10 Trading Forecasts For 2021BloombergQuintOpinion
2020 was a hugely contrasting year. Both the fall and the recovery from it were unprecedented. This had a tremendous impact on sentiments. The trough of March was a culmination of the decline that began in December 2018. The unthinkable also happened - in that, the blue-chip stocks also fell over 50%. This is something that no one, repeat no one had factored and proved to be a very rude shock. It led to a feeling, when Covid-19 set in, that it was a doomed year ahead.
Thus, when recovery came in out of the blue, no one, repeat, no one, was prepared for it. For the first two months, it seemed like an oversold bounce; the next two seemed like some sort of stabilisation; the following two were nibbling times as fear of further declines began retreating. By the time one was just girding up to buy, the market went into complete overdrive and screeched upward like a banshee on steroids. Almost 70% of the year’s inflow from FIIs happened in the last two months. That put paid to a lot of plans and introduced the fear of missing out or FOMO element which led to a lot of trading and momentum investing.
Sentiment has gone berserk.
Cryptocurrency, the classic indicator of risk-on, surged to new all-time highs. Tesla stock reaches the moon before their rocket does. New themes like environmental, social, and corporate governance or ESG and clean energy became the new buzzwords. New-age technology has become a craze.
Covid-19 has spawned a new breed of traders who have tasted nothing but success.
This will lead to overtrading and overconfidence. In an area that demands deep awareness and a quick-thinking mind, rapid success (and outsized ones in some cases) will create complacency and carelessness that are precursors of big personal debacles ahead. This shall happen to traders who have no concept of how damaging market declines can be on the bank account. All they have seen in the last many months are one-day reactions followed by new highs.
The newly joined traders are certainly overbought in terms of their resources - both monetary and mental.
But, luck is on their side right now. A Covid-19 vaccine is on its way and everyone expects normalcy to return very soon. News flow has been improving, the economy shows some recovery. Covid-19 was a war-like situation and history tells us that post-war boom is always a feature. So perhaps, from the point of view of history, 2021 may continue to be a good year on the back of recovering corporate sector performances that seem to be much stronger than expected. Interest rates are expected to remain benign and inflation across the globe is also soft. The continued stimulus is depressing the Dollar and it is now seen breaking an all-important support level of 88 on the DXY charts. Where that will lead is a big question mark. For the moment, however, everyone is enjoying the upside caused by the current fall in the Dollar.
The market has been ahead of all this news, almost as though it has anticipated these changes! We all know that the Indian economy is to contract but the market seems unmindful of it. This is leading to very optimistic forecasts of 30% profit growth. But history also tells us that the start- of- the- year forecasts are always bullish and they are all wound down as the year progresses.
But paradigms are changing. The Nifty is trading at an unprecedented TTM of 35-38x. No one can quite handle that so they come out with the convenient forward PE and each one has their own figures ranging from 20 to 25, depending upon how far into time and how much earnings growth you project. These are exercises of convenience, of creating solace leading to a false sense of confidence.
There are forecasts for gold for continued new highs. Time was when gold spurted either during festival seasons (September to March) or due to a global crisis of some kind. But now everyone is speaking of gold as an investment asset of its own. The persistence of the trend across the globe is making people feel confident of continued advances, undisturbed by volatility.
The consistent reduction in interest rates is forcing the usually-Fixed Deposit oriented investors towards the equity markets. They will prefer the mutual fund route so that may assure the domestic funds some continued inflow in 2021. But some of them will also gravitate to trying their own hand at markets and these guys will flounder between investment and trading and will probably end up making a mess of both.
Where is all this leading to? To an inevitable conclusion that nothing that we held to be true over the past decades holds true anymore!
Buy and Hold seems to be working only for select stocks. Valuations parameters that one held to be true are being whacked out of the park. Technology inroads are making market cycles shorter and shorter and even the traditional ways of trading have stopped working. Machines are now more than 50% of the volumes. With fund flow continuing into the DIIs, fund managers are being forced to look wider and wider to create some alpha. Correlations between asset classes have stopped working. Unthinkable events like negative interest rates or negative commodity prices are occurring. The TV networks are becoming noisier by the day, WhatsApp messages are travelling faster and fly-by-night advisors are milking the gullible through Telegram channels and the wafer-thin training programs on YouTube are multiplying faster than ever before.
Finally some forecasts, subject to change any time of course!
- First and most important, trading will continue to replace investments at possibly an even faster pace in 2021.
- Second, all old beliefs of the past decades are getting overwritten. So you will have to throw away your old playbook which served you well until recently. Unfortunately, not time enough to prepare a new playbook. So you will have to learn to wing it.
- Third, focus on the short term is going to increase exponentially. This means fundamentals will take a back seat and technicals will become even more prominent. Technology improvements are greatly aiding significant changes to computing power and therefore technical analysts themselves need to upgrade. Sticking to some old moving average method or some RSI levels is going to see you trounced.
- Fourth, the usual noise will continue, but more and more everyone (including all those who are ‘supposed’ to know) will start guessing because nothing that worked in the past is working quite the same way now. So, it is better that everyone develops their own skills at guessing. After all, if it all comes down to guessing, better to rely on your own rather than someone else’s, right?
- Fifth, a lot more people will be forced to start learning about the markets and therefore it will be a good time for trainers. Many will dive into becoming trainers and some will succeed too, because their customers have no idea whether what is being doled out is good or not.
- Sixth, PMS schemes and boutique investment advisors will mushroom. Do your diligence checks before entrusting money to someone. It’s not just about profits. It is a lot about the process and maturity of the advisor. Choose carefully.
- Seven, coverage of small-cap stocks will increase greatly. That will bring in tnew investors. So mid and small-cap stocks will greatly outperform the large caps in the coming year.
- Eight, the moves of the Dollar will guide many of the global financial market moves. So add that into your items to track this year. Learn more about it. Chances are that you will be able to guess trends a lot better.
- Nine, political fallouts will occur and social dissonance will increase and more than any other factor, these will provide the inputs for periodic market correction. So we must certainly track the various attempts disturbances and attempt at destabilisations as they shall stall the reform process.
- Ten, watch the high-low of the first quarter of the year. The break of this range will indicate the direction that the rest of the year.
Let’s see how all those work out. Cheers.
CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise and NeoTrader; and chief investment officer of Plus Delta Portfolios.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.