Archive for November, 2012

The New Sensex

Mr. Axe and Ms. Houghton were the first to build the Axe Houghton Index. Charles DOW’s work came later, sometime in 1880′s. Standard and Poor was also founded during that time. Though it’s not clear who created the market capitalization methodology, but S&P is the largest publisher of market capitalization methodology indices. It was about 100 years later in 1960′s that MSCI took the idea ahead to a global and emerging market. And then there were broad indices from Russell’s etc.

The offer just kept getting larger with Derivatives, and ETF providers. A generation long financial industry built around indexing, a simple average or market capitalization methodology. No wonder the Nifty we knew got rechristened as S&P CNX Nifty. Though the Sensex may have avoided rechristening it also is a market capitalization index.

150 years is a long time for an idea to survive. But if the idea is an extension of human psychology it may become eternal. Now whether this makes it a candidate for Mackay’s grand illusions would be academic blasphemy, but this is what has already been voiced and proved that market capitalization is a flawed indexing approach.

Why?

You can read the complete article in Business Standard

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


Best of Oil & Gas Sector

The plot below displays BSE Oil & Gas and Sensex.

The plot below displays the relative performance of Bse Oil & Gas vs Sensex.

 

Here we have made a comparison of returns of BSE Oil & Gas Sector Index with Sensex. The red line illustrates the relative performance of BSE Oil & Gas vs. Sensex.

Though Oil & Gas sector had periods of outperformance compared to BSE Sensex, the ratio line shows that the Oil & Gas sector has consistently underperformed Sensex for the last 12 months.

Unlike the health care top performing sector we covered the last time(The best of Pharma), the Oil & Gas sector is on the other end of the performance spectrum. And since performance is prone to a reversion, as we have indicated in our mean reversion indexing paper.(Mean Reversion Indexing)

The Oil & Gas sector becomes more interesting for stock picking. The underperformance of the sector is also suggested by the quarterly Jiseki performance rankings of the Oil & Gas sector components among the BSE 500 universe. Around 95% of the components show the ranking below 50 percentile and 6 components are below 20 percentile performance rankings. This not only makes the sector undervalued, but also offers compelling inexpensive valuations to BUY.

Even from a macro economic perspective, India is an oil deficit country. It depends heavily on imports for its domestic crude oil demand. Considering our consumption case (The Crazy Consumption), the demand for crude oil is expected to increase. The buoyancy in global prices should assist the industry players to generate superior profits.

Recommendations

In the Oil & Gas sector Aban Offshore is a stock we recommend to buy. Below we discuss these stocks based on their Jiseki cycle and rankings. The proprietary ranking methodology looks at numerous performance criteria such as price performance, relative out performance, Jiseki rankings.

Aban Offshore

Aban offshore is ranked 18th based on Orpheus proprietary ranking methodology, which makes it the best performer in the sector. The stock has a positive price trend and positive Jiseki cycle since the last 70 days generating a 9.2% return for the period.

From a quarterly Jiseki performance ranking perspective also the stock is below 10 percentile which suggests that despite the intermediate multi week upside, among the BSE 500 stocks ABAN is still undervalued.

ORMI methodology looks at buying the worst negative outliers as they are prone to a positive reversion. The P/E ratio for the stock is low (undervalued) compared to its peer group and it shows a positive ROE.

Technical Review

We are positive on Aban Offshore as the prices continue to move up in a rising channel. Above this RSI momentum is above 40 levels. This is also positive. Prices broke the lower end of the Bollinger band and are at key inflexion point. A price reversal here would re-confirm the positivity. Above 435-440 levels, we remain positive.

Summary

We have 6 running total positive (both Jiseki and price signal positive), 3 running total negative (both Jiseki and price signal negative) and rest neutral (both Jiseki and price signal non-confirming).

Positives (6)

There are 6 components that are positive on both price and Jiseki cycle. Among these components, Aban Offshore and Great Offshore made a profit of approx 9% and 6% in span of around 70 days.

Negatives (3)

There are 3 components that are negative on both price and Jiseki cycle. Hindustan oil showed a loss of approx 3% in 7 days.

Non-Conforming (9)

This leaves us with 9 components that have a non-confirmation between price and Jiseki cycle filters.

Please find below the respective technical charts.

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Indexing: The INDIA 30 Orpheus Risk Management Index (ORMI) is based on proprietary algorithm.

The indices values that are disseminated today are broadly based on market capitalization methodology. Market capitalization methodology has been challenged globally for a few broad reasons. 1) As an asset strengthens it is given more weight 2) As an asset weakens it is given lesser weight. This on one side captures momentum but on the other side suggests investors to focus more on growth compared to value. This increases portfolio risk when market growth slows down or reverses, as has been the case since 2007. When markets contract, the erstwhile top performers push into red for extended period of time causing large drawdowns and emotional pain.

The India 30 Index is based on the above extreme reversion idea i.e. outliers tend to reverse, which suggests that investing is about value picking and extremes are prone to reversion. Our Index extends and fine tunes the idea first mooted by De Bondt and Thaler in their 1981 paper suggesting that 3 year worst losers portfolio tends to outperform the 3 year best winners portfolio.

Coverage India: CNX100, BSE500 traded stocks and Indian Indices.

Ayushi has done her masters in economics from Delhi School of Economics and then completed her Post-Graduation in Finance from National Institute of Securities Markets. She completed her graduation in Economics from Lady Shri Ram College. A keen econometrician, Ayushi enjoys financial modeling and risk management.