If Short S&P500, long DOW is absurd, what you are going to read below should be shocking. We will be taking you through pairs and performance cycles (a term coined by us) on the Indian capital markets. Performance cycles work because of time fractals.

This is what we said in our annual India outlook 2009.

“Starting Aug 1992, Sensex has shown an average 40 month cycle. Three of the 40 month cycle make a decade cycle. The first decade cycle ended in 2002 and the second decade cycle should end somewhere around 2012. We are now in the last 3.3 year cycle up. Since the markets have erased most of the gains made since the decade up cycle started in Sep 2001, the expected bounce should be choppy and time consuming. We won’t be surprised if prices retest Oct lows or breach them marginally early Q2 2009. And this means selective stock picking and better to minimize market exposure by doing quantitative long short strategies. 13,000 – 15,000 is an achievable high for Sensex in 2009. BSE Metals was the worst performing sector of the year at -72%. We expect it to deliver better returns, atleast for Q1 2009. We also expect BSE Oil to outperform Sensex over Q1 2009. Indian markets still lack instruments for doing advanced quantitative strategies. But long BSE 500 – short Sensex also seems an attractive pair for Q1 2009. Don’t get too much into the negative mode despite all crisis and majority is foolish talk. Try looking top down.”

What happened? If you look at the twelve composite and sector indices (Nifty, Metals, Oil, Health, FMCG, Technology, Real Estate, Power, BSE500, Capital Goods, Consumer Durables, Auto) a majority of them retested Oct lows and breached it marginally. Most of the market lows happened near 3-12 MAR window, 15 days before anticipated Q2 2009 started. We talked about a SENSEX target of 13000-15,000. Sensex hit a high of 15,600 on 14 Jun. The top loser BSEMETALS was a recommended sector not only fell marginally less than SENSEX in the first quarter (31 Dec 2008 – Mar 2009 low), but was the top performer for the year (31 Dec till date). Despite the OIL crash, our recommended pair lost 2% against Sensex. The BSE500 vs. SENSEX pair delivered 11% from 31 Dec. We clearly cautioned against too much negativity. SENSEX was up 67% for the year. We wrote about the Tech Reversal here on 26 Jan. After a month CNXIT turned up from a low of 1993 to 4076 (up 105%).

Coming back to pairs, the question which might surprise any conventional thought is that how did a notional pair LONG BSE500, SHORT SENSEX work? 20% annualized returns may not be very exciting for a leveraged forex trader but they can be significant for a mutual fund, especially if the returns come with lower risk. How could we know that the broad market could outperform the blue chips as early as the start of the year? Performance cycles are easy to spot and work with, if you believe Time Fractals and cycles work and exist. We can illustrate pair performance between Nifty, Cnxit, NSE Bank, the few tradable Index futures and between stock futures of sector peers like Reliance and ONGC etc.

Other interesting observations are that two respective periods saw shifting polarities, like a classic performance cycles. The performers of the first period became underperformers of the other. The first period underperformers against Sensex viz. BSE Real, BSE Consumer Goods, BSE Capital Goods became performers in the other period. While the first period performers (Till Mar) against Sensex viz. BSE Oil, BSE FMCG, NIFTY, Health care shifted polarity and underperformed Sensex (Post MAR). The best part is that some pairs delivered more than Sensex on an annualized basis. Sensex delivered 136% from MAR lows, while BSE Metals – Sensex and BSE Real – Sensex pair delivered 145% and 173% respectively on annualized basis.

Apart from the investment strategy studying pair performance cycles can also give many cues regarding market perspective. There is a limit to which BSE Metals can outperform the blue chip 30 stock index. If BSE Real, BSE Metals, and BSE Capital Goods have already outperformed Sensex by 100%, 90%, 50% respectively since MAR lows where do you think this outperformance can go? The outperformers of today will be the underperformers of tomorrow.

The BSE500 outperformance has topped against Sensex and broad market underperformance against blue chip is not encouraging if you are just looking at the Sensex portfolio. We repeat the best of 2009 is nearly over and any upside from here should barely reach double digits (less than 10%) for the 12 indices we discussed above. When you have 100% annualized performances under your belt in half a year, you don’t haggle about the last 10%. We will review if markets breach this 10% push up from here.

Are pairs really that good? Are time fractals tradable? Are pairs really offering more returns for per unit of risk? Is risk really associated with price or time? These are a few questions you need to answer before you reach implementation stage and comprehending how to make money buying Sensex against NIFTY or vice versa.

Why do BANKS fall? This question may have many answers based on when you ask it. The question may have no meaning if it was asked at the market top at BSEBANK 12,678 (20 Jan 2008). It may evoke a shrug if asked at Oct 2008 lows (BSEBANK 3,601). Now that BSEBANK has retraced almost 61.8% of the losses from historical highs (29 Jun 2009 8,575) the answer may at best be mixed.

