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Commentary

FIIs sell out and Systems Rule The Roost

FIIs are selling out big time. For 2008, the figure is an astounding 19,000 cr. with 5,000 crore exiting in may, and 4,000 cr. in the first nine days of June.

Is this profit booking? Lehman Brothers today announced that they would raise $6 billion in capital, and will likely have a $3bn loss. Lehman brothers has huge investments in India and is likely to be liquidating them enough to show a profit. And worse, others are probably pre-empting LB sales and trying to sell too, causing some panic.

Or is this an expected move? I have been bearish on the market and now my suspicions seem to be coming true. As of today the EPS growth of the Nifty is less than 12%, for a P/E, even now, of 18+. If were to have a P/E of 12, we’d get to the 3100 levels on the nifty – a further 30% drop from today (4500).

But this may not happen suddenly. Slow torture is what it looks like. Even shorting traders will find the going tough – bear market rallies are very very severe.

I’ve moved completely away from discretionary trading to a very system oriented approach. One system I use told me to be short since 4900 (friday before last, or the 30th of May) and I have been so. I booked profits today as it had reached a level where I couldn’t squeeze it any more. Regardless of what the situation is, I will let my system tell me what to do – and in the process we’re researching more systems. This is very tension free. When you trade, you don’t think. When you think, you don’t trade – you test.

In the current situation, the system’s done about 4 trades since May 15, and given me a profit of around 8% already (post brokerage and all that). That is consistent with this year’s set – from Jan to May it had returned 60%. I’m not going to reveal the system here – for obvious reasons – but suffice it to say that there are enough such systems that can be built, tested and traded. We have two, we are researching some more. The fantastic thing is: when we eventually have this thing set up we will probably need to trade only two hours a day, and we will even try to make that an automated process. Then it’s either research or holiday. I hope it’s the latter 🙂

  • santosh says:

    >FIIs net selling scenario sounds like Jan2008 revisited. Check this link out…http://www.moneycontrol.com/india/stockmarket/foreigninstitutionalinvestors/01/02/activity/FII/200801
    they were net buyers only once after 15Jan. On 22Jan (correct me if I am wrong), the Jerome Kervail saga uncovered, and we witnessed a couple of lower circuits on the nifty index.. FIIs definitely have more info(should I use the word ‘insider’) or plain and simple, they are the market movers. They knew something bad was hitting the market. This time around, Lehman going the Bear way is doing the rounds. How far this is true, only those guys know. Anyways, Congratulations on getting the short right. You covered ur short today, and the FIIs turned net buyers. Co-incidence?

  • Anonymous says:

    >Deepak – I am not going to rush and ask you for the system but if you have sufficient confidence to reveal it, why not make it commercial ? anyway, I will look for updates on this.

  • Anonymous says:

    >Couple of questions Deepak:
    a) Do you think this currently is a trader’s market?
    b) If answer to a) is yes, for how long do you predict this to be? If we are talking of Sensex 12k, we are not that far away given the 5% daily falls.
    c) Even if value emerges, and it will in certain pockets for sure, would you advise a person to go long on this market? Or is trading the name of the game here?
    d) You system is interesting but with 4-5% intraday swings which would anyway be milked by intelligent people like you, I am not sure you can justify the use of the system as such. It’d be only worthwhile to quote figures when we are in a sideways market. Right?

    –Arpan

  • Mahendra Naik says:

    >Deepak, I think you are making a very simplistic calculation by quoting nifty PE growth at 12% and then arriving at nifty figure of 3100. This growth takes into account results of oil mktg. cos which should be ideally left out, because their results do not reflect their real fundamentals. Leave this out and you still get a growth of 18-20% which is very much par for course.

    Anyways I would like to have your views on Elliot wave principle. Have you applied this in the Indian context and if yes what are your observations.

