would say FII will withdraw flows. But what happened? What is our ability to predict? The markets are supreme. Post the surgical strike, it has moved up.

I am bringing this down to Nifty on a shorter timeframe. The months of October- January were very difficult months. Things were getting rolled, almost like a juicer. At this time, I sold one stock and bought one stock. What I sold went up 30 percent and what I bought went down 20 percent. But those were the times which were painful and horrible. Every morning I would call my dealer and ask if everything was alright. Because even if there were an iota of bad news, the stock could be down 20 percent. Some guy had to just put out a tweet and the stock could be down 20 percent. So, you only hoped that there are no accidents in your portfolio. In the middle of all this, we did a surgical strike. But market saw record FII flows post that—something we haven't seen in the last two years. 15 days of this month, we could be equaling last months’ FII numbers.

I know we have an event coming up. What was the consensus one months ago? They said markets will be volatile till the elections and then we will have a bull market. Now everyone says that we will have a pre-election rally and post-election we will have a volatile market because earnings will not catch up. So, markets have a way and we must respect it. It is supreme.

My prediction is that the index will make a high soon. It will almost nudge 12,000 on Nifty. It will happen when most people would be waiting for certainty; but certainty will come with a price. That price is that you will not buy it at 10,800, but you will buy it nearer to 12,000. Markets have a way of surprising. I could be wrong. I think 10,800 points should be a very good support for us. If you are taking a market view, then keep that as a focal point. Till markets don’t go below that, just be careful. I am putting this more in terms of the election issue. Don’t get too lost in all the political clutter.

This is our market in the last 15-16 years and this is my long-term view on the market. I don’t like to have a 30-year view as I like to look at the market in segments. It is something which can change our lives in the next three-four years.

Between 2003-2008, we had a lovely bull market. It was more than even 45 degrees. Almost vertical bull market. Then we had a financial crisis. Then we had a market that went sideways which consolidated exactly for five years. So, we had a five-year bull market and a five years consolidation and the market took up and is nudging at its lifetime highs. This is a technical analysis found in Edwards and Magee.

We have seen the making of patterns which, I have seen it happen globally in countries which had massive bull markets like the U.S. or Japan. These are multi-year charts. We had flag patterns. Like a flag, you have a vertical up-moves, you have consolidation and when markets take off consolidation you will have market of similar move. So, we have beautiful up move, a consolidation and a up move. My study predicts a Nifty of 17,000 by 2021. That is a 50 percent up-move in the next three years. It is 15-16 percent compounded. But where we are coming from, even that is good enough. When you have an index, which compounds at this rate, if you are a good stock picker, then there is no reason why you can’t meet those objectives. It is about trying to double your money in three next three years. We are in that process and I do think it is a great opportunity. Don’t get bogged down by micro issues. Look at the bigger picture and it will make you crazy. Keeping out noise is also very important. Look at the big picture.

What is the trigger which will drive us there to the big picture? We saw FII flows. But FII flows can be lumpy and it is an issue of EMs. But the trigger for India continues to be domestic flows. You see FII buy numbers, but see these DIIs sell numbers. Don’t get scared by the sell numbers and don’t say that local investors are selling. DII number is a sum total of many components. There is insurances money, there are various other considerations which go into it. If you look at pure, basic domestic flows, lumpy investors come in and whole numbers get skewed. It is difficult to decipher it. You look at the data and it as too much overlap.

But one number which is pure and clean is the SIP flows. Most portfolios topped out in January 2018. After that, portfolios have been down. If you are large-cap investors, maybe it is 10-15 percent. Midcaps are down 20-30 percent. Small caps are down 40-50 percent. It is a very big hit. Post 2008, that was the first time in 10 years when we were jolted as much. Under normal response, domestic investors should have run away. Initially, you will find that till June-July, the FII flows even started going up even when the markets were falling. In the last three-four months which was most difficult time, even then SIP flows were constant. Everything takes time. SIP flow phenomena is a tsunami. This will be a big trigger. Most people who have SIPs have revisited their SIP at 15-16 levels. People’s portfolio has fallen back by two-three years. But, yet, you will not find dips. There is a certain amount of consistency. The rate or progress has changed. Once markets take off and move and people see that green in their portfolios, you will find this number shoot up. Unless and until, we have an elongated bear market of multiyear or a scam, I feel that this number is here to stay. Hopefully, it will compound or gradually move up which would be very positive for India.

Most domestic investors find themselves in the mid and small caps space. The kind of bull market that we saw in small and midcaps in 2016-17, it is not going to come back again. Only quality midcaps will move, and that universe is very small. If you are in this space and you are just holding on that there will be price as it is a bull market, then there is no guarantee of it. You will see a bull market happening in the index frontline, but it need not touch your portfolio. If you have quality midcaps, you would have started seeing early moves. But the other midcaps won’t have higher prices. Every bear market, you need to shuffle, learn, re-learn. On whatever basis you bought it, people who are stuck and waiting for their price or to emerge, that is not going to happen. You need to be able to move towards quality, even if you are in the midcap or small cap space.

While in Gujarat I saw a portfolio, which was four sheets long, and it had 200 stocks. Just because you are in midcap or small-cap space and you have a bull market, it does not mean your portfolio will do well. You have to be aligned. The more and more time I spend in the market, there is no compromise on quality. In a bull market, the poorer the quality the better the returns. Be careful of small people casting large shadows. Move to quality. I know it comes at a price and it has a high PE. But when company has growth, the PE changes. You can go and look at new highs in market even yesterday. There were always high PE stocks for the last 10-20 years but that is where people have compounded.

