Stay away from the Noise

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Indian markets are at an all time high, with NIFTY touching 9700 and SENSEX peaking at 31k . Retail investors are looking to invest their money in equities, hoping to catch a piece of sweet cake in this bull run. With all of this, comes a lot of noise around you mainly giving tips/ideas on what to trade on.

Last month Economic Times posted this article to give “stock ideas for the next 14–21 trading sessions”.

http://economictimes.indiatimes.com/markets/stocks/news/15-solid-stock-ideas-for-the-next-three-weeks/articleshow/58678866.cms


I did some data crunching and the results weren’t surprising. Out of the 14 ideas they were right only for 4 times. This might be okay if the winners were huge gainers than losers but sadly that’s also not the case.

Some assumptions before I begin the analysis:

  • Every stock price is taken from NSE using Kite’s API for historical dataset.
  • I’ve used equi weighted portfolio strategy, which basically means that say if I have 1L Rs in my hand, I’m going to divide it equally (irrespective of stock price or market cap of the stock) amongst the total stocks.
  • Fractional shares can be bought (4.65 instead of 5, to ease the calculations)
  • The calculation is done from 15th May till 5th June.

I built a wrapper around Kite Historical API to easily fetch the stock data using stock symbol rather than the instrument token(ISIN) in Bhaav copy. You can easily plot the data too with this. Find the repo here:


Say, if you were to invest in all these stock ideas, you would have made a -0.7% returns if you were to ignore the stop losses/target points(assuming you bought equal quantities of each stock). The grass isn’t much greener even if you had incorporated the TGT and SL, you still would have been in loss of -0.59%.

Let’s take a look at each recommendation and see how they performed:

PETRONET is missing from the above list as it was a SELL recommendation but prices never reached those levels that the trade could be executed in the whole timeframe.

So out of the 13 remaining stock recommendations (DISHTV is present twice), only 4 gave positive returns or hit the target. 70% are losers, but the point here to note is that the winners don’t have huge % gain either to offset the losses.

No one can predict the market and if someone claims to, they are clearly lying. Trading is a zero-sum game and if you don’t have trades which made more % of gains than losses, you’re not going to be profitable, clearly.

Indian Stock markets aren’t that efficient yet that one can solely rely on technical indicators like RSI, DMA, MACD etc. It’s all bullshit as here the prices are solely driven on rational (rather irrational) behaviour of speculators. Any small news will drive the prices of the underlying stock and it most likely won’t be in the direction you would be expecting.


The curious case of trendline

Case A: DISHTV

DISHTV

The reasoning behind recommending DISHTV is that it formed a support at 92–92 levels and RSI indicated that the price will go up.

Look at this chart! The stock price zoomed up soon after they recommended (and it most probably would have appeared at different other “stock tips” places also). But the target wasn’t hit and if you had continue holding it, it would be a loss making trade.

Case B: JUSTDIAL

The belief was that corrective move of this stock is over and should touch new levels of 540 after forming a base at 495 levels. You can see how sharply the fall has been, with no basis as to what-so ever. Again, DMA/EMA means nothing.

Case C: TCS

This is an interesting chart, as it shows even the target/stop losses given are arbitrary. TCS was making higher bottoms since many days and price reversal was “expected”. But the target given was 2470 whereas the chart suggests that a lot more could be milked off before closing the position. If and only if one held TCS till the closing date, they would have made profits of 0.73% on the entire portfolio. That means even with all loss making trades even if one of them is right by a huge margin, it can offset all other losses.


Expect the unexpected

Recently BHARTIARTL reported 72% fall from its previous quarter results and speculators were looking to short the stock. But it’s favourite stock of many equity mutual funds and they artificially rallied the stock up, confirming the fact that nothing in stock markets is predictable.

If it’s too obvious to make easy profits, something’s wrong.
— My Father
Airtel Closing Prices (15 min interval from 5/10–5/11)

Conclusion

We are yet to witness an efficient stock market scenario where all these pattern making techniques can actually be profitable. Don’t follow these recommendations or else you’ll end up holding the losers more than gainers.

If you were to invest the same amount of money in NIFTY50 in the same timeframe, you would have got +2.32% returns on your investment. Or if you would have simply ignored these recommendations you would still have more cash in hand 😋

Market rewards only if you bring better information to the market. It self-destroys any money making patterns that exist.
Nilesh Trivedi