  • Deepak Shenoy says:

    >santosh: It is definitely co-incidence 🙂 IIRC the FIIs sold about 1134 cr. on Monday – that’s not quite turning net buyers. They supposedly have bought some 4500 calls, but that could simply be about a call strategy rather than anything else (suppose they had written 4400 call earlier) I don’t think the FII’s “knew” – nobody ever knows, they only seem to know after something happens. In fact they sold a lot when the big raly in April happened too.

    Anon: we’ll probably not make it commercial, because of multiple reasons. If this kind of thing succeeds we would rather manage money directly than sell this system (no one wants to sell a good and working system – if it sells it means the potential has ebbed)

    More importantly our edge is in creating and tracking systems – so if one fails, we’ll have another to back it up and so on. You can’t do that if you only sell a system.

    The rewards are also much larger if we manage money.

  • Deepak Shenoy says:

    >arpan: Eveyr market with good volume is a trader’s market. Trading doesn’t need anything – just volumes. Some stocks have lost volume and therefore have no tradability but for the top 50 stocks there is definitely enough volume (for the amount of money I have)

    b) As I’ve mentioned we are likely to have a traders market forever. Will it keep falling? I don’t know. It should, but it rarely does what it should.

    c) Value is ok even now if you find it. LIke mudra, I’m long on a much longer term basis than my trading.

    d) The above system is not intraday. As I’ve mentioned it took four trades since May 15. It’s been backtested since 2006 and seems to work ok since then = about 75% return a year.

    Btw, there are very few stocks with 4-5% intraday swings. No point trying to attack those – unless there is a system that gets them. We’re working to write one though.

  • Deepak Shenoy says:

    >mahendra: I don’t bother segregating fundamentals. For even oil marketing company whose earnings are lower than expected, there are other companies whose earnings are HIGHER than expected through either extraordinary earnings or Exchange rate gains or such.

    Index earnings must be taken as such, and not moved around according to a belief.

    Elliott waves wise – the entire concept depends on where you start, and how you count waves. It’s very subjective. I don’t like it for that reason – one person will say wave 3 of 5 and another will say continuation of wave 4 or something like that and both will be right because they counted differently. It’s very silly that way.

  • Anonymous says:

    >deepak,
    how do you get the data?
    what is the programming language that you have used?
    do you directly plug it to your brokerage system?
    in a previous writeup you had said that you would give some details on how to go about building the system.
    can you suggest?

  • Anonymous says:

    >Hi deepak, I’m a great fan of your blog, but your talk of a “System” that eliminates the need to think, leaves me cold. It sounds very much like you’re in search of a magic bullet, and many have tried before and ended up… well, not so well!
    The dreaded four letters LTCM being a prime example!

    Then again maybe i’ve got it all wrong and misinterpreted your post! Given my intellect that’s more than possible 🙂

    Whatever the scene, just keep the blog going, it’s probably one of the best things you’ve done! System or no system i wish you well and look forward to your posts. If anything post more often!!

    M

  • Anonymous says:

    >hi deepak,
    what is the programming language you use?
    how did you get the data?

  • Deepak Shenoy says:

    >anon: yes, and I’m sorry I haven’t informed about systems much – haven’t had the time to write stuff that can be posted. Data is available from various sources, including the NSE, and yahoo.

    Meanwhile check this link for an excellent description.

    M: This is no more a magic bullet than choosing stocks based on “fundamentals”. If you trade, you should have a strategy. ANd that strategy should be back-tested. And the results should make sense in various timeframes. And you should track the results as you trade, so that they match the past – otherwise something is wrong. And because systems fail ever so often, you should keep researching new systems.

  • Gunjan says:

    >I know I am deviating from the topic. But I could not find any other way to express/ask this.

    I am observing that BHEL keeps on coming down and now its almost close to 52 weeks low, almost Dec 2007 prices. Is it anything wrong with the company’s recent actions? Or its something else that is impacting. It would be really great if you can comment on this heavy script.

    Thank you.

  • VS says:

    >Hi Deepak,
    I’m a relative newbie to the stock market and would like to know how you do an open short? Is it like you do margin trades (short) everyday or do you go for F&O ?

    Thanks,
    VS