Look at HDFC Bank. It has always been expensive. But which is that stock which will be as expensive as HDFC Bank? So, take Canara Bank, Bank of India, etc. and see the outcome. In a bull market, you will earn Re 1 less because they move slowly. But in a bear market, you will save Rs 10 more and that is how cycle of compounding works. All the wealth which has been created, you will find that not only have these stocks gone up, but they fall lesser in the falling markets. Just imagine I buy a stock at Rs 100 and it goes to Rs 200, comes back to Rs 50 and then goes to Rs 300. How likely are you to run through that journey? The answer is no, as on an emotional level, you will not be able to handle. It's always better to go in gradual, compounded stories.

Keeping volatility low is the other side of compounding. Compounding and low volatility go hand in hand. It’s not just returns, but also look at risks and drawdowns. So, be careful. Even in midcaps there are high quality stocks, then stick to it even they have high PE. Good things are expensive.

A small cap index has a 40-50 percent drawdown. 60-70 percent people have lost in their portfolios. So, you will miss the bigger picture if you buy clutter. Stick to quality, you may earn Re 1 less but you will not lose your house. You will see that all great stories on wealth creation have been in that space of compounding with low volatility. You don’t have to be the first and find something new every day. You are much better to sit on HDFC Bank than picking on something over the last eight-10 years.

The Nifty Bank Index in 2017 had a good market and banking sector went into a sideways consolidation. So, it's a rectangular kind of pattern and bank Nifty has broken out to new lifetime highs. Nifty Bank is a lead indicator to the market. I use that as one of the tools for predicting the market by virtue of its weight in the Nifty. If you keep an eye on bank Nifty you will get early indicators. This market which has broken out to lifetime highs, it has a good 10 percent up move even from here. I have created my own indicator where I see the performance of Nifty and Nifty Bank. When Nifty Bank outperforms Nifty, you will find that you will have a case of a sustainable bull market.

The other space which is not talked about and come in compounding phase is consumption. Consumption stocks have run up. Even in falling market, they held your portfolio very good. I'm happy for it as I am overweight consumption. In short run, you may see bit of correction. If you are looking for 3-5 years, apart from banking the second big theme could be consumption. It has already run up. You will say PE are very high and it is expensive, but it doesn’t matter. What grows at good rate becomes cheap as long as there is growth. This are the two major themes you should look at as they are the heart of the market. Stick to quality and compounders and that is how you will create wealth.

These are three phases of market. There was a bull market between 2002 and 2007. The market was up 584 percent on index. Then between 2008-2013, the market was down 10 percent. Then we had a fresh breakout. We have taken NSE 500 and we did some quantitative work. Which stock in a five-year phase was biggest wealth creator? The biggest wealth creator in a five-year move was Unitech. Unitech was up 1.23 lakh percent in that phase, however what happened in the end? Jayco which was second highest wealth creator. Aban Loyd was third highest wealth creator. However, we may like to talk badly about it today, in those times all were chasing those stocks and all were piled on it because this is where the biggest wealth was created. Bhushan Steel, gone. Others also, have in no way between 2008 and today, created any wealth.

This brings me to a beautiful line by Howard Lindzon and that is what my trading style is too. Find a trend, and ultimately you will make money in trends. Trending earnings lead to trending prices. Even Warren Buffett looks for trends. If earnings are trending, you will have a trending price. Look for trends whether you use fundamentals or technical. Have the patience to write the trend. Remember no stock is for life. Get off when the trend ends. Which is something most people can’t do. These are the three things to look for. When Buffett says that he buys stocks for life but when the trend in IBM didn't materialise, he exited the stock. So, nothing is a trend for perpetuity. If you bought it, you can be wrong, you will be wrong. Be humble. The biggest wealth creator could also be your biggest wealth destroyer. It's very important that when the trend changes, be humble enough and learn to exit. This is what 2002 to 2007 taught me.

The interesting phase was between 2008-2013. It were five years where the market was negative 10 percent. Horrible space to be in. In that space too, you will find stocks with over 1,000-percent return. Trends will be there at all phases of market, it is for you to find the trends. You will find it is a very consumption driven rally. It is nothing to do with market. Trends will always be there. Some stocks will be trending, but it is your job to find them. Even if it was a sideways market for five years.

My largest holding is Bajaj Finance and it has been a roller coaster journey. The stock has done well. But when the markets go down everyone says that this is costly, there is an NBFC crisis etc. And I am experiencing the roller coaster ride. The most difficult thing is to sit on it.

So, these three stages have taught me this. Find a trend, ride it and when the trend changes exit it. The methodology you use is up to you, your study.

I am a trend follower. I look for trending earnings and trending prices. My favorite book is Market Wizards by Jack Schwager. Reminiscences of Stock Operator is very often mentioned by many people as their favorite book and that is my second favorite. In Market Wizards I came to know a very good investor trader Ed Seykota. He is a bit of a mentor and he is a master as far as trend following goes. That's where I developed my style. Read this book and it will open out a different world for you. Don’t view technical analysis as Rs 2 stop loss, Rs 5 target. There is much more to it. Michael Covel has beautiful site on similar stuff.

My mantra is cut your losses and let your profits run. It is that simple.

I asked Ed once, that I use fundamentals and technical. How do I combine when there is conflict? He said it doesn’t matter. Even if you toss a coin and make investment decisions, if you stay true to above mantra, be humble enough to cut your losses. The market is supreme. Whenever you are in profits be able to sit on it. This summarises my style in markets.