Performance cycles on the other hand can give an answer at all times. BANKS can underperform NIFTY, means fall against NIFTY cyclically. For example NSEBANK fell against NIFTY three times since July 2007 for an average 140 days. If you zoom in a bit more coming from weekly to daily charts, the number of times NSEBANK underperformed NIFTY or fell against NIFTY increases by a factor of three to nine times with an average time period of 46 days. There is another interesting thing that happened during this time when BANKS were underperforming NIFTY, broad markets were falling or stagnating on all the three occasions. What does this mean? This means that if we study performance cycles (TIME FRACTALS) we can not only isolate performers but we can also understand when the broad market might be ready to turn.

NSEBANK seems ready to underperform again against NIFTY. Empirically this means that chances of a broad market stagnation or negativity might be in. We have illustrated here the pair performance cycles (INTERMEDIATE and MINOR) between NIFTY and NSEBANK. Both time frames suggest an impending cycle low which could mean the end of NIFTY’s underperformance against banks. A clear turn from respective lows should see NSEBANK underperforming NIFTY for more than a few months. This also means that LONG NIFTY– SHORT NSEBANK could be an interesting pair to watch for the next 140 or 40 days. Now 140 days is a long time which takes us well into the final quarter of 2010.

Financials react fast to economic changes and hence carry clues for market perspective. This validates our overall negative view on the Indian market, which would be challenged only if prices move above the highlighted key resistances. We have carried Elliott updates on the main indices and ANTICIPATED AND HAPPENED cases on BSE REALTY and BSE POWER.

Enjoy the latest WAVES.INDIA

* This is a perspective product and not a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager.

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ORPHEUS INDIA RESEARCH

WAVES.IND is a perspective product published on Tuesday and Thursday. The report highlights Indian Stock Market top sectoral Indices and Sensex (BSE 30) viz. BSEOIL, BSESC (Small Cap), BSEMC (Mid Cap), BSEHC (BSE Health Care), BSEPHARMA (Pharmaceuticals), BSECG (Capital Goods), BSEBANK (Banking), CNXIT (Technology), BSEFMCG (FMCG), BSEAUTO (Auto) etc.. The product also covers all the 30 Sensex components. The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools, sentiment indicators and other alternative research tools like INTERMARKET to spot outperformers.

COVERAGE: REUTERS RICS. INDICES. .BSEBANK, .BSEOIL, .NSEI, .BSECG, .BSESN, .BSEAUTO, .CNXIT, .NSEBANK, CITc1, IFc1, .NSEBANK

ORPHEUS RESEARCH AT REUTERS – UNITED KINGDOM

ORPHEUS RESEARCH AT REUTERS – USA

There are stories about the inverse correlation between SENSEX and the US Dollar Index (USD). The same stories which talk about inverse correlation can also explain perfect correlation, but there is something missing here. First, perfect correlation does not last. Second, if instead of absolute prices if we compare changes between prices, the idea of correlation adorns a new meaning. For us at Orpheus it is not about positive or negative correlation, it is about the cycle of correlation.

The question of when DOLLAR strengthening against SENSEX will start or vice versa is more important than the obvious fact that dollar strengthening affects Sensex inversely. SENSEX pushed 17% higher in dollar terms compared to INR. This was a result of INR weakness against the dollar that was reflected in SENSEX returns.

According to performance cycles, an asset will always outperform or underperform the other asset. This means that there will always be an inverse correlation between any pair of assets if you are comparing performances. So what matters is really not correlation, but which of the assets is outperforming the other and WHEN.

In continuation of the above view we continue to look lower on SENSEX. The current downmove looks like an impulse which should push prices back till open gap levels.

We highlighted a Head and Shoulders pattern on SENSEX and Double Top pattern on NIFTY and BSE OIL. The current report also carries ANTICIPATED AND HAPPENED cases on NIFTY, CNXIT and BSE REALTY, as well as time oscillators updates. Our overall Indian market view remains negative.

Enjoy the latest WAVES.INDIA

* This is a perspective product and not a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager.

ORPHEUS INDIA RESEARCH WAVES.IND is a perspective product published on Tuesday and Thursday. The report highlights Indian Stock Market top sectoral Indices and Sensex (BSE 30) viz. BSEOIL, BSESC (Small Cap), BSEMC (Mid Cap), BSEHC (BSE Health Care), BSEPHARMA (Pharmaceuticals), BSECG (Capital Goods), BSEBANK (Banking), CNXIT (Technology), BSEFMCG (FMCG), BSEAUTO (Auto) etc.. The product also covers all the 30 Sensex components. The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools, sentiment indicators and other alternative research tools like INTERMARKET to spot outperformers.

COVERAGE: REUTERS RICS. INDICES. .BSEBANK, .BSEOIL, .NSEI, .BSECG, .BSESN, .BSEAUTO, .CNXIT, .NSEBANK, CITc1, IFc1, .NSEBANK

ORPHEUS RESEARCH AT REUTERS – UNITED KINGDOM

ORPHEUS RESEARCH AT REUTERS – USA