Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

India Loses The Sheen of Instant Market Gratification, But Midcaps Have Saved Us. Till Now.


Josh has an excellent post at The Reformed Broker: The Positive Feedback Loop is Broken.

In an uptrending market, investors are conditioned to hold onto their investments and buy more because it continues to reward them. This is true for real estate, commodities, venture capitalism and, of course, the public markets. I buy stocks, they go up, it feels good, I buy more stocks, they go up, it feels good, I buy even more stocks, they go up, it feels good…

The longer this goes on for, the more ingrained the conditioning. Tentative dip-buying gives way to confident leaps into the breach. This is why the dips become short and shallow while the recoveries become v-shaped. No time to lose!

But then, slowly, the instant gratification begins to subside. It is imperceptible at first. They’ll bounce back, they always do! But they stop bouncing back. The positive feedback loop breaks down. I buy stocks, they don’t go up, I buy more stocks, they sink lower…

Indicative of a subsiding gratification loop, says Josh, is the US stock market. Where the index hasn’t gone anywhere for a while:


The volumes are there, but there’s simply no moving to a new high. Josh says this is the part where – in his analogy of a mouse that’s being conditioned to move left to get cheese, while moving right gives it an electric shock – the mouse is going left, but it’s getting no cheese.

The feedback loop which was positive – you bought stocks because they went up, and they went up because you bought stocks – is now on the verge of breaking.

If that’s the case, in India we’re definitely further down the no-gratification ladder.

The Nifty, Too, Isn’t Being A Gratifier

While the Nifty remains just 500 points from all time highs – around 7% off – it’s really that it’s not done that much this year:


The gratification of a higher Nifty High has not been seen since January or so when the index actually high a new all time high. Even though it’s recovered from a recent low, you can see that it’s not really going anywhere.

But we’ve been happy: Midcaps Hit New Highs

India, though, has had it’s share of happiness coming from the Midcaps. The Midcap Index from the middle of June has been a near vertical ride:


This has ebbed only in the last few days.

So We’re Gratified No?

Yes and no. There are a few points to note here:

  • Midcap moves are reflective of domestic participation for the most part. When midcaps move but the larger caps do not, it’s probably more domestic retail money moving the markets rather than institutional flows.
  • This is not a huge worry unless it’s permanent, but when you see a timeline of over six months that this continues, you have to wonder. This can’t be temporary if it lasts over six months.
  • Distribution in the large caps, accumulation in the midcaps; this typically triggers a big move. In  2007 November I wrote precisely that, in a post named – for my one foray into predictions – Happy Diwali. It feels a little similar today (though I’m not horribly bearish on the US market) but the lesson from that time is: This can take months to correct.

As long as domestic retail keeps putting its moolah in the markets, we’ll see this bull run continue, at least in the midcaps. Large caps will move only if the institutions participate. Indian institutions are very tiny. I don’t expect foreign investors to pour money into our markets after it turns out this government is damp-squibbing itself, and if the domestic enthu stops, our markets find themselves looking down the steep end of another cliff.

Disclosure: Heavily long – and I’m worried.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial