Technical Analysis for Investors with Nooresh Merani

Mr. Nooresh Merani is a Blogger/Educator/SEBI Registered Research Analyst. He has been writing blogs on tech view by Nooresh from the past 17 years. He has conducted 300 + Technical Analysis Training Workshops across India. He is focused on picking turnarounds/breakouts and major trend changes in Indian Equities esp. within midcaps/small caps.

The session organised by Delhi Chapter of CFA Society India on Oct 1, 2022 started with the importance of investing during the right time followed by identifying the investable sectors/ names, identifying the right times for investing and optimizing cash in the portfolios.

Technical analysis is more than 100 years old with first material written by Mr. Charles Dao. The basic difference between technical analysis and fundamental analysis is the focus on “What?” in technical analysis as compared to “Why?” in fundamental analysis.

1. So why is right time extremely important while investing in financial markets?

“There is no real Alpha in the stock market, everything is cyclical”

• Considering many cycles of financial markets across various geographies, investing towards the bottom of the cycle can double the money in the following 2-3 years whereas, investing around the top of the cycle generally results in least amount of returns or even loss in the near-term.
• However, deploying 100% of funds at the bottom and withdrawing 100% at the top is not possible in the real world.
• The key is to be reasonably right instead of exactly right with a target of 10% – 40% funds deployment near the bottom of the cycle and 10% – 40% withdrawal near the top of the cycle in a staggered manner to maximize the returns.
• He shared the returns of various benchmarks from across various times from last 20 years to highlight the importance of being reasonably right with timing.
• He also focused on a random portfolio with ~4% weightage across 25 stocks which generally beats the active styles of investing especially in the bottom phase of the market.
• Along with timing, taking concentrated bets coupled with patience and ability to digest non-performing stocks is also very important to generate great returns from technical analysis.

2. Sectoral trends & leadership analysis

• Its important to track the performance of sectoral indices vs the broader market to identify sectoral trends.
• It has been observed that sectoral leadership analysis works very well in bull (rising) as well as sideways (moving between 5-10%) market scenarios.
• Investors can look at a basket of stocks from a particular sector in absence of sectoral indices coupled with avoiding the skewness towards leading stocks.
• It is important to look at the sector/ stock’s high/ low during 52 weeks, 3 months as well as month to spot the emerging outperformance trends.
• It is important to note that sectoral outperformance trend generally starts with outperformance of leading stocks and ends when microcap stocks start to see unjustifiable optimism.
• Investors can utilize methods such as sectoral ratio analysis vs broader market (Nifty), custom made equally weighted indices to spot the relative outperformance from the broader market
• Some examples can be FMCG, Pharmaceuticals, IT, Textiles, Metals and Power sectors outperformance during various cycles in last 20 years.

3. So what can be the right time to invest and how one can optimize a cash position in the portfolio?

• The key for looking at froth/ momentum in the market actually lies in the BSE Smallcap index. because it has the lowest of the smallcaps and is not limited by number of stocks.
• The S&P BSE SmallCap is designed to represent the bottom 15% of the total market cap of the S&P BSE AllCap. The index is designed to represent the small-cap segment of India’s stock market.
• When a broader benchmark like Nifty makes lower tops or is struggling to make strong moves and BSE Smallcap Indices continue to make higher highs or much stronger moves. Just after this trend, we generally see a good correction of 10-25% on smallcaps and 5-15% on Nifty.
• However, this divergence can persist from few days to even few months.
• It has been observed that investors can greatly improve their returns during this period by applying strict stop losses, avoiding leverage and fresh cash infusion.
• One can also increase cash formation during the beginning of correction.
• He also shared examples from past 20 years where such divergences were identified for a very short period of time as well as continued for 4-5 months.

Thus, an important indicator is the ratio of BSE Smallcap index to the broader benchmark. It has been identified that whenever this ratio goes close to or above 2, it is a signal of a potential market correction. Whereas a value close to 1 indicates a right time to invest in order to improve returns.