Alpha, the net performance of a component against the benchmark is an overlooked tool.

If Nifty is down 7.4% for the year, the real stock picks were the one which delivered more than 10% (assuming trading costs). If you don’t track, trade or make systems to track and isolate this alpha, your toolbox is lacking an important instrument. Hard work, volatility and emotion and if you end up with stocks that delivered negative 10% against Nifty year to date, it’s time for review.

If alpha was so important, then why don’t newspapers and websites publish it? Why alpha gets featured annually but not as intraday or daily event? Why don’t we carry alpha trackers every day along with the top movers, top losers, and top volume picks? What stops us from doing it? “I am not an investor, I am a leveraged trader, I play for 100 points on Nifty” Even as a derivative trader, don’t you need to know which one of your futures will deliver more returns then the other? Which short will make more money, Tata Motors or Maruti? Which long will make more money TCS or Infosys? Trader repeats “I specialize on Nifty and am happy with 24% leveraged returns for the year”. It’s not hard to deliver gains when markets move up, it’s harder to attempt to deliver more return per unit of risk or in other words deliver alpha. Tata motors delivered 10% more than Nifty year to date.

Now the trader may say “Who knows?” Nobody knows what’s going to happen, then why do we claim to get excited about gains early part of the year, unaware of what lies ahead in the year. The good think about being in performers whether on the long or the short side is that we burn less and we deliver more. Orpheus is in no way trying to dissuade you from doing what are you already doing profitably and consistently, what we are telling you is about confluence, combining ideas. Shorting something that gives 10% more than Nifty is worth the effort.

Above this, it’s not that difficult. On 15 Jan we said “Among stocks, the top performers for the week are auto stocks viz. Tata Motors, M&M. Four of the top 14 ranked stocks are metal majors (Tisco, Sterlite, Sail and Jindal Steel). The top ten also includes the tech majors viz. Infosys, Tcs and Wipro. All these top ranked stocks are the potential underperformers for the weeks ahead and should be excellent short opportunities, now that we have reinforced our topping scenario for the market.”

Orpheus top shorts delivered and did not disappoint. Tata Motors (-16.6%), Sterlite (-14.1%), Sail (-11.4%), Mahindra (-10%), Jindal Steel (-9.5%), Tisco (-8.8%), Infosys (-7%), Wipro (-5.6%), TCS (0.2%). However, what we take pride in is the fact that netted for the Nifty losses of 7.4% for the same period, 6 of the 9 picks delivered. More interesting is the long side. In the same report we said “Reliance Infrastructure, Maruti and HDFC are at the bottom of numeric ranking and remain the top potential outperformers in the weeks ahead.” Barring Maruti which was down 12% both Reliance Infrastructure and HDFC gained (alpha) 8.2% and 1.5% against the Nifty.

Absolutely speaking any bounce back now on markets should be the last for the year. We ofcourse can be wrong and prefer to judged on alpha (relative performance) as relative accountability is fine with us. According to Alpha India the top outperformers in the weeks ahead should be Reliance Communications, Reliance Infrastructure, SBI, HDFC, ONGC, Larsen, Jaiprakash, Maruti, Bharti and DLF. On the short side (reduce side), we have Ranbaxy, ACC, Sail, TISCO, Wipro, Tata Motors, SUN, TCS, M&M and Infosys. Performance like everything follows the 80-20 rule, 80% of your gains are going to come from 20% of your portfolio. So why not give it a thought?

The latest Alpha India carries Numeric Rankings for Nifty stocks, for Indian Sectors, change in rankings from week over week, performance cycles, absolute change in prices week over week, long only – short only signals, running pair signals and pairs update on Tisco vs. Sterlite (delivered 25% since 3 Nov 2009), new fresh signals and lots more.

Performance cycles

ALPHA is a pair trading, long only – short only strategy and Numeric Ranking product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.

TIME ARBITRAGE portfolio has 18 pairs CNXIT-NIFTY, RELIANCE-NIFTY, TCS-NIFTY, ONGC-NIFTY, INFOSYS-CNXIT, ONGC-RELIANCE, HDBK-ICBK, BHEL-ACC, GRAS-LNT, HLL-ITC, SBI-HDFC, NIFTY-STERLITE, NIFTY-HDBK, SBI-NIFTY, BHEL-NIFTY, NIFTY-ACC, TCS-CNXIT and SBI-HDBK. Minor degree averaged 10-30 days and intermediate degree trade averages above 30 days. The legs should be risk weighted before any implementation. We are assuming a running stop loss of 4% per traded pair. CNXIT/INFOSYS +A-B means LONG CNXIT, SHORT INFOSYS. While CNXIT/INFOSYS –A+B means SHORT CNXIT, LONG INFOSYS.

LONG ONLY, SHORT ONLY portfolio covers NIFTY, CNXIT, NSEBANK, RELIANCE, INFOSYS, ONGC, CIPLA, ICICI BANK, HDFC BANK, TISCO, BHEL, ACC, GRASIM, L&T, HLL, ITC, SBI, HDFC, STERLITE

STOP LOSS AND EXITS are activated at 4%

Performance cycles is a term coined by Orpheus Capitals. This is another name for time triads, time arbitrage, time fractals but expressed in terms of relative performance. It’s a bounded oscillator that moves in a range say from 1 to 30. 1 is top relative performance and 30 is worst performance. The idea is that performance is cyclical. A top performer will underperform in future and vice versa. A top relative performer is also the worst value pick and the top relative underperformer is the best value pick.

*This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.

Time is a social construct and we see time through the life and nature around us. Understanding time can not only give a unifying theory to research of a few thousand years, but also help us understand the world we live in. Time evolves, oscillates and continues. Time comes before everything, but we don’t see it. We just feel it. We believe what we see and this is why understanding what we don’t see is a challenge. Understanding time could bring more than a conventional thought down, it’s a revolution, which could rock the very foundation of economic thought or the geometric structures Euclid laid down in 300 BC. We are at the start of the journey, but if time is indeed the real mathematics, we could see high accuracy in time forecasts.

Econohistory is the study of performance cycles between assets. Cycles are the generic name for time fractals. Performance cycles can be studied for any time frame, for as small as a tick data to multiyear time frames. This objective approach to performance cyclicality can explain why intermarket analysis is an area of study? Why bonds and commodities tend to be inversely related? What is the connection of Oil with world markets? Why the world watches DOW sometimes and sometimes a 500 point effect on DOW seems to have no impact? Why correlation between assets moves from near perfect at times to weak correlation at other times? Why the same news has different impact on a stock or market? Why equities and bond trend together and why the relationship decouples sometime? When will inflation become deflation, disinflation, stagflation or hyperinflation? When and why does gold outperform and underperform silver? Econohistory can objectively answer these questions, using performance cycles, time fractals and past data. Economic history is mathematical.

To login to the member’s area or access Orpheus estore click here.

ORPHEUS RESEARCH AT REUTERS – UNITED KINGDOM

ORPHEUS RESEARCH AT REUTERS – USA