Market Technicals: Let It Roll, Baby Roll...BloombergQuintOpinion
Last week I was lunching with my aged brother-in-law.
And he almost choked on a massive piece of phool gobi kebab. I had to scramble to thump him in the back (though lightly, afraid that I might have killed him otherwise also) and managed to get the stuck piece of kebab out of his croaking throat. I saved his life (probably) but all he could do for the rest of the meal was to stare at me with very cross-eyes. I think he probably hated me for the rest of the evening!
Before you jump to any conclusions that it was probably my plan to nix him all along, I shall hasten to state that all I had told him was that I thought the new set of stocks like Tanla and Burger King and Adani Green should be added to the Nifty. I think he started choking just then. But when I added what I thought was a very astute suggestion that, in fact, the entire Adani group should be in the indices, he did that big choking stuff.
Now you may be wondering why this was so, and why did my brother-in-law get so apoplectic with what, to me, seemed like a very-with-it suggestion. After all, these were the 'super stocks' that people were trading in these days and an index should reflect the sentiment of the market, right? Not some frumpy old codgers like those staid companies from the past.
But the real reason was that my brother-in-law is one of those speedily disappearing species called value investors. You see, he owned truckloads of Tata stocks, Birla stocks, and such other ancient relics and was always telling me about how the massive tech-to-value rotation is going to occur over the past ten years. He still talks about his prized possession of an Annual Report of Century Textiles that said on the cover, More than its weight in gold—alluding of course to the share (in case you missed that point). So, the very thought of upstarts like Tanla and Adani stocks getting into a revered index gives him palpitations.
I think I must have let slip, during our lunch conversation, that value is probably dead, pops, and I suspect that is what must have sent him into that paroxysm.
I do believe this market has decimated value investors and converted them all into Super Godots!
Anyway, the reason I tell you all this is because I have run out of reasons to state why the market is going up! I thought it best to regale you with an interesting thing that happened last week. I am simply going to leave the market doing its stuff and be long. Simpler.
My fundamental friends have kind of gone quiet because they are now chary of how far they can push this ‘forward PE’ stuff to justify the current prices. They are all now turning to their technical friends and asking them when this perfidious rally is going to halt. That is a bit unfair, what! Everyone is making some money, portfolios have got repaired, PMS and fund managers are looking respectable once more but still, people want to call this rise deceptive and treacherous?
Be that as it may, the technical guys have no problem handling this rise. They will just reach into their pockets and pull out a couple of more targets for you! And when you meet them after a fortnight, they have another couple of more (higher) levels to offer. But, you say exasperated, you told me 12,500 a month ago, you wail. How do you justify that now?
Herein lies the crux.
Most people in the market are tied down by a certain boundary that they can ascribe to moves. This market has defied those boundaries.
Hence it poses difficulties in dealing with it because matters seem to be “out of bounds”. Technical analysts, those who practice it as they should, do not have this as a problem because they can redefine the boundaries as the market declares its intent to continue to do so. This is a huge advantage, provided, it is recognised as one—and not a shortcoming. People often complain that in technical analysis, there is always a next level. Of course, there is. So, instead of seeing that as a problem, you should really see it as a strength. How do I mean this?
When the market started rallying from March onward, everyone thought it was a rally. And then a higher bottom in April, followed by a higher high. Covid-19 will destroy everything, we were told. The lockdown shall decimate all businesses, we lamented. Earnings are gone, we moaned. But the market did a higher high (August) and then put in a higher bottom (September).
Technical analysts threw out 38% and then 50% and finally 62% retracements at the rising tide. Nothing worked. Fundamental analysts threw valuation and the dire atmosphere at it, to no avail. In the last week, I spoke about target clusters. In a presentation to a private group, I have thrown some time clusters at this trend. But the market is not paying heed to anyone or any of these.
The main point is that price analysis enables you to remain flexible. Earnings and cash-flow analysis and whatever else the fundamental analysis guys use, I feel, makes them a bit dogmatic on what is right and what is not. Good technical analysts don’t suffer from this dogmatism. If the market goes higher, okay. Just revise the stop and continue your long. That’s it.
But who is doing that? Not too many. Starting, I would believe, from around 11,500 or so, people have been lightening up. Are they right? Price wise, they are not. Some are selling here at 13,500. Will they be right? No one knows.
The point is everything we take as a conjecture is probabilistic. But do we think like that? Hell, no. We are all deterministic in the way we think. So, when the market doesn’t do what we think it ought to do, then hey, it is the market that is out of kilter here. Me? I am just being rational, don’t you see?
Which is why I stated at the start, that I don’t have any analysis to proffer for the week gone by. So long as the market wants to continue rising, let it. We just remain for the ride. Eventually, it will turn. We can deal with it when that occurs. Can that be just around the corner? We don’t know. Will it extend further? We don’t know that either.
This market, in hindsight for many, has been great for trend following. It still is. But those that engage in trend forecasting better be aware of the super saying by Robert Miner, ‘’Trade the Market and not your Forecast. ” That is one of the dictums of my life. I strongly suggest that many should make it theirs too.
Currently, at the end of the week, the market continues to state it wants to go higher. Let’s just keep listening to it. Until it says different. For trend followers, the levels to watch for any warning would be 13,500 (short-term) and 13,000 (medium-term).
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.